The Ultimate Guide to Universal Life Insurance in Canada

There are a number of ways to ensure that your loved ones are taken care of in the event of your death. A universal life insurance policy is one of those ways. Many people get confused with the different life insurance products on the market and are unsure which one is best suited for them. 

If you have dependents or a business to protect and have exhausted your tax-advantaged investment options, a universal life insurance policy may be beneficial. However, you need to understand the different life insurance options and how to use them.

This guide explores the various life insurance options available in Canada and expands on universal life insurance.

What is life insurance?

Life insurance is similar to other types of insurance policies, such as car insurance or disability insurance. You pay insurance premiums to a provider to minimize the financial impact of an unfortunate event or accident. For life insurance, you purchase coverage for your beneficiaries and dependents in the case of your death.

Most life insurance policies provide a lump sum payment to your beneficiaries. The amount of coverage provided in a life insurance policy depends on the type of insurance you purchase and your premium payments.

Premiums are periodic payments you make to an insurance provider for coverage. A premium is simply the cost of your insurance coverage. Your premiums also cover fees and administrative charges from your insurer. 

Usually, you need to pay premiums every month. However, some insurance providers may have other payment frequencies and arrangements. If you buy a life insurance policy, find out if your insurer provides a discount on annual premium payments.

Different types of Life Insurance

Generally, a life insurance policy can either be permanent, like universal life insurance, or have a specific period of time when the coverage will end, like term life insurance.

Permanent life insurance

This type of insurance usually provides lifetime coverage. Lifetime coverage provides financial benefits for your beneficiaries in the event of your death. With permanent life insurance, you have cash value and build tax-deferred assets. A permanent life insurance policy can be whole life insurance or universal life insurance.

Term life insurance

This type of insurance has limited coverage, usually for 10 to 30 years. Some insurers also provide life insurance coverage for as little as 5 years. If you purchase term life insurance, it will offer death benefits to your beneficiaries only within the specified term stated in your insurance policy. If your term life insurance expires, you can choose to purchase another policy.

How universal life insurance works

Universal life insurance is a type of permanent life insurance. The unique feature of a universal policy is that it provides flexibility and the combination of life insurance coverage and an investment account.

The investment portion of your universal life insurance has a cash value. The cash value is the amount that goes towards your savings and investments and accumulates from the time you purchase your insurance policy. You can choose how to invest the money in your universal life insurance investment account. Your insurer may offer you different interest-earning or market fund options.

When you pay your insurance premiums, your insurer will allocate some of the premiums toward your insurance and the rest towards your investment. Your investments in the universal life insurance plan are usually tax-advantaged. 

A universal policy is flexible and may allow you to change your premiums depending on your policy and insurer. As time evolves, you can assess your premiums and your specific situation to decide if you want to increase or decrease your payments. 

When you purchase investments through your universal life insurance policy, you should note that the value of your investments can rise or fall depending on the performance of your investments. Financial markets are volatile, and you can lose money or gain returns when you buy investment assets.

Your insurance provider may allow you to purchase a joint universal life insurance policy for you and your spouse, common-law partner, or other family members. The cost and coverage policy of single universal life insurance will defer from that of joint life insurance. 

Cash value of universal life insurance

Permanent life insurance policies usually have a cash value, while term insurance policies do not.

You can collect money from your universal life insurance through the cash value in your plan. Depending on the policy you purchase, there are various ways to access the funds in the plan.

Taking money from the cash value of your universal life insurance works like a loan against the cash value that has interest payments, or a withdrawal. Sometimes, you may not need to pay any interest on the loan from your universal life insurance policy if you do not borrow above your cash value. If you make a withdrawal from your cash value, you may need to report your income, which is subject to tax.

You can use the withdrawals from your cash value to meet other financial goals, such as paying for education, a down payment on a house, or other living expenses.

If your universal policy allows, you can use these funds to increase your universal life insurance premiums, provided you have enough in cash value to cover it. Generally, this will enable you to increase your beneficiaries’ payout benefits in case of your death.

When a universal life insurance policy has cash value, you can receive some money from the insurance provider if you cancel your policy. Cancelling your insurance policy is usually referred to as “surrendering the policy.”

It is important to note that any outstanding loans on your insurance policy may reduce the payout your beneficiaries are entitled to receive. Generally, universal life insurers deduct your withdrawals or unpaid loans, with interest, from the insurance payout.

You also risk terminating your universal life insurance policy if you deplete your cash value and miss premium payments. In this case, you will put your beneficiaries at risk, as the insurer will not give them a death payout benefit if there are no funds left in the cash value.

Before you purchase a universal life insurance policy you should note that in most cases, your beneficiaries do not receive the full amount in your cash value. Beneficiaries are usually entitled to receive only the insurance death benefits. 

Your insurer would likely take possession of your cash value unless you purchase a policy that allows you to transfer the policy’s cash value and death benefits to your beneficiaries. However, this option may cost you more in premium charges. 

Benefits of universal life insurance

For some people, universal life insurance offers valuable benefits, including the following:

Lower cost over time

When comparing universal life insurance and term insurance, the premium on universal life insurance can appear higher at the outset. 

However, over time, universal life insurance costs are comparatively lower than term insurance policies. As you get older and your term insurance policy expires, the premiums for term insurance often become more expensive.

When compared to whole life insurance, universal life insurance is generally cheaper, as your insurer does not give you a guarantee on your policy’s cash value.

Flexibility

Universal life insurance offers a flexible option for providing benefits to you and your beneficiaries. With this option, you can choose the investment assets in your universal life insurance plan and access funds based on your account’s cash value.

Based on your risk tolerance and investment goals, you can decide how you want the insurance provider to invest your money. Universal life insurance policies also allow you to adjust your premiums for higher death benefit coverage.

Additional income

Your universal life insurance’s cash value can serve as an additional source of income in retirement. Also, if you want to leave your beneficiaries with extra income to cover estate expenses, you can do so through your universal life insurance policy, provided you have this option.

Tax advantage

The life insurance coverage portion of your policy provides a tax-free payment to your beneficiaries in the event of your death.

The investment account in your universal life insurance plan can increase in value over time as your financial assets appreciate. When this happens, if you do not receive payments from the account beyond your premiums, you may not have to pay taxes on the capital gains.

A way to transfer wealth

If you have maxed out your tax-free savings account or your registered retirement savings plan and are looking for an alternative way to secure and transfer assets to your family, you can do so through a universal life insurance policy. A portion of your premiums will pay for the life insurance coverage, the investment portion earns interest and investment income. 

Cons of universal life insurance

Universal life insurance comes with a cost and, therefore, may not be the best option for you and your family. Here are some things to consider before purchasing universal life insurance coverage.

Cost of insurance

The initial cost of permanent life insurance can be expensive. Due to its flexibility, if your investments lose value over time, your premiums may have to increase and your insurance payout can lose value. 

For some people, the additional premium of term insurance may not be worth the expense. If term insurance policies are suitable for your life expectations, a universal life insurance policy may be too expensive.

Complexity

You need to monitor your investment portion of the universal life insurance to ensure that your asset combination still meets your long-term financial goals. Universal life insurance can be complex. Similar to managing your investment portfolio through a brokerage, you need to be knowledgeable about investment products.

Lost Cash Value

Depending on your policy, only the policyholder can access the cash value money. As such, the cash value of your universal life insurance is only beneficial when you, the policyholder, use it. If you do not use the cash value as a loan, withdrawal, insurance cancellation, or premium increase, the money does not go to your beneficiaries. Your insurer gets to keep the cash value, which includes a part of your paid premium over the years.

Universal life insurance vs. whole life insurance vs. term life insurance

Universal life insurance and whole life insurance are both types of permanent life insurance. Their coverage policies insure you for life and pay out benefits to your beneficiaries if a death occurs. 

The primary differences between the two insurance types are the nature of the premiums and how the cash in the investment account is managed.

Whole life insurance

For whole life insurance, premiums are fixed and do not change during your coverage. In contrast, universal life insurance premiums can fluctuate depending on your cash value. You may need to increase your premiums to sustain your insurance coverage. 

Additionally, whole life insurance guarantees the minimum cash value you can receive, making the premiums you pay slightly higher than universal life insurance premiums. Universal life premiums, however, do not provide a guaranteed cash value. The amount in your cash value can fluctuate based on your investment portfolio.

Term life insurance

Term life insurance only provides insurance if your death occurs within a certain period of time. For example, if an insured person’s term life policy covers them for up to 10 years from the time of purchase and they live beyond that period, the policy will expire. The policyholder would need to buy another life insurance coverage policy or their beneficiaries will not receive any payout in the event of death.

If you have difficulty differentiating between universal life insurance, whole life insurance, and term life insurance, or deciding which option works best for you and your family, refer to the table below.

	Universal Life Insurance	Whole Life Insurance	Term Life Insurance
Structure	Life insurance coverage and investment account.	Life insurance coverage and investment account.	Only life insurance coverage.
Coverage Period	Permanent life insurance and lifetime coverage.	Permanent life insurance and lifetime coverage.	Temporary life insurance and limited coverage time. Usually 10-30 years.
Premiums	Usually has flexible premiums. You can decrease or increase your premiums.	Usually has fixed premiums.	Usually has fixed premiums.
Tax Impact	Beneficiaries receive tax-free payments upon the death of the policyholder. The investment account grows tax-deferred until withdrawals.	Beneficiaries receive tax-free payments upon the death of the policyholder. The investment account grows tax-deferred until withdrawals.	Beneficiaries receive tax-free payments upon the death of the policyholder.
Investment account management	You can choose which assets to invest in through your account.	The insurance provider manages your investment account and invests based on their discretion.	Has no investment account.
Cash Value	Has cash value with no guaranteed amount.	Has cash value with a guaranteed amount.	Has no cash value.
Withdrawals	You can withdraw money based on your cash value amount.	You can withdraw money based on your cash value amount.	You cannot withdraw from a term insurance policy.
Cancellation	The policy can be cancelled, depending on your insurance provider. The policyholder may get some portion of the cash value amount.	The policy can be cancelled, depending on your insurance provider.	The policy can be cancelled depending on your insurance provider. No return of premiums.

Which life insurance policy to choose

Life insurance policies differ across providers. Some life insurance policies are standard, while others are custom-made to fit your life circumstances.

When term insurance makes sense

If you are concerned about the initial cost of coverage and estimate a lower life expectancy, you can opt for a term life insurance policy. You need to consider the possibility of living beyond the term of your policy or the age specified in your insurance policy. You can always convert your term life insurance policy to a permanent life insurance policy or purchase a new term policy if your old one expires.

At the outset, a term life insurance policy may be the less expensive option. However, the premiums may increase as you age, causing you to purchase a new term policy or convert to a permanent life insurance policy. Also, if you develop new health conditions, this can raise your new policy’s premium.

When permanent insurance makes sense

A permanent life insurance policy can provide more extended coverage but can be more expensive than a term life insurance policy. It is almost certain that your beneficiaries will receive death benefits irrespective of when you die. 

Of course, you must keep your policy active by paying your premiums, or you jeopardize your beneficiaries’ payouts. You also need to provide accurate information on your health conditions to ensure your insurance provider pays your beneficiaries in the event of your death.

What to consider when trying to decide

When choosing a life insurance policy, you need to carefully compare the available options across various providers. 

For example, some insurance providers allow you to choose your coverage preferences within a universal life insurance coverage. Selecting a specific type of universal life insurance policy can mean that your beneficiaries receive either the amount covered in your plan or your cash value amount, whichever is higher. Other options allow you to transfer your cash value to your beneficiaries in addition to the policy coverage. 

A life insurance policyholder may also provide the option to participate in a dividend-payout option and receive dividends through a permanent life insurance policy. This type of insurance policy is called participating life insurance. If you need permanent life insurance that allows you to stop paying premiums at a certain age, you can also buy a policy that covers this.

How to purchase a life insurance policy in Canada

Before you purchase life insurance, you need to discuss your options with a financial advisor. Some financial advisors may convince you to buy life insurance products for their commission benefits, so make sure you get accurate advice for your situation. 

Shop around

Speak to various insurance providers or insurance brokers to get different perspectives. Compare life insurance providers and their policies to decide on the best insurance coverage for you and your family. 

You can receive a free quote from insurance providers. Some life insurance providers allow you to get a quote online, or you can speak with an advisor to get a custom quote. To give an insurance quote, insurers will ask you to provide personal information, such as your health and medical history, family health history, age, current health conditions, health habits, and coverage expectations.

Your health status

To finalize your life insurance application, you will need to fill out and submit a form. The insurer will review your application and approve coverage based on your situation. Insurers carry out a full underwriting process to assess our application. The underwriting process examines your medical history, age, sex, and lifestyle to determine your risk level.

The higher your risk level, the higher premium you will have to pay for life insurance coverage.

An approved insurance policy will outline all the terms and conditions, such as the term of coverage, coverage amount,  premiums, and policy options.

A medical exam

Some insurance providers may not request a medical exam. However, if you are in good health with a clean medical history, you may save on insurance premiums by buying an insurance policy with an insurer that verifies your medical conditions and history.

How much universal life insurance coverage do you need?

The life insurance coverage you need will depend on your specific situation. The insurance provider will ask for your medical records to determine how much your insurance coverage will cost.

If you have beneficiaries and dependents who are minors or live with a disability, this can impact the decision to purchase a life insurance policy. In addition, some employers provide life insurance for full-time employees. An employer’s life insurance policy coverage can provide as little an amount as one year’s worth of your annual salary, or up to three times your annual salary.

Employment benefits

Before you purchase a life insurance policy, double-check with your employer to see how much coverage you are provided, if applicable. If you choose your employer-provided coverage, you risk losing life insurance coverage when you leave your job. You may also be without life insurance coverage for a period of time when you start a new job, as some employers require a waiting period before you are entitled to benefits.

Existing assets

The life insurance coverage you need may also depend on your assets in other investment accounts. 

For example, you may decide that you do not need a life insurance policy if you have adequate assets in your tax-free savings account, your registered retirement savings plan (RRSP), registered disability saving plan (RDSP), or other investment accounts.

Health status

Your health conditions may also determine if you need life insurance and how much coverage you need. Previous or current health conditions, family health history, life expectancy, and age can help determine how much coverage you should purchase from an insurer.

Calculating the amount of coverage you need

Your life insurance coverage can help your children, spouse, or other beneficiaries after your death. Your insurance coverage should help cover their living expenses, education, debt obligations, estate costs, funeral arrangements, mortgage needs, and other costs.

If you need to calculate how much life insurance coverage you need and how much it can cost to get an insurance policy, you can use a life insurance calculator to get an estimate.

Claiming universal life insurance benefits

To ensure everything goes smoothly for your beneficiaries in the event of your death, you need to confirm the process of claiming universal life insurance benefits.

When the insurance policyholder dies, the policy’s beneficiaries can file a claim with the insurance provider. 

The insurance death benefits are tax-free to your beneficiaries and do not need to be reported as income for tax purposes. However, your beneficiaries may need to pay taxes on cash value amounts above your premium payments.

Frequently asked questions about universal life insurance