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Whole life vs. universal life insurance

These permanent policies build cash value, but they suit different types of investors.

Whole and universal life insurance are both permanent policies that have death benefits and build cash value as investments over time. But they have a few key differences in terms of flexibility and how your money is invested.

What is whole life insurance?

Whole life insurance is a permanent policy that offers lifelong coverage and has a cash value component. The premiums typically stay the same for the life of the policy, and the cash value earns interest at a fixed rate set by the insurer. For this reason, it’s the most basic — and least risky — permanent policy.

What is universal life insurance?

Sometimes known as adjustable life insurance, universal life insurance is a permanent policy that offers the flexibility to change the amount and frequency of your premium payments. It also allows you to increase or decrease your death benefit. The cash value grows through accounts that offer a fixed interest rate set by the insurer, interest earned from a chosen investment portfolio, or returns tied to the performance of a stock index. Since it’s subject to market conditions, the returns may fluctuate over time.

Key features of whole vs. universal life insurance

Whole life insuranceUniversal life insurance
Lifelong protection
Fixed premiums
Flexible premiums
Builds cash value
Investment component
Guaranteed death benefit
Fixed interest rate
Variable interest rate
Tax-free growth
Dividend payments✔ (for “participating” policies)(Policies are usually “non-participating,” meaning dividends are not paid)
Policies available with no medical exam(Medical exam is usually required to apply)

What you should know about whole life insurance

When you’re weighing your options, these are the main things to keep in mind about whole life insurance:

  • You may be able to purchase a no-exam policy. This is known as simplified issue life insurance. Since your insurer is taking on more risk, it charges a higher premium, and the death benefit is usually capped at a lower amount like $25,0000.
  • Your premiums will typically stay the same. You can expect to pay the same amount every month. That being said, there are a handful of whole life policies with increasing premiums, so be sure to read the fine print. For premiums that stay the same, you’ll want to sign up for a guaranteed level premium policy.
  • You’ll probably be paid dividends. If your insurance company is a mutual firm, you’ll get annual dividends that reflect its profits and success. You can choose to receive them in cash or let them accumulate interest. You can then use the dividends to reduce your policy’s premiums or buy more coverage. Even if the company is financially strong, dividends aren’t always guaranteed, so think of them as a bonus.
  • It forces you to save. Whole life bundles your insurance and investment, so it works as a forced savings vehicle. This is an attractive feature for those who lack the discipline to save on their own. It’s also popular among people with financial assets to protect, as the cash value can be used to pay estate taxes.
  • The cash value increases regardless of market conditions. With each premium payment, your cash value increases. Whole life offers fixed returns, while universal life’s returns fluctuate with the market. This makes whole life a more secure permanent policy for the risk-averse.

What you should know about universal life

Universal life insurance is a more complicated product. These are its key differentiators:

  • You can change your premiums. You have the liberty to adjust the amount and timing of your payments to suit your financial situation. This feature is unique to universal life insurance and is ideal for those whose income fluctuates or who can’t commit to steady monthly payments. Keep in mind that this flexibility kicks in after you’ve paid your first premium and built up enough cash value.
  • The premiums increase as you age. Unlike whole life, universal life premiums can rise over time.
  • You can increase or decrease the death benefit. The flexibility of universal life policies extends to the death benefit as well, which you can adjust at will. The higher the death benefit, the more expensive your premiums will be. To increase coverage, you’ll most likely need to pass a medical exam. To lower it to a minimum amount, your insurer may apply surrender charges to the cash value of your policy.
  • The interest rate is subject to change. With universal life, you’ll earn interest on the cash value of your policy, but the rate isn’t fixed. It changes based on market conditions, without dipping below your policy’s guaranteed rate. This makes universal life a riskier investment, with potentially greater returns. Indexed universal life policies (IUL) are tied to an index, like the Standard & Poor 500 or Nasdaq 100.
  • You can get a no-medical-exam policy, but it will cost you. Like with whole life, it’s possible to find universal life insurance policies out there that don’t require a medical exam. However, you’ll pay more for this convenience since the insurer is assuming the risk of covering you for life without getting an accurate assessment of your health.
  • Universal life doesn’t benefit from dividend payments. If your insurer is a mutual company, you likely won’t receive any dividend payments on its profits.

What is the cash value component?

All permanent life insurance policies have a cash value component. When you pay your premium, a portion is invested to give your policy a “cash value.” With whole life insurance, that cash value grows at a fixed rate of return — which means you’ll be able to predict your returns each month.

However, universal life insurance is linked to the performance of an index, like the S&P 500, and it earns interest based on that. As a result, it has a higher potential return — but it also comes with a higher risk.

When you build up enough cash value, you can start to borrow against your policy. But it isn’t like a savings account, where the money is yours to spend or leave to a beneficiary.

Taking loans out against your policy’s cash value

When you withdraw money from the cash value in your policy, you’re taking out a loan against the policy’s value. If you don’t pay it back in full and with interest, your insurer will dip into the death benefit when you die. This means your beneficiaries might not receive as much money as you intended.

You can use the cash value for whatever you want. You might:

  • Borrow money for a big purchase. You can take out a loan against your policy to put a down payment on a house or to cover medical bills or a sudden loss of income.
  • Protect your retirement fund. If you have a whole life insurance policy, and most of your retirement fund is in stocks, you can borrow from your policy when the market is doing poorly and repay it when the market swings back up. This can help protect you from the financial consequences of cashing in stocks for your retirement when the market is down.
  • Pay for your insurance premiums. You can leverage the cash value of your policy to pay for your insurance premiums.

Are loans borrowed against the cash value of a life insurance policy taxable?

Withdrawals from your policy’s cash value may be subject to income tax depending on the value of the policy. If the amount withdrawn is equal to, or less than, the adjusted cost basis (ACB) of the policy, the withdrawal is tax free. Any amount withdrawn above the ACB is taxable as part of the policy’s “realized capital gain.”

What happens to my cash value when I die?

Think of your cash value as “use it or lose it.” If you die before withdrawing or collecting the cash value of your policy, your insurer will absorb it. Your beneficiaries won’t receive any accumulated cash value with the death benefit.

Should I buy whole life or universal life insurance?

Ultimately, your life insurance needs should suit your financial situation and goals. While whole life and universal life are similar in many ways, they have key differences that may sway you one way or another.

These factors may help you make an informed decision.

Consider buying whole life insurance if …

  • You like stability. With whole life insurance, everything is fixed: Your premiums, the death benefit and the interest you’ll earn on your cash value benefit. All you have to do is continue making your payments and trust that everything else is being taken care of.
  • You’re working with a budget. For planners and careful savers, whole life is an ideal permanent life insurance policy. The premiums are consistent, so you know exactly how much you owe every month, which makes budgeting easier.
  • You’re young and healthy, but your family has a history of serious health conditions. If you have a family medical history of cancer, stroke or heart disease, you might want to lock in a good rate now, while you have no health complications. Whole life is typically the least expensive type of permanent life insurance.
  • You want to invest without thinking about it. Your insurer manages the investment portion of your policy, so you don’t have to figure out how to grow the funds yourself. With universal life, you have to participate a little more by choosing which investments you’d like to be involved in.

Consider buying universal life insurance if …

  • You want to change your coverage to suit your circumstances. In the world of life insurance, universal life policies offer an unparalleled degree of flexibility. You can adjust the amount and timing of your payments, as well as the death benefit.
  • You’re comfortable with risk. Unlike whole life, universal life’s returns aren’t fixed. They’re privy to market conditions, meaning they come with greater risk, but offer potentially greater returns. If you’re interested in risky investments but don’t have the discipline or expertise to invest on your own, it’s worth exploring universal life insurance.
  • You like the idea of your premiums being tied to interest rates. Typically, universal life premiums are lower when interest rates are high, and vice versa. This isn’t the case with whole life, whose premiums stay the same. Also, the interest rates for universal life policies are adjusted monthly. This means that during periods of high-interest rates, policyholders may see their cash values rise rapidly.

Compare life insurance companies that offer whole life insurance policies

1 - 3 of 3
Name Product Types of Insurance Coverage Range Issue Ages Medical Exam Required Province Availability
Whole Life, Term Life, Universal, No Medical
$25,000 - $25,000,000
18 - 75
PolicyAdvisor is a digital life insurance brokerage that has partnerships with 20 insurers in Canada.
Sun Life Go Guaranteed Life Insurance
Whole Life
$5,000 - $25,000
30 - 74
All of Canada
Permanent life insurance coverage that guarantees fixed premiums until 95 years old (and no premiums thereafter).
Connect with a Sun Life Advisor
Whole Life, Term Life
18 - 74
All of Canada
Fill in a quick form and a Sun Life advisor will contact you to help you find the right life insurance policy for your needs.

Compare up to 4 providers

Alternatives to whole and universal life insurance

If whole and universal life insurance are too expensive, or if you’re not ready to make a long commitment yet, consider getting a term life insurance policy instead. These policies are less expensive and active for a set period of time like 10, 20 or 30 years.

If you want to save without but committing to a permanent life insurance policy, research retirement accounts to find one that’s a better fit for your needs.

Bottom line

Whole life and universal life both offer lifelong coverage. They also turn into cash assets over time, but universal life is a riskier investment that requires more participation on the policyholder’s part. For stable premiums and interest rates, whole life might be the better choice. If you’re a keen investor who wants the freedom to tweak your policy, look into universal life.

Either way, be sure to compare life insurance companies before signing the dotted line.

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