What’s the Difference Between Whole Life vs Universal Life Insurance?

For the past few weeks we’ve been talking about the benefits of permanent life insurance, specifically in regards to how the rules of investing your money into permanent life insurance policies are changing at the end of 2016. Remember that permanent life insurance combines two financial products – a life insurance policy that lasts your entire life and a tax-exempt investment vehicle that grows along with it.

Long term needs and financial flexibility are two key aspects for individuals employing the permanent life insurance strategy

You wouldn’t buy permanent life insurance if it meant sacrificing your mortgage payment or your traditional RRSP or RESP savings strategy. Long-term needs, on the other hand, such as tax-free legacy gifts for your children or grandchildren, charity efforts, or even taxes payable on shares or real estate holdings, are fair game.

This week, we’re going to dig a little deeper into two specific types of permanent life insurance products available: whole life and universal life.

Whole Life Insurance

Whole life policies offer premiums that won’t increase over time and offer a guaranteed accumulation of the cash value of the policy. Participating Whole Life policies offer a policyholder a dividend each year, which can be reinvested in the product or used to offset future premiums. Unlike a share dividend, Whole Life dividends are not generally taxable. Therefore, Whole Life owners can see their policies grow tax efficiently every year.

The investment vehicle in a Whole Life policy is called the “par account”. The insurance company invests this account. You don’t have to manage an investment decision. The insurance company collects whole life premiums, pays any death benefits and admin fees, and deposits the residual in the par account. Your participating dividend is based on the return of the par account, which includes a return on the whole life underwriting business.

In short, Whole Life is a great option for people who want a straight forward answer to a long-term insurance need. Buy a Whole Life, let it grow!

Universal Life Insurance & Flexible Plans

Universal life has been around since the 1970s, whereas Whole Life was created over 100 years ago.

Universal Life is a combination of non-participating Term insurance payable for life, plus an investment account that the owner has absolute discretion over. There is no set premium cost for Universal Life. Instead, you are provided a minimum and maximum premium payable each year, and the owner can choose an amount to pay within that range.

Having flexibility over the premium payable and the investment selections means that Universal can be tailored for any circumstance, both now and in the future. But having so much flexibility can also lead to Universal Life’s biggest challenge – it can be mismanaged. If you keep paying the minimum and choose investments that don’t do so well, you can have a much smaller permanent life insurance than the participating Whole Life alternative. However, if you pay the higher end of the annual premium and choose investments soundly, you can outperform the participating Whole Life! The reward (and risk) is born by the Universal Life owner (whereas that same risk is born by the insurance company in Whole Life).

What If I Need the Money During My Lifetime?

Both Whole Life and Universal Life offer the ability to borrow against the policy itself, even while you’re still alive! The best way to think about this is how you borrow against a piece of real estate (like your home). If you have equity in your home, a bank will lend you up to a percentage of your home value (typically up to a maximum of 70%). If you have permanent life insurance, a bank will lend you up to a percentage of the policy’s cash value (typically as high as 90%).

So we put money into permanent life insurance during our 30’s, 40’s, and 50’s, and take tax-free borrowings against it during our retirement years. That is a wonderful form of tax efficient retirement! Or we borrow from it during our working years to invest, or to pay for post-secondary education, or anything we feel like. It really is that flexible!

Which Works Better For You?

Both types of permanent insurance are tax exempt, so the only real question is to determine which path is right for you. To answer that, you need to take a look at your goals, both for the near future and further down the road. For many of our clients, both policies present significant benefits, which often ends up in the purchase of both.

When it comes to whole life vs universal life insurance policies, both exist to provide support for your family, whether it’s needed when you’re gone, or needed when you’re still around.

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This post was written by Marco Faccone