Whole Life Insurance Vs Universal Life Insurance
Permanent life insurance has a few more moving parts than term life insurance policies. Taking the time to choose the right coverage for the right reasons will help you make a more informed decision. Read on for a comparison of whole life versus universal life insurance.
Life insurance is considered the bedrock of a good financial plan because when you die, it acts like a financial safety net for those you’ve left behind. Whether it’s paying off outstanding debt, covering the cost of your funeral, or ensuring a dependent is taken care of, it’s a simple idea that has stood the test of time.
How much life insurance do you need?
Learn more or call 1-800-562-6237 to speak with a Serenia Life advisor.
What has changed is the number of ways you can purchase life insurance and fine-tune a policy to include everything you want at a price you can afford. This is why it pays to work with a licensed advisor who can offer no-cost, objective advice, and a range of policy options.
Types of life insurance in Canada
Life insurance policies fall into two broad categories with distinct advantages based on your needs.
Term life insurance policies offer protection for a specific length of time, called the “term,” typically in periods of 10, 20, or 30 years. These policies are intended to replace your income during your working years and expire — unless you decide to renew them — at the end of term. You can learn more in our guide to term life insurance in Canada.
Permanent life insurance policies are different. They never expire as long as you continue to make your payments. Two of the most common types of permanent coverage are whole life insurance and universal life insurance.
At first glance, they appear very similar because they both offer a combination of permanent life insurance coverage and a cash-value1 portion that acts like a financial reserve you can access in various ways.
But let’s dig a little deeper…
What is whole life insurance?
Whole life insurance provides coverage for life and can never expire as long as payments continue to be made. With 20-Pay Whole Life insurance, you only need to make payments for 20 years, so you know exactly when payments will stop. Even better, there’s an end in sight! Throughout the years, your insurance provider will also allocate money to a cash portion, which grows on a tax-deferred basis, and can be enjoyed while you’re still alive.
The cash portion of your policy can be seen as a “Plan B” in case you ever need to access cash for something like your kids’ tuition or a financial emergency. For example, you can access some or all of the cash portion through a policy loan2 and choose to repay it later.
The money in your cash reserve gets invested by a team of specialists with a mandate to prioritize safety and security, so you’ll never have to stress over how the money is working for you. And when tax season rolls around, you don’t need to worry about reporting your earnings on your tax return unless you’ve withdrawn the money. In other words, you won’t pay taxes on the cash value unless you withdraw it3.
What is universal life insurance?
Universal life insurance is often promoted as a more flexible alternative to whole life insurance because policy owners can make adjustments to both their payments and the amount of their coverage.
For example, a policy owner might switch to a lower cost payment option, with reduced coverage, if they suddenly start earning less money. Or they may want to increase the death benefit (i.e., a payment made to designated family members, other loved ones, or the charity of your choice after you die) by agreeing to pay more.
Universal life insurance policies also have a cash-value portion that can be invested in a wide variety of ways. Due to variable interest rates and investment options, the cash value in a universal life insurance policy can potentially grow faster than the cash portion of a whole life policy — it just carries more risk.
Whether or not this added layer of flexibility is an advantage is a hotly debated topic because investments in the cash portion are affected by market volatility, meaning they can go up and down. If the value of these investments drops significantly, the policy owner could be asked to make additional payments to keep the policy in effect. This is a major risk for someone who may not have the income they need to make more payments. To avoid this type of risk, many Canadians simply choose whole life insurance as a more stable and stress-free alternative.
It’s also possible to take a payment holiday, in the case of financial hardship. The policy stays in effect to protect your loved ones but it won’t last forever. While your payments are “on holiday,” the cash portion of your policy is paying the bill for you. Eventually, you need to replace that cash or run the risk of your policy becoming depleted and cancelled.
Exploring the difference between whole life vs. universal life insurance
As you can see, permanent life insurance has a few more moving parts than term life insurance policies. Taking the time to choose the right coverage for the right reasons will help you make a more informed decision. Here’s a quick comparison of your permanent options.
MORE THAN JUST MONEY
We believe that permanent life insurance is about more than just money. It’s also about taking comfort in the fact that your loved ones are guaranteed to receive the financial support they will need when you’re no longer there to provide it yourself. Speak with a Serenia Life advisor about how we can incorporate life insurance into your financial plan and make adjustments when and if you need to.
| Cost | Payments are fixed so you pay the same amount every month, guaranteed. | Payments can be adjusted up or down and changes will affect the value of your death benefit. |
|---|---|---|
| Death benefit | The amount never changes. Your beneficiaries know exactly what to expect. | The amount can go up or down based on how much you pay. |
| Cash value | Expect low-risk, steady growth that won’t always match the market. | You and your advisor need to select the investments in your cash portion, and while you could potentially see significant growth, you also assume the risk of any losses. |
| Flexibility | In the case of an emergency, you have options to access cash or surrender4 the policy for a full or partial refund. | You assume some risk in exchange for the flexibility to adjust the cost and choose your own investments. |
| Investment component | You can count on investment specialists to do all the work for you. | It’s your job, on your own or with an advisor, to choose your investments. It can be time consuming and challenging if finances aren’t your forte. |
| Long-term value | Guaranteed. From day 1, you know exactly what to expect, providing stability and predictability. | Variable. With the potential of higher returns comes increased risk that could affect the lifetime value of the policy. |
| Withdrawals | A cash withdrawal or loan can reduce the guaranteed growth of the cash portion. But that amount can be estimated ahead of time. | A cash withdrawal or loan affects the policy’s investment performance. This makes it hard to plan since the long-term effects are unpredictable. |
The performance figures quoted by whole life and universal life insurance providers are estimates, and not always comparable market indices. Ask your advisor to explain how your money is invested and make sure it aligns with your tolerance for risk.
Which one is best for Canadians?
The best form of life insurance is always the one that nicely complements all the other parts of your financial plan, and matches your budget and tolerance for risk.
Serenia Life advisors recommend whole life insurance for its guaranteed payout, simplicity, and reliability. Here’s why:
- As long as you continue to make payments, or once your 20-pay policy is paid up, you will never be asked to pay anything additional, regardless of your age
- The cash-value portion of your policy can be expected to increase steadily, thanks to a cautious, low-risk investment mandate
- You assume no investment risk and can count on your policy to pay an exact amount to your loved ones
- Participating whole life insurance policies pay dividends5 to policy owners that can be used like cash to buy more coverage or even pay for your policy
That said, universal life insurance is preferred by some Canadians who may need flexibility, are willing to put in some time and effort, and don’t mind taking on more risk. Before buying a universal life insurance policy, seek advice and be aware of these limitations:
- The value of your death benefit may be tricky to predict, making estate planning a little more challenging
- You could be on the hook for additional or higher payments if the cash-value portion of your policy drops to zero
- You assume the risk of the investments in your cash portion not performing as well as expected
Why choose Serenia Life for whole life insurance?
As a member-based organization whose roots go back nearly 100 years, we encourage kindness by sharing our profits through community outreach, fundraising, and unique member benefits that help Canadians support their families, and their communities, including:
- $1,000 postsecondary scholarships
- $250 seed funding toward fundraising events
- Free digital wills (value: $189), or a $150 reimbursement when you hire a lawyer to draft or update your will
View a full list of our member benefits.
Let us help
The subtle differences between whole life insurance and universal life insurance are the reasons why the latter is typically less expensive. But with lower costs comes more risk and uncertainty. Always speak to a knowledgeable advisor to understand what you’re buying and how it works. Book a no-obligation call with a Serenia Life advisor today!
Disclaimers
1Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued.
2Policy loan is an easy way to access the accumulated cash value of the policy. A variable interest is charged on the amount borrowed. This may result in taxable consequences. Loan can be repaid at any time. Upon death and the loan is unpaid, the outstanding balance including any accumulated interest will be deducted from the total death benefit, with the remainder paid tax free to the beneficiary(ies).
3Policy withdrawal is an option to withdraw money from the accumulated cash value of the policy if Paid-up Additions or Accumulated Dividends is the selected dividend option. Withdrawals reduce the total cash value, affects future growth, and reduces the death benefit. If the withdrawal is only up to the amount that is paid in premiums (known as the adjusted cost basis), there won’t be taxes. Otherwise, there would be taxes on the portion that is more than the adjusted cost basis.
4Policy surrender can either be partial or full surrender of the cash value of the policy. A partial surrender will reduce the value of the policy. A full surrender means cancelling the policy and receiving the cash value less any surrender fees. Beneficiaries won’t receive any death benefit upon full surrender. There may be tax on the amount received that is above the adjusted cost basis.
5Dividends are not guaranteed and are paid based on the overall experience of Serenia Life Financial, considering all risk factors. Dividends may be subject to taxation. Dividends will vary based on the actual investment returns in the participating account as well as mortality, expenses, taxes, lapses, withdrawals, and other experience of the participating block of policies. These factors have the potential to increase the value of your policy above the guaranteed amount, depending on the dividend option selected.
