Universal Life Insurance in Canada

What Is Universal Life Insurance?

Universal life insurance is a form of permanent life insurance.

It offers benefits throughout the life of the insured and a death benefit when they die.

Each premium has two components: the insurance cost and the policy’s savings component, or cash value.

Over time the cost of insurance increases as the policyholder ages.

However, increasing the accumulated cash value may cover this increase in insurance cost.

Since universal life insurance protects policyholders throughout their lifetime, policies usually involve full underwriting.

This includes a close examination of your personal information and medical history.

Tests required by the insurance company usually involve a doctor’s visit to assess your blood, urine, blood pressure, weight, height, and other factors.

What’s Covered?

Universal life insurance offers a guaranteed death benefit, providing the policyholder pays policy premiums.

As mentioned, policies usually offer a cash value component too.

Policies with a savings component may guarantee a minimum interest rate, depending on market conditions.

If the market performs well, the cash value will increase.

However, policyholders may not earn anticipated gains if the market does poorly.

Cash held in the policy’s savings component can be withdrawn or borrowed as a loan.

However, many forms of universal life insurance exist, each with distinct features, costs, and risks. 

For example, guaranteed universal life offers a fixed death benefit and premium.

The policyholder chooses an age for the end of the policy and pays higher premiums for each higher age.

Indexed universal life insurance invests part of the policyholder’s premiums into annual renewable term life insurance.

The balance of the payment adds to the policy’s cash value, less applicable fees.

Variable universal life invests the cash value of the policy in the market in hopes of greater returns.

The death benefit decreases due to payouts, outstanding loans, and outstanding interest at death, regardless of which form of universal life insurance you choose.

Nonetheless, accessibility to cash and policy flexibility often make universal life insurance attractive.

Universal life insurance policies also offer a variety of riders that may add extra features or coverage, usually for an added fee.

For instance, riders for a chronic illness or long-term care allow death benefit withdrawals under specific circumstances.

Family hanging out

Benefits of Universal Life Insurance

1. Less costly than whole life insurance

Universal life insurance tends to be less costly than whole life insurance.

The policyholder, not the insurance company, decides how premiums and the death benefit are handled. 

2. Flexible premiums & death benefit

Universal life insurance policies offer flexible premiums.

Policyholders can choose how much they want to pay and when they want to make payments, making these policies attractive to those with a variable income.

They are also adaptable if life changes reduce the need for a significant death benefit later in life.

Policyholders may choose to make higher payments to increase the policy’s cash value.

Conversely, they can skip payments without a policy lapse if the policy builds sufficient cash value.

The cash value can pay the premiums, providing the policy’s cash value remains above a certain level.

Similarly, the policyholder can increase the death benefit by meeting underwriting requirements.

Policyholders do not need to surrender their policy to make these adjustments.

3. Cash value

A universal life insurance policy usually offers a guaranteed minimum interest rate on the policy’s cash value.

This may ensure the cash value increases, providing the policyholder pays their premiums and does not borrow too heavily against the cash value.

Withdrawals are taxable, but loans against the accumulated cash value are tax-free.

However, unpaid loans and unpaid interest reduce the cash value when the insured dies.

The insurance company retains any funds beyond the policy’s death benefit.

Key Insight

Most universal life insurance policies allow the policyholder to borrow against their policy’s cash value without tax implications.However, they will pay interest on the loan.

Whole Life Insurance vs Universal Life Insurance

Whole life insurance is a low-risk, straightforward insurance choice that does not require policyholder involvement.

Policyholders pay premiums on a regular schedule, and premiums do not vary.

The amount of the death benefit is guaranteed and fixed.

Policyholders cannot adjust the policy terms, regardless of their financial situation.

You can surrender your policy to access the cash value, offering some security.

However, this perk comes at a higher cost than if you bought universal life insurance instead.

Some whole life policies pay dividends that you can receive in cash, leave in your account to accumulate interest, or use them to pay part of your premiums or buy more coverage.

Universal life insurance is also known as adjustable life insurance because it is flexible.

The policyholder can reduce the death benefit to reduce their premiums or increase it as financial needs and life circumstances evolve.

Premiums collected beyond the cost of universal insurance accumulate within the cash value portion of the policy.

The cash value can pay premiums, providing sufficient money remains in the cash account.

Frequently Asked Questions

  • Does universal life insurance end?
  • Can you cash out a universal life insurance policy?

Charlene Royston has written extensively for the private, public, and non-profit sectors for over ten years. Her experience working with a trust company led to a special interest in personal finance, including mortgages, investments, and retirement options. By simplifying the complex, she hopes to empower others to make more informed decisions.