Whole Life versus Universal Life

Whole Life versus Universal Life

Whole life insurance, as the name implies, provides lifetime coverage. The premiums are also level, and the plan provides guaranteed cash values. Whole life policies can be divided into two categories:

a.  participating policies where the policy owner participates in the insurance company’s profits and the plan pays out a dividend; and

b.  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 divided between the cost of insurance, administration costs and  investment.Whole Life Insurance does not offer a variety of investment choices.

Whole life policies have fewer options. The premiums are fixed and cannot be changed. The investment return on a participating whole life policy is linked to the profitability of the insurance company and long-term interest rates.

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.

Universal life was created in part to deal with some of the shortcomings of traditional whole life insurance. It offers unbundled insurance—the policies separate out the cost of  life insurance, the administration fees, premium tax and investment charges. Most universal policies have several cost of insurance options. They offer an increasing cost of insurance structure ( YRT) which results in lower risk charges in the early policy years but higher costs in the later years.  There is also a  level cost of insurance structure which generates higher initial charges but the rates are level for life. The investment choices can also vary widely, from no-risk guaranteed certificates to high-risk accounts linked to growth-oriented equity funds.

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. Many universal life policies have surrender charges if you want to access your cash value within the first ten policy years.

For Universal Life Insurance and Whole Life Insurance, please feel free to contact Aman Kapur at www.youinsuranceguy.ca or by phone 1-416-509-2540 to assist with the plan of your choice. Or simply click here to request a quote


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