Whole Life Versus Universal Life Policy – Laura McKay is the founder and CEO of Canada’s fastest growing digital life insurance company. In 2021, she was named one of Bay Street Bull’s Women of the Year. Laura holds a BA in Mathematics from the University of Waterloo. His degree focuses on actuarial science, the fundamentals of mortality risk and life insurance pricing and valuation. After completing his degree, he worked in actuarial research at Manulife and Munich Re. From 2013 to 2018, Laura worked at Oliver Wyman, a prominent management consulting firm in New York. In this role, he helped develop growth strategies, operational challenges and regulatory issues with many Fortune 500 life insurance companies.
Whole life insurance is a type of permanent life insurance that covers you for life after paying premiums.
Whole Life Versus Universal Life Policy
Part of the money you pay goes into life insurance, and the rest is divided into savings and investment components.
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TikTok may have you convinced that universal life insurance is a good investment strategy and “cheat code” for the wealthy, but that’s not always the case.
Changing universal life insurance is easy. But you should carefully monitor your policy, check whether the investment is successful or not, and make adjustments if necessary.
If investments continue to underperform, your premiums may increase. This means you can’t pay for your policy and it expires.
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When the investment portion changes, the cash value portion of your policy may increase or decrease.
This part of the cash value attracts people to universal life insurance because they know enough about it to understand that they can withdraw money from their policy by withdrawing or borrowing money.
You must pay the correct premiums and monitor your policy to ensure that the cash value does not run out. If this happens, you could lose your policy.
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For most Canadians, a universal life policy isn’t worth it. Universal life should protect your family financially
The investment side of global life isn’t known for great returns, and using tax-advantaged accounts like RRSPs and TFSAs with investments isn’t great.
“Many Canadians do not need to invest in universal life insurance until they explore other investment options. Also, the complexity of this type of policy makes it difficult to ensure their investment strategies work over time.”
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Life insurance is easier for most Canadians. This is where term life insurance comes in.
Term life insurance covers you for a specific period of time, usually 10 to 30 years. It protects you at an affordable price without the unnecessary bells and whistles of a universal policy.
The idea is that you have more flexibility in choosing how high your premiums go within the limits set by the insurer.
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This range always reimburses you for the service through insurance costs known as death benefits and administrative fees.
If you pay more than the minimum contribution, the extra amount will be added to your cash value.
This cash value may increase over time, but it’s important to remember that your estimated growth numbers are only estimates and not guarantees.
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This type of insurance often offers flexible premiums that allow you to control and adjust your premiums. They also offer you the option of getting the cash value of the policy.
Whole life insurance is a permanent type of insurance that is designed for your entire life. This period will not expire until you have paid the premiums.
These policies usually guarantee a rate up to a certain age. If you cross this age, you may have to pay a hefty premium to keep the policy in force.
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If your policy lapses due to non-payment, you will need to start a new policy later in life, which can be expensive, so it is better to get a Canadian senior life insurance policy.
“Universal life insurance is for people who want to get the most out of their policy and investment. It’s not a ‘set it and forget it’ policy like life insurance.”
Universal life insurance is expensive and complicated to manage, so it’s not the best choice for most people who need affordable premiums and a simple policy to understand.
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In addition, there is little room for tax benefits in life insurance policies, and new tax rules in Canada starting in 2017 make universal life insurance less attractive.
The reality is that most Canadians need term life insurance, at least for those who are financially dependent on them.
A cheaper bonus over time means you can save money and invest the difference. Then, after your term expires, you can continue to invest without tying up your money in expensive policies.
Variable Life Vs. Variable Universal: What’s The Difference?
As a permanent type of insurance, your whole life insurance policy remains active as long as you pay your premiums.
Typically, you can adjust premiums and rewards, offering flexibility as your lifestyle or income changes.
When you pay premiums, a portion of the money goes into an account that represents the cash value of your policy, and you can earn interest over a period of time.
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As with most life insurance policies, the death benefit to your beneficiary is tax-free. However, interest earned on the cash portion of your policy is tax-deferred, which may be beneficial in your situation.
There are different types of universal life insurance, and these options give you flexibility in choosing how to use the investment portion of your policy.
Universal life insurance is not an affordable option for most people. This can be very expensive, making it difficult for insurers to continue paying to keep their policies active.
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Term life insurance is the most affordable in Canada; Spouse Insurance offers a 10% discount for the first year that married couples file jointly.
Your insurer may limit your cash back or limit how much you can invest based on tax laws, so ask about ‘participation rates’ or premium limits before you sign up.
There is no practical version of these instructions. You must pay the correct premiums and monitor your policy to ensure that the cash value does not run out. If this happens, you could lose your policy.
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While the investment part is attractive, it’s wise to carefully consider the interest you can earn. If you want to invest in your financial future, you’re better off with a traditional investment account like a TFSA or RRSP.
Cash value is one of the features most people are familiar with when it comes to whole life insurance, but it takes time to build. In the event of an emergency, it is wise to have a clear idea of how long it will take to recover your life insurance or take out a loan.
These policies are often sold as flexible coverage that can be adjusted over time as your needs change. This may sound like a good thing, but keep in mind that increasing coverage requires a medical exam, which can result in higher premiums.
Annuity Vs. Life Insurance: What’s The Difference?
If you are a high net worth individual who has maximized your other investment options, you may want to consider universal life as an option. But it is not a good investment because of its limited returns.
The real concern is how these policies were marketed as investments. In many cases, customers do not understand how the policy works and do not review it carefully when necessary.
In the worst case, when the policy is sold, the returns are overstated, giving people the impression that it is safer than it actually is.
Indexed Universal Life Vs Whole Life
Then, over time, premiums go up, policies are underfunded, and people suddenly can’t afford to keep their policies active.
There are several types of universal life insurance. While they all offer lifetime coverage, they differ in how they are structured.
This type of universal life insurance is commonly known as ownership, so you may need to do some research to find out what kind of policy you’re looking for.
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This is sometimes called “non-delayed universal life insurance”. No cash value means you don’t have to worry about your policy running out because you don’t have enough cash to pay the premiums.
Guaranteed universal life insurance can be offered as a way to get the lowest premium for universal life insurance.
However, at that time the policy is like a whole life policy, so it would be a better option.
Term Vs. Whole Life Insurance: What’s The Difference?
Even more attractive, if you remove the cash value component, this policy is closer to term life insurance.
If affordability is more important to you than cash value, consider term life insurance. Term life insurance offers coverage at a price that suits your needs.
Note: Indexed universal life insurance is actually declining in Canada
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