Investment accounts are a key component of a universal life insurance policy. These accounts hold the excess funds from your premium payments and give you the opportunity to grow wealth inside your life insurance policy, potentially in a tax-advantaged way, as long as certain rules are followed under Canadian tax law. Depending on the policy, deposits above the tax limit may go to a side account, whose growth is taxed every year.
When you pay a premium that is higher than the minimum amount required to cover the insurance costs, the extra amount is allocated to one or more investment accounts of your choice. These accounts are designed to help you build cash value inside the policy, which can be accessed later or passed on as part of your death benefit. Withdrawals and policy loans are dispositions, taxed on the amount above the adjusted cost basis.
How investment accounts work
- Premium payments are made into the policy.
Premium tax
is deducted (in applicable provinces and territories).
- The remaining amount (net premium) is allocated to the selected investment accounts.
- Each month, the cost of insurance and other charges are withdrawn from the investment accounts.
- Any remaining value has the potential to grow over time based on how the accounts perform.
Types of investment accounts in universal life insurance
While specific account offerings vary between insurance providers, most policies offer one or more of the following categories:
Daily interest account
- Offers a variable interest rate based on short-term money market performance.
- Considered low risk.
- Often used as the default account if no others are selected.
- Interest is credited daily; how often it compounds depends on the policy.
Guaranteed interest accounts
- Allow you to lock in a fixed interest rate for a set term (for example, 1, 3, or 5 years).
- Good option for conservative investors.
- Early withdrawals may result in a market value adjustment (a penalty).
Variable/index-linked accounts
- Mirror the performance of market indexes or investment portfolios.
- Higher potential returns but with greater risk and volatility.
- Do not give direct ownership of funds; returns are credited based on a benchmark or index.
- Best suited for long-term investors who can tolerate fluctuations.
Choosing the right investment mix
Your selection of investment accounts should match your:
- Risk tolerance
- Investment goals
- Time horizon
- Desire for growth vs. stability
Many insurers offer risk profile questionnaires to help determine the right allocation for your policy.
Why investment accounts matter
The performance of your investment accounts affects:
- The overall cash value of your policy
- Your ability to make premium holidays (pausing out-of-pocket payments)
- The amount your beneficiaries receive if the payout option includes the investment value
- Your long-term tax planning and estate value
If your accounts underperform or decline in value, you may need to contribute additional premiums to keep the policy in force.
Summary
| Feature | Description |
|---|---|
| Purpose | Grow cash value inside the policy |
| Funded by | Premiums above the minimum required |
| Types | Daily interest, guaranteed interest, variable/index-linked |
| Risk level | Varies by account type (low to high) |
| Tax treatment | Tax-deferred growth (within limits) |
| Access | May be withdrawn or borrowed against, subject to conditions |