What is the difference between Whole Life Insurance and Universal Life Insurance?
Our last blog article addressed the differences between Term Life and Whole Life (AKA Permanent) insurance policies. Let’s assume that you’ve decided that Permanent Life Insurance best suits your needs. Now you have another decision to make: what type of Permanent Life Insurance should you choose? Both Universal Life and Participating policies are permanent, but they offer different features.
Firstly, let’s recap what Permanent Life Insurance policies can offer:
- Permanent, lifetime insurance coverage that never expires, as long as you make required premium payments
- Cash value growth within the policy that you may be able to access during your lifetime
- Guaranteed death benefit that pays out tax-free to your named beneficiaries when you pass away
Types of Permanent Life Insurance: Universal Life
The simplest way to explain Universal Life (or UL) policies is to think of them as having two elements: the insurance component and the investment component.
Like all permanent policies, UL policies require a premium payment, paid monthly or annually, which covers the cost of insurance. Cost of insurance varies from person to person, based on factors such as the age of the insured person at the time of policy purchase, gender, smoking status, medical rating, and coverage amount.
What’s special about Universal Life?
Where UL is unique is that it also allows for policyowners to “overpay” – this means that you have the option of using the insurance policy as an investment vehicle.
For example, if your monthly premium is $50, and you want to pay only $50 monthly, that’s all you’re required to pay. However, let’s assume that you would like to pay $75 monthly. In that case, the $50 covers the cost of insurance, while the extra $25 is invested. You have the option to choose what kind of investments reside within your policy, based on your personal risk profile – depending on how much variability you’re comfortable with, you can choose more conservative, balanced, or aggressive investment options. As long as you pay the required premiums, you have the freedom to adjust your monthly payments based on your needs and income consistency. Any excess payments into the policy will be added to the death benefit, so when you pass away, the entire amount will be paid to your named beneficiary. Alternatively, you may decide to withdraw these invested funds – if that’s the case, you may be subject to taxation. When applying for a UL policy, you may also elect to have your premium payments adjusted so that your policy will be guaranteed to be paid up early, meaning that any payments into the policy after that point are completely voluntary.
Types of Permanent Life Insurance: Participating
Participating insurance is similar to UL in that it is permanent, meaning that as long as you pay your required premiums, your coverage lasts for your lifetime. The key difference lies in the insurer’s participating account, which can lead to extra growth being directed your way.
What is a participating account?
An insurer’s participating account is made up of the funds you contribute to your policy (i.e. premiums), combined with all other participating policyowners’ premiums. The insurance company invests these funds, and if there is growth, the company pays out dividends to participating policyowners. Factors that can influence participating account growth include market performance, policyowner withdrawals and loans, and death benefit payments across the company. If earnings exceed the amount required to meet the company’s obligations to policyowners, dividends may be distributed to those who own participating policies. Dividends are never guaranteed, but you do have a few options with respect to what you do with any dividends your policy receives. You can allow your dividends to accumulate, and potentially accrue interest – this growth is not taxable unless you withdraw the dividends from your policy. You can also use those dividends to purchase more coverage within your policy. Another option is to use those dividends toward your premium payments, potentially allowing the policy to fund itself.
How do you decide which type of permanent life insurance is best?
Universal Life may be the best option for you if…
- Your income is cyclical – UL allows for more flexible premium payment options throughout the life of the policy
- You’ve maxed out your RRSP and TFSA contribution limits, and still have more to invest
- You are interested in a more hands-on approach to managing your investment options within your life policy
Participating insurance may be the best option for you if…
- You have a consistent income – participating policies require premiums to be paid regularly, and for a set amount
- You’re looking for life insurance coverage with guaranteed tax-free growth over time, with the possibility of earning dividends when the company does well
So what type of permanent life insurance is best for you?
Life insurance is such a personal product that we can’t make that decision for you. However, we can help you identify your needs and make an informed choice based on what your needs are and what you’re comfortable with.
Don’t hesitate to request a quote through our site, or call or email us and we’ll get started on your personal life insurance plan!