Universal Vs. Participating: Permanent Life Insurance Options for Canadians

It's easy to get overwhelmed by life insurance choices. First of all, figuring out how much life insurance you need can be complicated in and of itself. Choosing a policy type only adds to the complexity. Most of the time, agents and brokers try to get you to focus on the premiums. The more you pay, the more "expensive" the policy is, or so you are told. But life insurance isn't a commodity product. Some of the best policies are permanent contracts - they're flexible and offer a solid financial base to work from. 

Universal Life

Universal life, also called "UL" for short, is nothing more than a blend of term life and an investment account. While you can't separate one from the other, it's often referred to as an "unbundled" policy. This means that you can easily see what the cost for insurance is in the policy, and what the insurer charges you for the investment function. 

•The insurance component

This is the basic death benefit feature of the policy. Like all term life insurance, the basic death benefit is guaranteed so long as all premiums are paid. Universal life's term component is a one-year annual renewable term policy. This means that, every year, the term insurance premium rises because the cost of insurance rises as you get older.

Canadian insurers set a maximum insurance charge, however, and guarantee that you will never pay more than a set dollar amount. Plus, the investment function is designed to provide the necessary cash to pay for the rising costs in the policy.

The death benefit, and premiums, are also flexible with a UL policy. You can choose between an increasing death benefit (which increases every year) or a level death benefit (which stays level for the life of the policy). While the contract is in force, you can switch back and forth between these two options and even change the exact death benefit amount, lowing or increasing it. Increasing the death benefit often requires permission from the insurer as well as additional medical underwriting.

For example, if you start a policy with $100,000, and an increasing death benefit, your policy's benefit may grow to $200,000 after many years. At some point, you may wish to level off the death benefit, so you switch to the level death benefit feature. Your policy's benefit stops growing. As you get older, you realize you don't need so much insurance, so you keep the benefit level, but drop the actual coverage amount to $100,000 - your policy costs drop as a result since you're buying less insurance.

During this entire time, you can increase, decrease, and even stop premium payments at any time. As long as there is enough money in the cash value reserve account to pay for the cost of insurance, premiums are not on a fixed schedule. 

•The investment function

The investment function of the policy is often referred to as the cash value or "cash value savings." Each month that you pay premiums, money goes directly into this cash account. The insurer then deducts an amount of money to pay for the death benefit. Then, the company credits the account with interest from investment earnings. UL policies offer several ways to earn interest. You can choose between the company's general investment account, comprised of fixed-interest investments, or the separate account, comprised of mutual funds. 

If, at any time, the cash value account balance falls to zero, your policy terminates. The downside to UL policies is that, while the insurer guarantees the death benefit if all premiums are paid, there's no explicit guarantee that the cost of insurance won't rise substantially - this might cause the death benefit to become prohibitively expensive in your advanced age.

Those costs could rise above what the investment account is earning, causing the policy to "collapse." This is a good policy if you're comfortable sharing that risk with the insurer in exchange for flexibility in policy provisions. 

Participating Whole Life

Companies, like www.Kanetix.ca, almost always give you access to a UL alternative - whole life. Participating whole life is a particular kind of whole life policy that pays dividends. Unlike universal life, whole life is very simple. 

The policy is bundled, so the costs are not transparent, but the policy guarantees both the death benefit and a basic cash value amount. Participating policies offer the additional benefit of non-guaranteed dividend payments on top of the base cash value amount. Premiums are level and must be paid each month to maintain insurance coverage, though dividends and cash value can be used to cover those costs if you cannot pay for them out of pocket. 

Participating whole life is designed to grow the death benefit and cash value at a predictable pace throughout your entire life. it's a good policy if you want strong guarantees and certainty in your policy.

Jessica Watts spent many years working in the insurance industry. Now retired, she likes to keep one foot in the business by blogging online.