Whole Life or Universal Life?

Universal life was created in part to deal with some of the shortcomings of traditional whole life insurance. Whole life insurance, as the name implies, provides insurance for the insured’s lifetime. The premiums are also level, and the plan provides guaranteed cash values. Whole life policies can be divided into two categories: participating policies, where the policy owner participates in the insurance company’s profits and the plan pays out a dividend; and non-participating policies, which are lower in cost and do not pay out a dividend.

The primary disadvantage of whole life insurance is its failure to disclose how the premium is allocated between the cost of insurance, administration costs and the investment portion. Also, they do not offer the variety of investment choices found in universal life plans.

Universal life offers unbundled insurance—the policies separate out the life insurance, administration fees, premium tax and investment charges. But in many cases this separation can create further complexity. Most universal policies have multiple cost of insurance options. They offer an increasing cost of insurance structure which results in lower risk charges in the early policy years but higher costs in the later years, and a level cost of insurance structure which generates higher initial charges but the rates are level for life. The investment choices can also also vary widely, from no-risk guaranteed certificates to high-risk accounts linked to growth-oriented equity funds. AIG’s Universal Life plan has over 400 investment accounts, so you had better choose a broker who knows his/her stuff.

Universal life policies also offer flexible premiums, a choice of level or increasing death benefits, and the ability to take premium holidays if you have to stop paying your premiums in the later policy years. One caveat to beware of is that many universal life policies have surrender charges if you want to access your cash value within the first ten policy years.

Whole life policies have fewer options. The premiums are fixed and cannot be increased or decreased by the insurance company or the policy owner—some may view this as an advantage, while others may prefer more flexibility. The investment return on a participating whole life policy is linked to the profitability of the insurance company and long-term interest rates. It should be noted that while the dividend rates on most participating whole life policies have declined with the slide in interest rates, the yield in most instances is still significantly higher than found with similar low-risk universal life accounts.

The majority of non-participating whole life policies are fully guaranteed contracts. The premiums, pay periods and cash values are all contractually stated and cannot be altered by the insurance company. However, these policies produce very little cash value in the early years, so it is crucial that the policy owner be committed to this policy over the long haul before signing up.

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11 Responses to “Whole Life or Universal Life?”

Would you recommend Universal Life or Whole Life insurance for a 20 year old?

Jordan Smith thought on July 28th, 2008 8:05 pm
Hi Jordan,

Thanks for your comment. The first step in the right plan to choose is determining what you want the insurance for. If you are looking to cover a temporary need like a mortgage or business loan a Term policy may better suit your need.

Assuming you have a Permament need and want a Permanent policy the type of Permanent policy you should chhose will depend on how much control and risk you want in the plan. Universal Life offers more flexibility and control but the policy returns are non guaranteed and can flucuate widly among certain equity based accounts.

Whole Life policies offer more guarantees but less flexibility. For policies with smaller face amounts a Whole Life policy would likely make more sense because the policy fees are generally lower and thus will be a smaller percentage of the premium. Please let me know if I can help out further.

Regards … Lorne

lorne thought on July 28th, 2008 8:16 pm
What if you have a life insurance policy with A.I.G.? Is it safe? Should I cancel it? Do I get my money back? I am very confused. Please advise. Thanks, Natalie Hayward

Natalie thought on March 20th, 2009 1:59 pm
Hi Natalie,

Thanks for the note. I would not be quick to cancel your AIG policy. It may have many benefits which are difficult to replace in a new plan. The article below will provide you with some useful insights in making your decision.

http://lsminsurance.ca/life-insurance-canada/2008/09/five-reasons-stick-with

You can also call me directly at 905.248.4849 if you would like discuss your situation in more detail. Regards … Lorne

lorne thought on March 20th, 2009 2:30 pm
Hi
female 49 nonsmoker good health condition
already have 80000 dollars life insurance coverage
now think of adding more The budget is within 1200 dollars paid per year.
what kind of insurance policy will be more appropriate

faye thought on July 5th, 2009 11:16 am
Thanks for the question. The type of plan depends on your long term objective and risk tolerance. I will send you a separate email shortly. Regards … Lorne

lorne thought on July 5th, 2009 12:38 pm
Hi Lorne,
I am thinking of getting a Universal life insurance policy. Per my research Canada life, Manulife and Sunlife have better ratings. However, they have higher cost of insurance hence less contribution to the investment account. Other companies like Transamerica or Equitable have much lower cost of insurance, increase death benefit but have lower ratings. How should I make my decision of which company to go for? Moreover, how much avg. return is earned in a universal life policy? Is there any guaranteed source available?

Moe thought on July 31st, 2009 1:22 pm
Hi Lorne
Thinking of buying a Universal Life for my wife with gteed coverage until age 88 for USD 1 million. Initially thought of getting TransAce due to its lower premium upfront, but was advised to do SunLife instead due to its higher cash value over time albeit higher premium upfront. I myself already have coverage under TransAce of upto 100 yrs for Usd 2 million.
Which one should I get for my wife ? TransAce or SunLife ?
The thought is to leave something for the kids when we passed away. However, can we use this as our Pension plan as well during the old days ?
Very much appreciate your help

Thanks

kunardy thought on November 13th, 2009 12:32 pm
Hi Kunardy,

Thanks for the note. There are a number of variables which need to be examined to determine which Universal Life plan is best:

Cost of insurance
Investment options
Strength on the insurer
Available riders
Underwriting guideline

I will send you a separate email now. Regards … Lorne

lorne thought on November 13th, 2009 3:05 pm
I am single salaried person with my wife and 2 kids 7year and 3 year.

I want pure life insurance death benefit so i can support my family, If i am not there.
so I need ur expertise to finalised best policy with least expensive , I don’t want as an investment only to insure my life.

My question is which policy is beeter for me, I want to pay in 20years even for whole life for eg-

1. 20 year term policy with cover 850000 premium is 560/year

2. Universal plan 200000 for whole life +650000 rider for 20years-premium will 140/month and will pay in 20 years.
OR
3. term plan 100 ( I have no idea but looks good)

4. whole life policy

and how is Equitable as a company.

Gorav thought on February 14th, 2010 9:08 pm
Hi Gorav,

Thanks for the note - the short answer is each plan has it’s plus and minuses it depends on your situation and your needs. If you want a short term policy with no investment component a Term plan is the way to go. Equitable Life is a sound and reputable company.

We are happy to assist further.

lorne thought on February 15th, 2010 4:20 pm

Whole Life or Universal Life?

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