The seven key differences between Universal Life Insurance and Whole of Life Insurance 

Asian woman presenting in a business meeting.
Issue 3, June 2022 | PCS Vision

The decision to incept a life insurance plan to safeguard you and your family as well as maintain peace of mind is a relatively easy one to make. But choosing the right insurance products from the vast array of available options is not as simple. This is especially true as protection products continue to evolve in sophistication as financial instruments.

In this article, Mercer PCS Managing Director, Isaac Lim, clarifies the key differences between Universal Life Insurance (ULI) and Whole of Life Insurance (WoL) in Asia.

A brief look back at ULI and WoL in Asia

Trends in life insurance plan have generally been driven by a combination of product innovation and investment market conditions. In Asia, high net worth (HNW) individuals have had Universal Life Insurance for over 20 years.

Whole of Life solutions came into wider usage around eight to nine years ago for HNW individuals, as it evolved to better complement their growing financial complexity and needs. In recent times, with the availability of premium financing and more competitive premiums, more high net worth individuals are considering Whole of Life solutions.

Some things in common

Both WoL and ULI combine life protection coverage with savings elements. And in most cases, policy holders can borrow against the cash value of the policy.

WoL and ULI are popular insurance plans for HNW clients who want protection for their family, wealth transfer, and estate-equalization solutions.

Premiums for both types of protection solutions are determined based on actuarial projections.

Seven key differences

Whilst there are individual product variations within the two categories (as insurers continue to build new and better product features to make permanent life insurance more attractive) there are also some fundamental differences between ULI and Whole of Life products.

As demonstrated below, Whole of Life policy benefits and contributions are guaranteed and level. ULI provides flexibility in lieu of those guarantees.

With Universal Life policies, you have more flexibility to structure the policy according to your needs – like overfunding in the policy. How much you pay on your policy then directly affects the fluctuation of the policy’s cash value and death benefit. Instead of guaranteed or non-guaranteed dividend/bonus like WoL, ULI policies are credited based on interest rates and have a minimum guaranteed crediting interest rate.

A side by side comparison

Universal Life Insurance

Whole of Life

Investment only in investment-grade bonds

Government and corporate investment-grade bonds.

Investment in investment-grade bonds as well as other asset classes

Only 50-60% of WoL investment is invested in bonds. The remainder is invested in other asset classes such as equities, mutual funds, and real estate investment trusts.

Transparent crediting interest rate and cost that can change over time

The crediting interest rate and cost of insurance are transparent, so policy holders understand their cost of insurance deducted from the account value and the amount of interest credited to the policy.

Guaranteed/non-guaranteed dividends

The dividends and cost of insurance are not transparent.

Possible to increase or decrease death benefit without surrendering your policy

You can adjust the death benefit as required, increasing it (often subject to a medical assessment) if your circumstances change, or lowering it to reduce premiums.

Fixed and guaranteed death benefit

Death benefits are guaranteed. Depending on the insurer, death benefits can be guaranteed up to age 100 or age 120.

Cash value potential, but not guaranteed

If there is enough cash value in the account, you have the flexibility to withdraw cash, and this can affect the death benefit.

Guaranteed cash value during policy holder’s lifetime

The cash value grows as the annual dividends are credited to the policy. The dividends can be withdrawn without affecting the death benefit.

Policy at risk of lapse

If the investments perform under expectations for an extended period of time, and the cost of insurance is at the maximum amount, there is the risk of policy lapse.

No risk of policy lapse

As long as the premiums are paid, WoL policies will not lapse.

Whilst the key differences between WoL and ULI can be demonstrated, Mercer PCS believe the real life application of any product should absolutely depend on the unique circumstances of each individual’s need and planning for his or her family.

When making life protection decisions, circumstances such as age, health, risk profile, family structure, financial goals, lifestyle, and cash flow must be carefully considered, all the while taking into account the continuous emergence of new insurance products and features. The complexity means HNW individuals are advised to seek expert, unbiased advice before making any crucial decisions.

*This article is general in nature and not intended as advice; it might not be appropriate to you.

Contributor(s)
Isaac Lim

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