Whole life insurance vs. universal life insurance – is there a difference?


The two major types of permanent life insurance are whole life and universal life. They both offer similar benefits, but stand on opposite sides of the scale when it comes to investments. The question of which one is right for you depends on your long-term goals, and how much risk you want to take.


Knowing the ins and outs of different life insurance policies is essential to choosing the right type of coverage for your needs. In this article, we compare whole life insurance and universal life insurance: two common types of permanent insurance that give you coverage for life but also differ in important ways.

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What is permanent life insurance?

Permanent life insurance lasts for your entire life. Unlike a term life insurance policy, which only covers a specific period of time, permanent plans cover the policyholder until they pass away.

Read more about the difference between term life insurance vs. permanent life insurance.

As with all life insurance, permanent policies pay out a death benefit to your beneficiary. They’re best used for long-term needs, like taking care of estate taxes, caring for dependents, and paying for end-of-life expenses like funeral costs.

Additionally, unlike term insurance, most permanent life insurance policies have an investment component that accumulates a cash value. This is one of the most attractive features of permanent policies, in addition to the all-important death benefit options. Many Canadians use this investment component to supplement their retirement income.

Permanent life insurance usually comes with two investment options:

  • Participating policies: These generate dividends that are paid out to you every year.
  • Non-participating policies: There are no dividend payments but the cost of insurance is lower.

Read more about participating life insurance

What is whole life insurance?

Whole life insurance (WL) is a type of permanent life insurance coverage that accumulates a cash value. As with all permanent life insurance plans, it provides lifelong coverage. As long as premium payments are made for the duration of the policy, beneficiaries are guaranteed to receive a tax-free death benefit when the insured dies.

With whole life policies, the cost of insurance is decided at the start of your contract and remains fixed for the policy’s duration. This means you are guaranteed to pay the same premium rate for the rest of your life, unlike with renewable term plans.

Read our review of the best whole life insurance companies in Canada

How whole life insurance works

When you apply for a whole life policy, premium rates are decided based on the amount of coverage and other factors like your age, health, and lifestyle. In some cases, you may be asked to take a medical exam.

Once your policy is approved, you are responsible for paying premiums either annually or monthly, depending on your agreement with the life insurance provider.

Every time you pay premiums, a portion of the money goes towards keeping the policy active and covering administration fees, while another portion is invested by your life insurance provider. This money is your policy’s cash value. It increases with a fixed interest rate and on a tax-deferred basis.

You also have access to cash value during your lifetime. Or, if you cancel the policy, you can walk away with a cash surrender value of whatever has accumulated minus applicable surrender charges. This can be accessed whether you have participating or non-participating whole life insurance.

Universal life insurance allows policyholders to access the cash value savings account that earns tax-exempt interest in 4 different ways.When a whole life policyholder passes away, their beneficiary is guaranteed a death benefit. This is paid by the life insurance company as a one-time, tax-free payment. This money can be used as income replacement for family members, to cover final expenses, as an inheritance, or anything else the beneficiary chooses to use it for.

What is universal life insurance?

Universal life insurance (UL) is also a type of permanent life policy that provides lifelong coverage and a tax-free death benefit when the policyholder dies.

But what stands out the most about this type of insurance is its flexible premiums, death benefits, and investment options. This is perhaps the biggest difference between universal and both whole and term policies.

With a universal policy, you choose how much they want to pay in premiums. Of course, there is a minimum payment amount, which covers the cost of insuring the policyholder as well as administration fees. But policyholders can decide how much more they want to contribute to their policy’s cash value portion. The minimum premium cost can also vary over the course of the policy, depending on whether the size of the death benefit changes.

In addition to flexible premiums, this type of policy can give you a greater say in how your cash value is invested. You can choose between three different investment options, which vary in terms of interest rate and risk:

  • Daily Interest Account (DIA)

Interest is calculated and credited every day. The interest rate is set by the insurer and may fluctuate.

  • Guaranteed Interest Account (GIA)

Guaranteed interest rates for a specific period of time, such as 1, 5, or 10 years.

  • Variable Interest Options (VIO)

Interest depends on index performance, mutual funds, or other managed portfolios. Potentially bigger returns but also higher risk.

How universal life insurance works

Applying for a universal life insurance policy looks similar to other permanent life insurance policies: your minimum premium rate is decided by the life insurance provider based on amounts of coverage, as well as age, health, and lifestyle.

To keep the policy active, you must ensure that your policy’s premiums are paid as agreed with your insurer. When you pass away, your beneficiaries will be entitled to a one-time, tax-free death benefit.

But unlike with whole life insurance, you can decide how much money you want to pay into a UL policy’s cash value. Because of this, people may often consider universal life when they’re looking for an investment strategy.

For instance, they may treat their universal life policy as an investment account where they deposit money to be invested. The cost of the life insurance policy is deducted by the insurer, and the remaining balance can then be invested and generate tax-deferred interest.

Universal life insurance offers flexibility to choose how the cost of your life insurance should be calculated.Is universal life insurance risky?

Universal life coverage is considered risky compared to whole life insurance. Whereas whole life insurance offers many guarantees (fixed premiums, death benefit, policy dividend options), universal life insurance offers flexibility and a wider range of investment options. Naturally, this comes with greater risk.

That being said, the level of risk associated with a universal life insurance plan depends on the type of investments chosen. Universal life policyholders should always keep in mind that their cash value depends on their rate of return.

The greatest risk is if you rely on your policy’s cash value to pay your premiums. If your investments underperform and you do not have enough money in your cash value account to cover premiums, your policy can lapse. This could leave you without the crucial death benefit options that life insurance is meant to provide in the first place. It is therefore important to keep a close eye on the investment portion of your universal plan.

Whether this form of life insurance is the right choice for you depends on your appetite for risk. Even if you’re just thinking over permanent life insurance options, you should speak with a licensed life insurance expert like the ones at before you make your choice.

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What do whole life and universal life have in common?

Whole life insurance and universal life insurance share some important key features. Namely, they both:

  • Provide lifelong life insurance coverage as long as premiums are paid
  • Come with an investment component and cash value component, which can be used as collateral for policy loans
  • Pay a tax-free death benefit, just as term plans do

What is the difference between whole life and universal life insurance?

These two types of life insurance also have key differences that set them apart. Let’s take a look:

Whole Life Insurance Universal Life Insurance
  • Locked in when policy is signed
  • Level premiums do not change for duration of policy
  • Flexible
  • Policyholders choose how much to pay
  • Can increase
Death Benefit
  • Guaranteed
  • Minimum amount locked in when policy is signed
  • Not guaranteed
  • Can be adjusted by policyholder (influences cost of insurance)
Cash Value
  • Fixed interest rate
  • Guaranteed growth
  • Generates interest
  • Grows on tax-deferred basis
  • Growth depends on performance and changing interest rates
  • With participating whole life only
  • No dividends
  • Managed by life insurance company
  • Little supervision needed
  • Managed by policyholder
  • Close supervision needed

Frequently Asked Questions

Is universal life insurance cheaper than whole life insurance?

Universal life insurance can be much cheaper than whole life insurance, for a few different reasons.

With whole life insurance, you pay higher premium rates over the course of the policy to ensure a guaranteed premium rate, death benefit, and cash value.

With a universal life insurance product, on the other hand, you can choose to decrease your policy’s death benefit and premium payments based on your needs. Universal life insurance is also less expensive because the policyholder takes on more risk by generating cash value through investments rather than a fixed interest rate.

How much does whole life insurance vs. universal life insurance cost? 

Life insurance premiums can depend on factors like age, sex, health, and lifestyle.

But, to give you an idea, a non-smoking male in his mid-30s can expect to pay roughly $160 per month for a whole life insurance policy worth $250,000.

The same man can expect to pay about $120 per month for universal life insurance. But, remember, the cost of universal life insurance varies: you can choose to pay more to increase your universal life cash value.

Read more about how much life insurance costs in Canada

Which is more flexible: whole or universal life insurance?

When it comes to flexibility, universal life insurance is the clear winner.

Whole life insurance is known for its consistency. It has guaranteed premium rates, death benefits, and cash value growth.

But universal life policies let you decide how much you want to invest in the policy’s cash value component. And this type of policy gives you more control over investments, letting you decide on the level of risk to potentially maximize gains. The death benefit is also flexible; you can choose to decrease or increase the size of the benefit depending on your changing needs.

Which gives a greater cash value?

It really depends. Universal policies may have a greater potential for growth, but also greater risk. On the other hand, cash accumulation is more steady in whole life policies over time.

Whole life insurance has guaranteed and more or less predictable cash value growth. Every time you pay your monthly or annual premiums, a portion is added to your cash value, which grows based on a fixed interest rate. So, your growth is guaranteed.

Universal life cash value accumulation depends on factors like your premium payments. Remember, you decide how much you want to put into your investment account. Universal life insurance growth also depends on investment performance, which can vary depending on market conditions and current interest rates.

In a strong market, universal life insurance can have much higher returns than whole life insurance policies. In a weak market, however, returns are not guaranteed. This is why it’s important not to get dazzled by the potential growth alone.

Instead, you should have a chat with one of our insurance advisors to help determine which life insurance option is best for you.

matching life insurance to your investment style

Which builds cash value quicker?

Universal life insurance has the potential to grow cash value more quickly if you invest in your policy early on and investments perform well.

With whole life insurance, the portion of premiums that goes towards cash value decreases over time — as the cost to insure you goes up. This means that the cash value grows at a more rapid rate in the early years of the policy, but then begins to slow.

Is universal life insurance better than whole life insurance?

When it comes down to it, no type of policy is “better” than another. The best policy is determined based on your needs.

If a stable and easy-to-manage policy is what you want, then whole life insurance will be better than universal life. Of the two, it’s the lowest-risk option for policyholders.

If you want flexibility and a greater say in how your money is invested, then universal life insurance will be the best choice.

Can you convert universal life to whole life or vice versa?

No, it is not possible to convert whole life insurance to universal life insurance or vice versa. So, choose wisely before you decide to buy!

We know that with permanent coverage, there are so many diverse options and combinations that it can be tricky to plan your best move. But that’s why the PolicyAdvisor experts are here to guide you and help if you’re looking for alternative options for an existing policy. Give us a call today or schedule one in the future so we can review the best options for you and your family’s financial security.

Need help?
Call us at 1-888-601-9980 or book time with our licensed experts.

  • Whole life insurance and permanent life insurance both have lifelong coverage with an investment component
  • Whole life offers more stable growth and less control over investments
  • Universal life gives you more control over investments, but has a greater risk

By Carly Griffin
Senior Insurance Advisor, LLQP
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