UNDERSTANDING THE DIFFERENCE BETWEEN UNIVERSAL LIFE AND WHOLE LIFE

When choosing the most suitable life insurance policy for your needs, an important consideration is whether to opt for whole life or universal life coverage. Many similarities exist between the two types of policy but there are also some key differences which will affect the type and level of coverage that is provided.

What are the similarities between whole life and universal life insurance?

Both types of policies are classed as permanent in that they last for the duration of your life, on the condition that the premiums are paid. In addition, it is possible for both to accumulate cash value over time which the policyholder could potentially borrow against on a tax-free basis.

What are the key features of whole life insurance?

• Whole life aims to create long term growth for the policyholder through policy dividends from the performance of the PAR fund, which is a type of diversified investment portfolio. Such investments are regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI). It is classed as a more passive type of investment, in that there is little need for management on the part of the policyholder.

• The aim of a whole life policy is to generate slow yet secure growth to maximize the gains within an estate in the longer term

• Whole life insurance policies offer set and fixed premiums, meaning that the premium will not change during the course of the policy. This can be a good choice for those who like the security of budgeting for a fixed amount on an ongoing basis.

What are the key features of universal life insurance?

• Universal life generates potential growth through maximizing investment opportunities in the market, with greater flexibility for the policyholder to choose specific features of the product. It is in this way that universal life insurance is classed as a more active type of investment.

• The policy is a combination of insurance coverage plus elements of tax-sheltered investments which are policy-holder led.

• Premiums can fluctuate with interest rates and rates of return on the investment portion of the policy.

• Any interest generated during the policy accumulates on a tax-deferred basis

Which type of policy is best for me?

It’s essential to evaluate your individual circumstances, needs and preferences prior to purchasing a policy. If you are seeking a policy which offers you the security of fixed premiums and death benefits as well as steady growth potential, a whole life policy may suit your needs. However, if you prefer the flexibility of managing the investments within the policy more directly and are comfortable with a higher level of risk and fluctuating premiums with a higher potential for gain, you may benefit more from a universal life insurance policy.

Talk to us, we can help you determine which type of insurance suits you best in your unique situation.

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