Universal Life Insurance in Canada: Good Investment Strategy or Bad News?

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Erik Heidebrecht
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Licensed Financial Advisor

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In This Article

Key takeaways:

  • Universal life insurance isn’t for those who want “set-it-and-forget-it” coverage.
  • Universal life insurance might be for you if you have already maxed out other investment options like a TFSA or RRSP.
  • The average Canadian is better off with term life insurance.
  • Whole life insurance can be the best option for those looking for permanent life insurance.

What is universal life (UL) insurance in Canada?

Universal life insurance is a type of permanent life insurance coverage that will cover you for your whole life, as long as you keep paying the premiums. 

Some of what you pay goes towards the life insurance itself, while another portion is divided between savings and investment components. 

Image explaining Universal Life Insurance with the following text: "Universal life insurance is a type of permanent life insurance that will cover you for your whole life, as long as your policy's cash value stays above zero. Some of what you pay goes toward the life insurance itself, while another portion is divided between savings and investment components."

TikTok may have convinced you that universal life insurance is a good investment strategy and a “cheat code” for the wealthy, but this isn’t always the case.

The problem is that these policies are often confusing to buy and own. 

Universal life insurance is easy to customize. But you need to monitor your policy closely to make sure the investments are performing and make adjustments as needed. 

Your premiums could go up if the investments continue to underperform. That could mean you might not be able to afford your policy and it would expire. 

In fact, almost 88% of universal life policies never pay out because people let their policies lapse. 

Here's a quick summary:

  • Universal life insurance is a policy that lasts your entire life.
  • You can change how much you pay for premiums, but your coverage won’t last if you don’t pay enough.
  • Universal life insurance needs to be monitored constantly.
  • Most Canadians are better off using investment accounts like TFSAs and RRSPs.
  • Universal life insurance might be right for those who have maxed out other investment opportunities.

What’s the cash value of universal life insurance?

The accumulation of cash within your universal life policy is called the cash value

The cash value portion of your policy can either grow or suffer losses as the investment portion fluctuates. 

This cash value portion is often what attracts people to universal life insurance, as they may know just enough about it to realize you can take money out of the policy by withdrawing or borrowing funds. 

You’ll need to monitor your policy closely to make sure you’re paying the right premiums and your cash value doesn’t get depleted. If this happens, you could lose the policy.

Are universal life policies worth it in Canada?

Universal life policies are not worth it for most Canadians. While universal life is supposed to provide financial protection for your family and build wealth, they're not very effective as investment vehicles.

The investment portion of universal life isn't known for having great returns, and definitely not as good as using tax-advantaged accounts like RRSPs and TFSAs that have investments.

Most Canadians are better off with a simpler type of life insurance. That's where term life insurance comes in.

Term life insurance covers you for a set amount of time, usually between 10 and 30 years. It gives you protection at a lower cost, without all the unnecessary bells and whistles of a universal policy.

Plus, since premiums are so much lower, you can invest the difference where you see fit.

How does universal life insurance work in Canada?

When you pay your universal life insurance premiums, those fees get split into two parts:

  1. One of these parts covers the cost of your life insurance coverage.
  2. The other is divided between savings and investment.

The idea is that you’ll have more flexibility in choosing how high your premiums are within a specific range set by the insurer. 

This range will always cover the cost of insurance, otherwise known as the death benefit, and the cost to deliver the service to you through administrative fees. 

The extra amount is added to your cash value if you pay more than the minimum premium payment.

This type of coverage usually offers flexible premiums that allow you to monitor and adjust how much you’re paying. They also offer you the opportunity to access the cash value in the policy. 

But you’ll need to make the minimum payments to keep the policy from lapsing.

Does universal life insurance expire?

Universal life insurance is a type of permanent insurance, which means it’s intended to last for your entire life. It won’t expire as long as you keep paying your premiums.

These policies typically guarantee a rate up to a certain age. You may have to pay a significant amount to keep the policy in force if you happen to live past that age.

If your policy lapses due to non-payment, you’ll need to start over with a new policy at a later point in life, which could be expensive, making it better to get a senior life insurance Canada policy.

Who is universal life insurance for?

Universal life insurance is for someone who wants:

  • Cash value that could be withdrawn or borrowed from over the life of the policy.
  • Permanent coverage that lasts a lifetime.
  • Flexibility to adjust premiums and death benefits over time.
  • Control over where the investment portion is used.

There are two types of people who might be a good fit for universal life insurance:

  1. Younger people making a very high income, who don't need the money for decades and can take on more risk. 
  2. Those in a high-income tax bracket who have maxed out their TFSA and RRSP and want to pass down an inheritance tax-free.

That said, most young people aren't in those high tax brackets.

Universal life insurance tends to be both expensive and complex to manage, so it's not the best choice for most people who need affordable payments and a simple policy they can understand.

Plus, life insurance policies have less tax-exempt room, making universal life insurance less appealing because of new tax rules in Canada from 2017.

The truth is that most Canadians need term life insurance, at least those who have dependents who rely on them financially.

Term's more affordable premiums mean you can save your money and invest the difference. Then, when your term is over, you can keep investing without tying your money up in an expensive policy.

Pros and cons of universal life insurance

Here’s a quick glance at the pros and cons of universal life insurance:

Pros:

Lifetime coverage

Flexible premiums payments

Cash value accumulation

Tax deferral benefits

Variety of investment strategies

Cons:

Expensive premiums

Cash value may be limited

Careful monitoring is required

Return on investment portion not always attractive

Building cash value takes time

Flexibility could require a health exam

Let’s take a closer look at these pros and cons.

Pros of universal life insurance

1. Lifetime coverage 

As a type of permanent insurance, your universal life insurance policy will remain active as long as you pay your premiums. 

2. Flexible premium payments

Typically, you can make adjustments to the coverage amount and premium payments over time, offering flexibility as your life or income changes. 

3. Cash value accumulation 

As you pay your premiums, a portion of the money goes into an account that represents the cash value of your policy and can earn interest over time.

4. Tax deferral benefits  

As with most life insurance policies, the death benefit paid out to your beneficiaries is tax-free. However, the interest earned on the cash value portion of your policy is tax-deferred, which could be a benefit in your situation.

5. Variety of investment strategies 

There are different types of universal life insurance, and these options give you some flexibility in choosing how the investment portion of your policy is used.

Cons of universal life insurance

1. Premiums can be expensive 

Universal life insurance isn’t an affordable choice for most people. It can be prohibitively expensive, making it hard for policyholders to keep up payments to keep the policy active.

PolicyMe's term life insurance rates are some of the most affordable in Canada; and life insurance for couples offers 10% off in their first year when they apply together.

2. Cash value may be limited

Your insurer may cap your cash value returns or how much you can invest based on tax laws, so ask about things like the “participation rate” or contribution limits before signing up.

3. Careful monitoring is required

There’s no hands-off version of these policies. You’ll need to monitor your policy closely to make sure you’re paying the right premiums and your cash value doesn’t get depleted. If this happens, you could lose the policy. 

4. Return on investment portion not always attractive

While the idea of an investment portion is appealing, it’s wise to look carefully at the interest rates you could earn. If you’re interested in investing for your financial future, you’re better off with a traditional investment account like a TFSA or RRSP.

5. Building cash value takes time

Cash value is one of the features most people are familiar with when it comes to universal life insurance, but it takes time to build it up. It’s wise to get a clear picture of how long it will take before you’d ever be able to withdraw or borrow against your life insurance in an emergency.

6. Proposed flexibility could require a health exam, causing increased premiums

These policies are often sold as flexible coverage you can adjust as your needs change over time. This may sound like a good thing, but be aware that raising your coverage may require a health exam, which could trigger higher premiums

Is universal life insurance a good investment strategy?

Universal life insurance is not a good investment strategy for most people. 

In most cases, you’d be better off putting your money in your RRSP or TFSA. 

If you’re a high-income earner who has maxed out your other investment options, you could consider universal life as an option. But with limited returns, it’s not typically a great investment.

Illustration of bucket with Universal Life Insurance pros and cons

There are real concerns with how these policies have been sold as investments. In most cases, customers simply haven’t understood how the policies work and haven’t monitored them as closely as needed.

In the worst cases, the returns are overestimated when the policies are sold, leaving people with the impression they have more security than they actually do. 

Then as time goes on, premiums go up, policies are underfunded, and people suddenly can’t afford to keep the policies active. 

Types of universal life insurance in Canaada

There are a number of different types of universal life insurance policies. While they all offer lifelong coverage, there are differences in how they are structured. 

1. Guaranteed Universal Life Insurance (GUL)

Guaranteed universal life insurance offers a universal life policy with little-to-no cash value.

It's sometimes called “no lapse guarantee universal life insurance.” The lack of cash value means you won't have to worry about your policy lapsing due to not having enough cash value to pay premiums.

Guaranteed universal life insurance might be offered as a way to get the lowest premium payment possible on universal life coverage.

However, at that point, the policy more closely resembles a whole life policy, so that would be a better choice. 

And even more noteworthy, if you remove the cash value component, this policy ends up being even closer to a term life insurance policy.

Look into term life insurance instead if affordability is more important to you than the cash value component. Term life insurance covers you for just as long as you need it at a price you can afford.

GUL Canadian example: Manulife Security UL

2. Indexed Universal Life Insurance (IUL)

For a universal life insurance policy, your cash value could be partially invested in:

  • A fixed-rate investment account that is lower risk.
  • An account tied to the performance of an index, which is higher risk.

Note: Indexed universal life insurance in Canada really comes down to an insurer's investment options. If they offer index funds, you get an indexed universal life insurance policy. But there are lots of other investment options like stocks, equities, bonds etc. 

It's important to keep in mind that the fees and costs associated with index universal life insurance policies can be high, including insurance premiums, administrative fees, and investment management fees.

These fees can eat into the potential returns and reduce the overall performance of the policy.

Plus, the returns on the investment component can be capped, meaning you may not fully participate in the gains of the underlying index.

IUL Canadian example: RBC Universal Life™ Insurance

3. Variable Universal Life Insurance (VUL)

Variable universal life insurance works similarly to an indexed universal life insurance policy. 

Again, your cash value portion is invested, but in this case, in investments that are similar to mutual funds. You'll be able to choose how much is invested in each and make assessments based on how the funds have performed over time.

Just like mutual funds, each investment fund will have management fees associated with it. So it's a good idea to investigate fees carefully to ensure they don't eat up your returns.

Variable universal life insurance policies tend to have higher fees and are more complex than other universal policies.

People who prefer an active role in choosing their investment options for their policy's cash value might find these policies appealing. But if you want a more hands-off approach or are risk-averse, you might want to avoid VUL.

Whole vs. universal life insurance in Canada

Universal life insurance and whole life insurance are both types of permanent insurance coverage, but they differ in cost and flexibility. 

Let's imagine each of these types of insurance is a bucket to hold your money. 

Whole life insurance is the safer option

With this type of insurance, you pay your set premium and the money in your imaginary bucket stays consistent. The money accumulates in your bucket, with part of the money going to insurance premiums and part of it being invested. 

This can be seen as the safer of the two options, as your money typically goes into a low-risk fund you won't need to worry about. In fact, your insurer will guarantee a rate of return.

Our recommendation: If you know you won’t monitor the policy to ensure you are paying the right amount over time, a universal policy likely isn’t for you. A whole life policy would better suit your needs.

Universal life insurance has more flexibility

With universal life insurance, the amount in the bucket can fluctuate. Why? The cost of insurance could go up and erode what you've put in. 

It's also possible for investments held in the bucket to do poorly, causing you to have to pay a lot more in premiums. If you can't pay the required amount, your policy could lapse. 

With universal, you also have some flexibility in what your funds are invested in. You also can choose if you want to pay your premiums monthly or annually.

Our recommendation: If you really want to be able to make decisions about what happens to the investment portion of your policy, you may want the flexibility of a universal policy.

Whole vs. universal life insurance cost

Whole life insurance has a steady monthly cost that stays the same over time. It can make it more expensive upfront, but it's stable. 

Universal life insurance, on the other hand, can start out more affordably but will get more expensive as you get older. 

Chart detailing whole vs. universal life insurance

Universal life insurance in Canada vs. term life insurance

While these are two common types of life insurance, they are strikingly different in how they work and how much they cost. 

Universal life insurance: invest or avoid?

Universal life insurance is permanent life insurance coverage that comes with other components such as cash value and some investment and tax-deferral benefits. These additional components make it seem that it offers broader coverage, but just be aware that you may or may not ever benefit from them. 

Premiums tend to be a lot higher for universal policies, which can also be an obstacle for people trying to afford the payments over the long term. 

Term life insurance: the smarter alternative

Term life insurance covers you for a specific period of time, such as while you have dependents like children or older parents. You may choose a 10 or 20-year term to ensure you are protected while this need exists. 

Then as your needs decrease, so can your coverage. Few people have coverage needs that stay level over their entire lifetimes. 

You don't have to be stuck without coverage at the end of your term, either. Most term life insurance providers offer both renewable and convertible life insurance policies. That means you'll probably be able to extend your term coverage if you need to or change your policy to a permanent one down the line.

Term life insurance is far more affordable, meaning you can likely opt for a higher death benefit while still being able to afford the payments. 

Have a look at a term life and universal life cost comparison to see the difference.

A table depicting Term Life Insurance vs Universal Life Insurance for a 30 year old non-smoking woman

Pricing based on publicly-available rates as of October 2021. Terms and conditions may apply.

In summary: don’t ignore the potential pitfalls of universal life insurance

Universal life insurance has some appealing aspects but also a lot of complexity.

Complexity is one of the biggest pitfalls with universal life insurance.

It can be difficult to assess the value of the additional components that drive up the cost of the premiums. It also requires careful monitoring that most people simply don’t have the knowledge or time to do.

Most Canadians would benefit more from a term life insurance policy and outside savings and investment accounts.

PolicyMe makes it easy to get term life insurance. Just get an insurance quote, apply online and find out if you’re approved in 20 minutes or less.

FAQ: Universal life insurance in Canada

Should I cancel my universal life policy?

You should first review your policy and coverage in detail. Book a call with an advisor who can tell you what the numbers mean and what has happened so far with your policy. 

You’ll want a snapshot of premiums paid and how much cash value has accumulated. You’ll also need an updated projection of future numbers. 

Remember that there typically are no guarantees, so you’ll only be able to work with what’s happened so far and the best projections that can be made. 

You’ll also want to review the consequences of cancelling your policy. There may be potential tax implications or policy fees that you’ll need to pay. 

What happens if I stop paying universal life insurance?

Here’s what might happen if you stop paying the premiums on your universal life insurance policy:

First, the premiums may be paid from the cash value of your account to keep the policy in force. This only works if there is enough cash value in the policy to do so. 

It might keep you covered in the short term if you aren’t able to make your payments but be cautious. If you use up the account’s cash value to pay premiums and deplete the cash value accumulation entirely, you could lose your coverage. 

You can cancel your policy, though, if you no longer want to pay your premiums. You'll receive what's called the cash surrender value, or the remaining cash value in the account. 

Just know that you’ll likely pay surrender charges, or a penalty for cancelling, and you must pay income tax on what you receive in the year you cancel.

Laura McKay

COO & Co-Founder
About the Author

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