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Universal life insurance

Universal life insurance is permanent cover with a savings side that you can adjust. It pays a lump sum, generally tax-free, to the people you choose when you pass away, as long as the policy stays in force.

It combines the insurance with an investment account inside the policy, and gives you more control than whole life over how much you pay and how the money is invested.

How it works

Each payment is split. Part covers the cost of the insurance, and the rest goes into an account that grows according to the investment options you choose. These can include interest accounts and market-linked funds. Growth inside the policy is generally tax-sheltered, within limits set by tax rules.

Within limits, you can change how much you pay. There is a minimum needed to keep the insurance in force and a maximum set by tax rules. Paying more builds up the savings side faster. Paying less can use up the savings, and if the account runs too low the policy can lapse unless you pay more.

The savings side rises and falls with the investments you choose, and projections are only estimates. There are also fees and charges, and the policy comes with an annual statement showing where it stands.

Each payment is split. Part covers the cost of the insurance, and the rest goes into an account that grows according to the investment options you choose. These can include interest accounts and market-linked funds. Growth inside the policy is generally tax-sheltered, within limits set by tax rules.

Within limits, you can change how much you pay. There is a minimum needed to keep the insurance in force and a maximum set by tax rules. Paying more builds up the savings side faster. Paying less can use up the savings, and if the account runs too low the policy can lapse unless you pay more.

The savings side rises and falls with the investments you choose, and projections are only estimates. There are also fees and charges, and the policy comes with an annual statement showing where it stands.

For illustration only: someone with a long-term need for cover, such as estate planning or business succession, who has already used their registered accounts and wants another tax-sheltered place to grow savings, might consider universal life, as long as they are comfortable with investment risk and monitoring the policy.

Keep in mind

• It is more complex than term or whole life, so make sure you understand how the costs and charges work.
• The value of the savings side can rise or fall with the investments you choose.
• Projections are not guaranteed, and a policy that is underfunded can lapse or require higher payments later.
• Insurance costs, fees and the structure of the policy vary by insurer and product, so compare them carefully.
• The insurer will ask about your health and lifestyle, and may require a medical exam or records.

Common questions

How is it different from whole life?

Whole life is more predictable, with level premiums and guaranteed values. Universal life is more flexible and gives you investment choices, but it is more complex, and the savings side can rise or fall.

Can I change how much I pay?

Within limits. There is a minimum needed to cover the cost of insurance and a maximum set by tax rules. Paying too little for too long can use up the savings side and put the policy at risk of lapsing.

What happens if the investments do poorly?

The savings side can end up lower than projected, and depending on how the policy is set up, you may need to pay more to keep the cover in force. I will explain the risks and how the policy is designed before you decide.

Is it a replacement for my RRSP or TFSA?

No. It is a different tool with different costs and purposes. Many people look at it only after they have used their registered accounts, and I would encourage you to speak with a financial planner or accountant about your overall plan.

Is the payout taxable?

In Canada, life insurance death benefits paid to a named beneficiary are generally tax-free. Tax rules on the savings side and withdrawals are more complex, so check tax questions with an accountant.

Also see: Term life insurance · Critical illness insurance · Whole life insurance

This page is general information, not personal advice or an offer of coverage. Costs, eligibility and policy terms vary by insurer and by your health and situation. See my licensing and disclosure page.