What is the difference between universal and whole life insurance?

By Jacques Wong | Last updated: July 24, 2017

Many people find this distinction confusing when they are first learning about life insurance. And we can hardly blame them when many people – even those in the life insurance industry – use the two terms interchangeably to refer to permanent life insurance products. While it's true that universal and whole life insurance are meant to continue until the day the insured passes away, there are important differences between the two types of policies.

The biggest difference between the two is the way the insurance premiums are priced and charged (find out What Influences Life Insurance Premiums). With whole life policies, the insured will pay the same premium every month and, if they fail to make a payment, their policy can be cancelled.

With a universal life insurance policy, however, there is more flexibility when it comes to premiums. If the insured falls on hard times and has difficulty making payments, they can drop their insurance coverage to the lowest level in order to save money without having the policy cancelled on them.

Of course, with both of these options, you can have your premium payments covered by the accumulated cash value in the policy if you decide not to pay for them out of pocket.

While universal life insurance has that extra flexibility, whole life policies generally have slightly higher premiums. This is because there is a guaranteed cash value accumulation component to the whole life policy, on top of the regular insurance portion. This means you can take out something called a policy loan, which allows you to draw from the accumulated cash value on your policy at a very low interest rate.

With whole life insurance policies, coverage options are also fixed starting from the date of purchase. The death benefits and other features cannot be changed on the fly once the insured has chosen them. Universal life insurance operates in completely the opposite way.

Generally speaking, universal life insurance is more flexible than whole life insurance in the sense that they can increase or decrease their death benefits, thus changing the monthly premiums. The insured may also pay their premiums at any time and in any amount they wish.

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Written by Jacques Wong

Profile Picture of Jacques Wong

Jacques grew up around the insurance industry and began actively participating in 2013. Since then, he has gotten a Level 2 license, won Insurance Council of BC awards in 2015 and 2020 for academic excellence in the insurance licensing courses. He educates insurance professionals through PNC Learning and as a Thought Leader at ReFrame Insurance.

In his day job as an insurance broker, he helps businesses with creative risk management solutions and strategic advice when it comes to insurance.

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