Universal life insurance (UL) combines lifelong coverage with tax-advantaged investment components. This offers benefits but also downsides compared to other policy types. Universal life insurance can be an intelligent choice, but only for the right individual.
Overview: What is Universal Life Insurance?
Universal life insurance provides lifetime protection and investment features that allow you to grow tax-deferred savings. Here’s an introduction:
- You select an initial death benefit amount, such as $1 million. Upon your death, this tax-free payout goes to your beneficiaries.
- A portion of your premium covers the pure insurance costs. The remainder gets deposited into a cash value account within your policy.
- You earn variable interest on the cash value based on the performance of investments you select. It grows tax-deferred.
- The death benefit and cash value can be adjusted, and you can access funds via loans or withdrawals.
- If your cash value covers the monthly insurance costs, the policy remains active for life.
Unlike whole life insurance with fixed premiums, universal life insurance offers flexible payments within certain limits the insurer sets. You also have some control over how the cash value gets invested.
Pros and Cons of Universal Life Insurance in Canada
Universal life insurance has unique benefits but also downsides to evaluate:
Pros of Universal Life Insurance in Canada
Lifelong coverage – Stays in force if premiums are paid.
Tax-deferred savings – Cash value grows tax-deferred.
Adjustable premiums – Payments can be raised, lowered, or skipped.
Loans and withdrawals – Access cash value when needed.
Adjustable death benefit – Some policies allow you to modify the payout.
Market participation – Investments provide upside potential.
Cons of Universal Life Insurance in Canada
Cost – More expensive than term life insurance.
Investment risk – Potential for cash value losses.
Complexity – There are many moving parts to manage.
Lapse risk – Underfunding can cause loss of coverage.
Surrender penalties – Fees for early cancellation.
Tax implications – Loans and withdrawals may be taxable.
Universal life insurance offers unique flexibility but also downsides. It’s crucial to understand the risks.
Who is Universal Life Insurance Good For ?
Universal life insurance is best suited to these types of individuals:
- High net worth Canadians – Maximizes tax-deferral once registered accounts like TFSAs are maxed out.
- Business owners – Can fund buy-sell agreements or compensate partners upon death.
- Those with lifelong dependents – Ensures care for a special needs child after you’re gone.
- Advanced estate planning – Creates a growing, income tax-free legacy for heirs.
Low-cost term life insurance better serves those needing temporary insurance. Whole life insurance provides better guarantees and is more straightforward to manage than universal life.
Types of Universal Life Insurance in Canada
There are a few main types of universal life insurance policies offered by Canadian insurers:
- Guaranteed Universal Life – Provides a guaranteed death benefit and stable premiums. The cash value accumulation is minimal.
- Indexed Universal Life – Interest on the cash value is partially tied to a market index. Offers some upside without full stock market risk.
- Variable Universal Life – You invest your cash value across various subaccounts. Allows unlimited growth potential but maximum risk.
Comparision types of Universal life insurance in Canada
Here is a comparison of some features:
| Policy Type | Premium Flexibility | Investment Options | Risk Exposure |
|---|---|---|---|
| Guaranteed Universal Life | None | No cash value | Minimal |
| Indexed Universal Life | Moderate | Index-linked | Moderate |
| Variable Universal Life | High | Mutual funds | Maximum |
What Does Universal Life Insurance Cost in Canada?
Your universal life insurance premiums will vary based on factors like:
- Age
- Gender
- Health status
- Amount of coverage
- Length of coverage
- Investment options
For instance, a healthy 30-year-old male seeking $500,000 of coverage may pay (according to PolicyAdvisor December 2022 data):
| 10-Year Pay Policy | Lifetime Pay Policy |
|---|---|
| $200 monthly | $75 monthly |
Those with health issues could pay 2-3x as much. Guaranteed universal life insurance tends to be the most affordable but needs cash value growth.
How Universal Life Insurance Works in Canada
With universal life insurance, premiums cover the current insurance charges plus contributions to the tax-deferred cash value account.
For example, with a $500 monthly premium:
- Cost of insurance: $100
- Cash value contribution: $400
This $400 monthly cash value contribution earns variable interest based on investments like index funds or money markets.
You can access the accumulating cash value through:
- Policy loans
- Withdrawals (tax implications)
- Full surrenders (surrender charges may apply)
Upon your death, beneficiaries receive the income-tax-free death benefit payout. The insurance company keeps any remaining cash value.
The Cash Value Component of Universal Life Insurance
A key feature of permanent life insurance policies, such as universal life and whole life, is cash value. Here are details on how it works:
- A portion of your premiums gets credited to the policy’s cash value account.
- This earns interest at a variable rate linked to market performance.
- The cash value grows tax-deferred as long as it stays within the policy.
- You can access cash value via loans, withdrawals, or surrendering the policy.
- Loans and withdrawals will reduce your death benefit and may have tax implications.
- Your heirs don’t receive the cash value payout – only the death benefit.
With whole life insurance, the insurer manages the cash value. However, universal policies allow you to choose investment options.
Using Universal Life Insurance for Retirement Planning
Canadians are increasingly using universal life insurance for supplemental retirement savings in addition to RRSPs and TFSAs. Here’s how it works:
- During your working years, contribute well above the minimum premiums required.
- Invest your cash value for growth – ideally averaging 5-7% annually.
- Upon retirement, access tax-free funds via policy loans to supplement your income.
- The death benefit passes tax-free to heirs, offsetting taxes owed on your registered accounts.
This strategy is most effective for high-income Canadians who have maxed registered plans. The key is committing to large premiums while working to realize the full benefits.
Pros and Cons of Using Universal Life Insurance for Retirement
Pros
- Tax-deferred growth potential
- Tax-free income in retirement
- Can access funds without selling assets
- Death benefit offsets taxes for heirs
- Credit shelter trust planning
Cons
- Requires large premium outlay
- No guarantee of returns
- Ongoing policy maintenance
- Risk of over-insurance
- Locked-in costs upon conversion
Using universal life insurance for retirement income takes extensive planning. Meet with an advisor to crunch the numbers and determine if this strategy aligns with your financial situation.
Features of Universal Life Insurance Policies in Canada
Universal life insurance policies have many moving parts. Here are key features to understand:
- Premium flexibility – You select how much and when to contribute within specified limits and subject to policy costs.
- Yearly renewable term (YRT) cost – Insurance charges start low but increase annually as you age. Lifetime guaranteed cost is also an option.
- Cash value – The savings component that earns tax-deferred interest based on your chosen investments.
- Policy loans – You can borrow against your cash value at favourable rates without tax implications.
- Partial withdrawals – Cash can be withdrawn from the cash value but reduces your death benefit and may trigger taxes.
- Adjustable death benefit – Some policies allow you to modify your death benefit up or down as needed.
- Riders and features – Additional riders for chronic illness, disability, and long-term care may be available.
- Policy lapse – If the cash value cannot cover costs, the policy may terminate unless you make up the premium shortfall.
Is Universal Life Insurance Right for You?
Universal life insurance can be beneficial when:
- You need lifelong insurance protection into old age.
- You want to maximize tax-deferred investing opportunities.
- You have sufficient income to commit to the sizeable premium requirements.
- You are comfortable actively monitoring and managing the policy.
- Your advisor confirms it aligns with your financial plan based on illustrations.
However, don’t take out a policy just because of promised investment returns. Work with an experienced advisor to ensure universal life insurance is the most appropriate solution for your needs.
Alternatives to Consider Instead of Universal Life Insurance
Here are some alternate options that may better suit your insurance needs:
Term life insurance – Affordable, pure protection for temporary needs. Easy to understand and budget for.
Whole life insurance – Also lifelong coverage but with guaranteed premiums, death benefit and cash value. Less investment risk.
Hybrid whole/universal policies – Blend the stability of whole life with the flexibility of universal life.
Self-directed investing – Open an investing account like an RRSP or TFSA if you just want tax-deferred growth.
Savings accounts – If you have limited income, using high-interest savings to save for goals may work better than insurance.
Tips for Picking the Best Universal Life Insurance Policy
If you decide universal life insurance aligns with your long-term financial plan, here are tips for picking the right policy:
- Compare quotes and illustrations from at least 3-4 reputable providers.
- Prioritize insurers with strong financial ratings and a longstanding history.
- Take the time to understand all the clauses, fees, limitations, and options.
- Model out premium payments and projected cash values across various market return assumptions.
- Align investment options with your risk tolerance and growth objectives.
- Confirm the policy provides the adjustability and flexibility you require.
- Discuss any confusing aspects with your advisor and ask questions.
- Request sample in-force illustrations to see how the policy is projected to work over your lifetime.
Buying Universal Life Insurance at Different Life Stages
Universal life insurance can be useful at various life stages, depending on your goals:
- Young families – Provides affordable lifetime protection for new dependents.
- Middle age – An option if more coverage is needed beyond group life insurance.
- Pre-retirement – Supplements retirement savings once registered accounts are maxed out.
- Business owners – Funds buy-sell arrangements and compensates partners upon death.
- Advanced age – A way to leave a larger, tax-free legacy to heirs if income allows for premiums.
Discuss your evolving insurance needs with an advisor at each stage of your life. Universal life insurance may make sense at some points but not others.
Common Universal Life Insurance Riders in Canada
Riders provide added benefits to universal life insurance policies at an additional cost. Popular options include:
- Waiver of premium – Waives premiums if you become disabled and unable to work.
- Accidental death – Provides extra payout if death is due to an accident.
- Children’s term – Covers your kids until a certain age, often 25 years old.
- Guaranteed insurability – Let you periodically increase death benefit without new underwriting.
Discuss riders with your advisor to decide which enhancements may be suitable for your situation.
Mistakes to Avoid When Purchasing Universal Life Insurance
Buying an improper universal life insurance policy carries significant financial consequences. Avoid these common mistakes:
- Being sold based on ambitious projected returns for the cash value – actual results may differ.
- Underfunding the policy – increases lapse risk.
- Overestimating the amount of coverage needed – results in overpaying.
- Not confirming guarantees – cash value or death benefit may not be guaranteed.
- Failing to understand fees – high fees can erode cash value.
- Selecting risky investments – exposes you to losses.
- Lacking an exit strategy – need to monitor policy longevity and changes in need.
- Not reviewing in-force illustrations regularly – projections can diverge from reality.
Work closely with an experienced advisor to mitigate pitfalls and create an optimal policy aligned with your financial situation.
Is Universal Life Insurance Worth It for You?
Universal life insurance is a niche product that offers unique benefits, but it only makes sense for a small segment of Canadians needing permanent insurance in old age plus tax-advantaged investing.
Work with an experienced, licensed advisor to analyze your financial situation. They can explain if universal life insurance aligns with your long-term coverage needs and growth goals or if alternatives like whole life or term insurance may be preferable.
Comparing Universal Life Insurance to Other Policy Types
Universal life insurance differs from other forms of life insurance in several vital ways.
Universal Life vs Term Life Insurance
Universal Life
- Offers lifelong coverage
- Premiums can be flexible
- Has a cash value component
- More expensive than term
- Requires monitoring of cash value
Term Life
- Covers a set period, such as 10-30 years
- Only pays if death occurs during the term
- Lower premiums than universal life
- No cash value, savings, or investment element
- It is easier to understand and budget
Term life insurance works well for temporary needs like covering a mortgage. But universal life is better for permanent protection into old age plus tax-deferred savings.
Read more : compare Universal Life vs Term Life Insurance
Universal Life vs Whole Life Insurance
Universal Life
- Flexible premium payments
- Adjustable death benefit
- Variable interest rates
- Cash value not guaranteed
- More investment risk
Whole Life
- Level premiums guaranteed
- Fixed death benefit
- Minimum guaranteed cash value
- Lower investment risk
- Less flexible overall
Whole life insurance offers more stability and guarantees than universal life’s flexibility. However, universal policies allow you to participate more in market returns.
Read more : compare whole life vs Universal life insurance
Universal Life vs Guaranteed Life Insurance
Universal Life
- Lifelong but not guaranteed
- Flexible payments
- Cash value accumulation
- Market risk on investments
- More expensive
Guaranteed Life
- Guaranteed for life as long as premiums are paid
- Level, fixed premiums
- No cash value
- No investment risk
- Lowest cost permanent option
Guaranteed life insurance provides a simple, affordable form of permanent coverage with no savings or investment component. Universal life is more robust but also more complex.
Read more : Compare universal life vs Guaranteed Life Insurance
An experienced advisor can help you weigh the pros and cons of universal life vs other policy types.
Universal Life vs. Term to 100 Insurance
- Both offer lifetime coverage. But universal life allows flexible premiums, while term to 100 has fixed premiums.
- Universal life builds up cash value, while term to 100 has no savings component.
- Term to 100 is convertible to permanent insurance later on.
- Universal life is more expensive than term to 100 in the early years.
Read more : Compare Universal Life vs Term to 100 insurance
Top Universal Life Insurance Companies in Canada
When shopping for universal life insurance, it’s important to choose a financially strong provider with a good reputation. Here is an overview of some top life insurance companies in Canada for universal life insurance:
Sun Life Financial
- Over 150 years in business
- Wide range of universal life products
- Competitive pricing
- Strong investment options including index funds
- Allows modifications to death benefit and premiums
- Partial withdrawals from cash value available
Read full review : Sun Life Universal life insurance
Manulife
- Also over 100 years in business
- Universal life policies with lifetime guaranteed rates
- Can adjust death benefit amounts
- Range of fixed and variable investment options
- Policyholders can access cash value through loans
- Chronic illness and disability riders available
Read full review : Manulife Universal life insurance
RBC Insurance
- Part of large financial institution Royal Bank
- Universal life plans offer bonus options
- Interest earnings linked to market indexes
- Investment account choices from RBC fund families
- Can lower premiums by decreasing death benefit
Read full review : RBC universal life insurance
ivari
- Independent company with 80+ years of history
- Competitive rates for universal life insurance
- Guaranteed cash values and death benefits
- Investment options including GICs and index funds
- Withdrawals allowed from cash value accounts
Read full review : Ivari Universal life insurance
Equitable Life
- Over 50 years in business as mutual company
- Universal life products offer living benefits
- Cash value grows tax-deferred
- Wide selection of segregated funds to invest in
- Option for joint first-to-die coverage
Read full review : Equitable Universal life insurance
Choosing the Best Provider
Work with an experienced insurance advisor to compare product features and get quotes on universal life insurance tailored to your needs. Look for an established company with strong financial ratings.
Get Expert Guidance Finding the Right Life Insurance
Universal life insurance is complex. Connect with an advisor at Best Insurance Online Canada to discuss your policy questions and get personalized quotes.
Frequently Asked Questions About Universal Life Insurance in Canada
How much does universal life insurance cost?
For a 30-year-old non-smoking male seeking $500,000 of coverage, monthly premiums may start around $75 (lifetime pay) or $200 (10-year pay). Those with health issues may pay 2-3x as much.
What are the tax implications?
The death benefit is income tax-free. Cash value growth is tax-deferred. Loans are not taxed, but withdrawals may be partially taxable.
Can I adjust my death benefit?
Some policies allow you to modify your death benefit up or down within limits. This may require new underwriting. Not all policies permit adjustments.
How risky are the investments?
Variable accounts like stocks carry higher risk. However, fixed-interest options are available that protect your principal, such as a savings account.
When should I access the cash value?
Wait until later in life when the cash value has sufficiently grown. Withdrawing too early can significantly reduce your death benefit.
What are the different types of life insurance policies in Canada?
The main types of life insurance policies in Canada are term life, whole life, universal life, and guaranteed issue life insurance. Term life provides temporary coverage, whole and universal are permanent policies, and guaranteed issue is a simplified policy without a medical exam.
When should I buy life insurance in Canada?
You generally want to buy life insurance when you have financial dependents, such as a spouse, children, or aging parents. Buying when you are young and healthy lowers your premiums. Your specific needs guide when you should buy coverage.
Where can I get life insurance quotes in Canada?
You can get life insurance quotes from insurance company websites, brokers like PolicyMe and PolicyAdvisor, or a licensed insurance advisor. Comparing quotes from multiple providers ensures you get the best rate.
Why is life insurance important in Canada?
Life insurance provides a tax-free death benefit to your beneficiaries should you pass away prematurely. This ensures your loved ones remain financially secure by covering debts, daily expenses, and future needs.
How much life insurance do I need in Canada?
Factors like your income, debts, number of dependents, and financial obligations determine how much life insurance you need. A rule of thumb is 5-10x your annual income. Use an online calculator or speak to an advisor.
