Universal life insurance
Lifetime coverage with an account inside the policy that you invest, and room to adjust what you pay.
- Flexible payments
- within the limits set by tax rules
- You choose the investments
- from guaranteed to market-linked
- Cash value you can use
- borrow against it or use it as collateral
How it works
Money in, cost out, and the rest invested.
Universal life combines lifelong insurance with an account inside the policy. Your premiums go into the account, the cost of insurance comes out each month, and the rest is invested in options you choose.
Your policy stays in force as long as the account can cover the monthly cost of insurance and fees. Your cost of insurance rates are set in your contract when you buy the policy. Depending on the plan, a deposit fee may be taken from each premium before it reaches your account.
Your investments
Choose how your account is invested.
You decide how the money in your account is invested, and you can change the mix over time. Most plans offer three kinds of options.
Lower risk
Guaranteed interest
Earns a set rate for a set term, from one year to many. Many plans also have a daily interest account for money you may need soon.
Rises and falls
Index-linked
Follows the return of a chosen fund or market index, such as Canadian or US stocks, or bonds. Returns can be positive or negative.
Choose your risk level
Portfolios
A ready-made mix of index-linked options, from conservative to aggressive, so you don’t have to choose each one.
You can combine options. Management fees apply, and returns on index-linked options and portfolios aren’t guaranteed. The options available vary by insurer and policy.
Death benefit
Two ways to set your death benefit.
With universal life, you usually choose how the death benefit works. The difference is what happens to the payout as your account grows.
Illustration only, not to scale. Investment returns aren’t guaranteed, and the options available vary by insurer and policy.
With a level death benefit, your account builds up inside a payout that doesn’t change, so the amount the insurer is covering gets smaller over time. With an increasing death benefit, your beneficiaries receive your face amount plus your account value, so the payout rises as your account grows. Because the insurer is covering a larger amount, the increasing option costs more.
Using your cash value
Three ways to use your cash value.
As your account grows, you can use it without giving up your coverage. Each way works differently.
| Feature | Policy loan | Collateral loan | Withdrawal |
|---|---|---|---|
| How it works | Borrow from the insurer, using your account value as security. | Borrow from a bank or other lender, with your policy as collateral. | Take money out of your account. |
| What it means for your policy | Interest is charged. Any loan still owing when you die is paid from the death benefit. | Your policy stays as it is. The loan is repaid by you, or from the death benefit. | Your account value goes down, and so may your death benefit. Less is left to cover the monthly cost. |
Policy loan
- How it works:
- Borrow from the insurer, using your account value as security.
- What it means for your policy:
- Interest is charged. Any loan still owing when you die is paid from the death benefit.
Collateral loan
- How it works:
- Borrow from a bank or other lender, with your policy as collateral.
- What it means for your policy:
- Your policy stays as it is. The loan is repaid by you, or from the death benefit.
Withdrawal
- How it works:
- Take money out of your account.
- What it means for your policy:
- Your account value goes down, and so may your death benefit. Less is left to cover the monthly cost.
Tax. Using your cash value may be taxable, depending on how much you take and your policy’s values. We’ll walk you through it before you decide.
Before you decide
What to weigh.
Universal life gives you more control than other permanent insurance, and more to look after. These are the trade-offs to weigh.
You carry the investment risk
Except on guaranteed interest options, returns aren’t guaranteed. If your investments do poorly, your account grows more slowly, or falls.
The account has to keep up
If the account can’t cover the monthly cost of insurance and fees, you’ll need to pay more, or the policy can lapse. This matters most with a yearly increasing cost, which rises as you age.
Fees
Management fees, and on some plans deposit fees, reduce what’s invested.
It needs attention
A regular review, and another after a poor year for markets or a change in what you pay, helps keep your policy on track.
Cost
What affects the price.
Age and sex
Rates rise with age, and insurers price men and women differently.
Health and lifestyle
Your health, family history and habits such as smoking.
Coverage amount
The larger the death benefit, the higher the cost of insurance.
Cost of insurance type
A level cost starts higher and stays the same. A yearly increasing cost starts lower and rises as you age.
Death benefit option
An increasing death benefit costs more than a level one, because the insurer covers a larger amount.
Is it right for you?
Who it suits.
May suit you if
- You want coverage that lasts your whole life, and control over how the account is invested.
- You want flexibility in how much you pay, and when.
- You’ve maximized your RRSP and TFSA and want more tax-advantaged growth.
- You want to cover taxes owed at death on a cottage, investments or a business, or leave more to family or a charity.
Something else may fit better if
- Your need is for a set period, such as until the mortgage is paid off.Term life insurance
- You’d rather have guaranteed values and leave the investing to the insurer.Participating life insurance
- You don’t want to review the policy and its investments over time.
For business owners
Many business owners hold universal life policies in their corporation, for protection and planning. Business-owned life insurance
Frequently asked questions
All questionsWhat is universal life insurance?
It’s permanent life insurance with an account inside the policy. Your premiums go into the account, the cost of insurance and fees come out each month, and the rest is invested in options you choose. You can adjust what you pay, within limits, and your coverage lasts as long as the account can cover the monthly cost.
How does the investment component of universal life insurance work?
You choose how the money in your account is invested, and you can change the mix over time. Most plans offer three kinds of options: guaranteed interest, which earns a set rate for a set term; index-linked options, which follow a fund or market index and can rise or fall; and ready-made portfolios of index-linked options. Only guaranteed interest options have guaranteed returns. Management fees apply, and the options vary by insurer and policy.
Can I withdraw money from my universal life insurance policy?
Yes. You can take money out of your account, borrow from the insurer with a policy loan, or use the policy as collateral for a loan from a bank or other lender. A withdrawal lowers your account value, may lower your death benefit, and leaves less to cover the monthly cost. Any loan still owing when you die is paid from the death benefit. Using your cash value may be taxable, so we’ll walk you through it before you decide.
How do universal life insurance and participating life insurance differ?
Both cover you for life and build cash value. With universal life, you choose how your account is invested and can adjust what you pay, but you carry the investment risk, and the account has to keep up with the monthly cost of insurance. With participating life, your premiums and guaranteed values are set in your contract, the insurer manages the investments, and you may also earn dividends, which aren’t guaranteed.
What happens if my universal life insurance account runs low?
If your account can’t cover the monthly cost of insurance and fees, you’ll need to pay more into the policy, or it can lapse. There’s usually a grace period, and the insurer will let you know before that happens. Regular reviews, especially with a yearly increasing cost, help you spot a shortfall early.
A question about your coverage? Ask us.
No obligation. We’ll tell you plainly what we think, including when you already have what you need.