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.

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.

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.

Usually not. Most universal life policies have no option to convert to whole life. To switch, you’d apply for a new policy and answer health questions again, and cancelling your universal life policy may be taxable if its cash value is more than what you’ve paid in. Keep your current policy until the new one is in place.

Most universal life policies don’t mature: they cover you for life. Paying at least the minimum premium your policy sets keeps your coverage in force. If you pay less, the account inside the policy has to cover the monthly cost of insurance and fees, and if it runs short, you’ll need to pay more to keep your coverage.

Not under those names. Indexed universal life (IUL) and variable universal life (VUL) are US products. In Canada, universal life insurance offers similar choices: index-linked options that follow a fund or market index and can rise or fall, alongside guaranteed interest options. See How does the investment component of universal life insurance work?

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.