There are two main types of permanent life insurance policies: whole life and universal life. In 2024, these policies collectively represented 83% of the Canadian life insurance market, with whole life accounting for 69% and universal life for 13%.
While these two policy types may be similar at first glance, there is a world of difference between them that you should be aware of if you’re considering buying a life insurance policy.
Our editorial team researched this topic using information from the federal life insurance guide, FSRA’s life insurance policy-type guide, FSRA’s guidance on working with a life insurance agent or company and FSRA’s policy-reading checklist. We summarized this information below.
What Is the Difference Between Whole Life and Universal Life Insurance?
Whole life insurance emphasizes the fixed elements of these contracts: premiums, the base death benefit and guaranteed cash values shown in the contract. Non-guaranteed dividends apply only to participating contracts.
Universal life contracts separate insurance and investment. The amount and timing of deposits and the available investment options are flexible within the contract limits. Cash values and funding requirements can therefore change with investment returns, charges and deposit decisions.
Neither type of insurance is necessarily better. Determine whether you need life insurance protection for your entire lifetime. If so, compare guaranteed amounts, deposits, illustrations under poor-performing scenarios, withdrawal restrictions and the amounts you would receive if the contracts were surrendered.
If insurance is needed for a limited period, such as while repaying a mortgage or during career or child-rearing years, generally lower-cost term insurance may meet your needs.
Whole vs. Universal Life Insurance: Key Differences
Whole life and universal life policies are similar in that they are permanent life insurance policies, meaning that they are designed to remain in force for life if contractual funding requirements are met. However, there are significant differences between them, as shown in this table:
| Feature | Whole Life Insurance | Universal Life Insurance |
|---|---|---|
| Premium Structure | Fixed, predictable premiums over the life of the policy. Once set, the premium remains constant, making budgeting easier. | Flexible premiums that allow you to adjust your payments based on current financial conditions. This flexibility can be beneficial if your income fluctuates over time. |
| Cash Value Growth | Guaranteed cash value accumulation. | The cash value grows on a tax-deferred basis. |
| Tax Implications | The cash value grows on a tax-deferred basis. | Similarly, tax-deferred but the flexible nature means policyholders must monitor their account to avoid potential taxable events if the account value exceeds certain thresholds. |
| Estate Planning | Offers predictable benefits for estate planning. The guaranteed death benefit can provide a straightforward transfer of wealth, making it easier to plan for heirs and taxes. | Provides more adaptability, allowing adjustments in the death benefit and cash value, which may be helpful in more complex estate planning situations. |
| Investment Component | Typically conservative. Cash value growth is usually based on the policy’s guaranteed values. | Can incorporate investment sub-accounts, allowing for potential exposure to equity markets, though this introduces a degree of investment risk. |
| Flexibility | Less flexible once the policy is in place; changes in premium payments or death benefits are limited. | Offers high flexibility in adjusting premiums, death benefits, and investment choices, catering to those who prefer a hands-on approach to managing their policy. |
What Is Guaranteed and What Is Only Illustrated?
| Value on an illustration | How to treat it |
|---|---|
| Premium or deposit schedule | Check which contractual payments are guaranteed and which are based only on the illustration. |
| Guaranteed death benefit | Distinguish guaranteed amounts from illustrated amounts at different ages. Determine what may reduce the benefit, such as loans, withdrawals or missed payments. |
| Guaranteed cash surrender value | If the contract includes guaranteed values, focus on those columns rather than values based on current assumptions. |
| Participating dividend | Dividend scales are not guaranteed. Ask what happens if dividends decrease and whether you would need to continue paying premiums. |
| Universal life investment return | Returns are not guaranteed. Compare lower-return scenarios after all charges. |
| Premium holiday or skipped deposit | Coverage is not free. Ask what account value will pay the policy charges and when additional deposits may be required. |
Ask for and keep a copy of any illustration you sign. The contract takes precedence over the illustration.
An illustration may include guaranteed and non-guaranteed figures. Don’t assume that amounts appearing in current or projected columns are guaranteed.
Read More: See How Participating Life Insurance Works
When Whole Life Insurance May Make Sense
Whole life insurance may make sense if you have a permanent insurance need, such as covering final expenses, providing liquidity for a large estate or leaving money to charity. You should be able to qualify for the insurance and pay the required premiums without counting on dividends, which are not guaranteed.
Because of the costs associated with whole life insurance, cash values may be low during the first few years. Whole life should not be treated as a short-term savings product.
Policy loans must be repaid. Unpaid loans can reduce the death benefit or cash value.
Read More: Explore Whole Life Insurance Options
When Universal Life Insurance May Make Sense
Universal life may make sense if you:
- Have a continuing insurance need
- Want some control over the investment or interest options in the contract
- Can support the policy under a conservative investment-return scenario, not only the current illustration
- Will review the policy every year, including its charges, account value, deposits and ability to remain in force
If returns disappoint or you withdraw money from the cash value, you may have to make larger deposits to keep the policy in force.
Before buying universal life, ask whether the insurance costs can increase, how long returns are guaranteed for each option and what the policy ledger would look like if returns decreased.
Read More: Explore Universal Life Insurance Options
How Surrender Charges, Withdrawals and Loans Change the Result
Permanent policies are long-term contracts. Before purchasing one, compare the cash surrender values with the total premiums or deposits paid in years 1, 5, 10 and 20. Consider how surrender charges, withdrawals and loans change the result.
Accessing cash in a policy can have tax consequences. Policy loans are not always tax-free.
Before making withdrawals, taking out loans, surrendering the policy or making major changes, ask your insurer for specific calculations. Check with a qualified tax advisor about your situation.
Read More: Read the Guide to Borrowing Against Life Insurance
Compare Different Policy Scenarios
Look at illustrations for policies with the same amount of insurance, the same insured and health rating, and the same number of premium-paying years. Comparing illustrations set up for different needs isn’t helpful.
Make sure the illustrations show guaranteed and non-guaranteed values in separate columns. Note anything that can change, such as investment returns, premiums, dividends, cash values and death benefits.
For a universal life illustration, review a scenario that assumes lower investment returns and identifies all charges. Ask how much you would have to deposit to keep the policy in force to a specified age under different return assumptions.
For participating whole life, review an illustration using current dividends and one using lower dividends. If the plan depends on dividends to offset premiums, ask what happens if the dividends decrease.
Ask why permanent insurance makes sense based on the results of a needs analysis. Ask why lower-cost term insurance, or a combination of permanent and term coverage, isn’t a better choice.
Read More: See Whether Whole Life Insurance Can Be a Good Investment