Whole Life vs Universal Life: Which is Right for Me?

Do you need to know the difference between whole life insurance and universal life insurance?

In this primer, I will explain the differences between the two policies and outline some of the pros and cons of these 2 types of permanent life insurance policy options.

What whole life and universal life insurance share in common is that they both offer death benefits along with a cash value accumulation feature which grows on a tax deferred basis.

Whole Life vs. Universal Life Breakdown

However there are some fundamental and significant differences between the 2 types of policies. Let’s look at them in more detail.

Whole Life Insurance

Whole life insurance could be said to be an ideal product for someone who can pay a set premium for a good deal many years, but who lacks the know all or is not investment savvy.  You could also describe the cash accumulation feature as a fixed form of a savings plan.

For this reason whole life is generally is viewed as a less flexible form of permanent insurance than universal life.

Whole life plans vary considerably between life insurance companies.  These plans come with a variety of options and sub options to choose from so it is best to sit down with a knowledgeable independent insurance broker like myself to gain a better understanding of your needs to find the policy most suitable for your situation.

Basic Types of Whole Life Policies

With a whole life policy you have 2 essential options to choose from, and some insurance companies only offer one type of whole life policy, so be clear you understand your choices and what type the company is offering. This includes:

  • Participating Policy – A participating whole life policy generally costs more but allows you to participate and receive the payment of dividends. You participate in receiving the profits made by the insurance company. When the investments made by the company perform well, then your cash value accumulation feature performs well.
  • Non-Participating Whole Life Policy – Is considered a very inflexible form of whole life policy. You cannot make any alterations to the death benefits, the premiums and the cash surrender feature which are all predetermined.

Here are the basics:

  • Your premium is used towards 3 separate components of the policy.  The first goes towards the death benefits or mortality charge.  A second portion goes to the administration costs, and the final portion goes towards the cash accumulation or investment portion.
  • The premiums you pay are fixed and are for a pre-determined period of time such as 25 years for example.
  • The monthly, semi-annual or the annual amounts of the premiums you pay are mostly fixed and rarely flexible.
  • In the early years of your policy, the majority the premium is paid towards the death benefits and very little is paid toward the cash value accumulation feature.
  • The cash value accumulation, which could also be referred to as the investment return is directly dependent and affected by interest rates so when they are low, you earnings or dividends are significantly lower as well.
  • The manner in how the cash value accumulation feature is invested is determined strictly by the insurance company.  You have no say in the matter.

Pros of a Whole Life Policy

  • Suitable for a long term insurance policy.
  • Takes the worry out of your hands.
  • Premiums, death benefits and cash value accumulation are relatively fixed.

Cons of a Whole Policy

  • Options are few and policy standards are inflexible.
  • Insurance company does not disclose how it allots the amount of premium you pay.
  • No choice offered for cash value accumulation feature.
  • No premium options.

Universal Life

Universal Life Insurance is considered as a newer, but more flexible version of Whole Life insurance.  This type of policy is considered very suitable for individuals who have larger amounts of money to invest and are looking for a combination of life insurance features such as death benefits which can be combined with a tax shelter investment vehicle.

Universal life is also referred to as unbundled insurance. The policy delineates or separates how the administration, the death benefits and cash accumulation features are to be handled.  This type of policy has more direct involvement and participation of the policy holder who has a variety of options and choices to make.

Universal Life Insurance Basics

  • Provides disclosure on how your premiums are divided between death benefits, administration costs and cash value accumulation feature.
  • Premiums you pay are more flexible. You can opt to pay lower premiums in your earlier years and pay higher premiums later on, or visa versa. You can even opt to take a premium holiday.
  • Allows you to alter your Cost of Insurance (COI). You can choose between either level or an increasing cost of insurance.
  • Can vary your death benefit options so that they are fixed, increasing or decreasing over the life of the policy.
  • Allows you to choose your cash value accumulation investment options which can also be changed to suit the investment climate more suitably. You can choose from a savings account option, indexed based investments such as a GCI, or growth oriented equity funds.

Pros of Universal Life Insurance

  • Provides more disclosure on how your premiums are used.
  • Allows for more flexibility in how you pay your premiums.
  • Permits you to more actively participate in how your cash value premium investment is to be invested.

Cons of Universal Life

  • Have high surrender charges in early years of the policy.
  • Too many options for the uninitiated.
  • Can have a negative impact on your cash surrender value if you make a bad investment or neglect to keep track your investment options.

Bottom Line

Both types of these permanent life insurance policies have their good points and bad points depending on your particular circumstances.  It is always best to have discuss both types of policies with an independent insurance agent like myself to get the best detailed information available