Universal vs. Term Life Insurance: What's Better for Canadians?

Universal Life vs Term Life Insurance in Canada

The primary differences between term and universal life insurance are: 

1. The length of their coverage
2. The stability of premiums
3. The premium payment amounts
4. The cash value of the policy
5. How the death benefit works
6. The time commitment for managing your policy

Universal life insurance policies had some initial traction ‘80s, but their popularity has declined since, reports WSJ. These policies ended up facing a lot of warranted criticism (which we will get into below!).

Another key fact about universal life: your policy’s cash value is tied to investments so you must manage your policy’s investments. If they underperform, your premium payments may rise or your policy can lose its cash value entirely.

This table gives you a high-level glimpse at the main differences between universal and term life insurance.

1. Determining Coverage Length: Universal Life Insurance vs. Term Life Insurance

The coverage length for universal life insurance is the policyholder's whole life and for term life insurance the length will vary per policy.

Term life coverage depends on how long you need your policy for. For example, you’ll see term life insurance lengths listed in years, like 10 years, 15 years, 20 years, 30 years.

The average Canadian family with term insurance holds a 20-year term; enough to cover their mortgage or the period before their kids become financially self-sufficient.

2. Comparing Premiums: Universal Life Insurance vs. Term Life Insurance

Premiums are not stable for a universal life insurance plan but they are stable for term life insurance.

Universal life insurance premiums aren’t stable because some of what you pay goes toward the investment part of the policy. So as your investments fluctuate, your premiums can too.

Term insurance has level premiums. This means that the monthly premium will be the same from the day you sign and throughout the entire policy length.

The stability of monthly premiums for term life insurance makes it a safe option for Canadians. And, the younger you are, the lower your life insurance costs will be.

Term or perm? Make an educated call with this head-to-head-guide.

Read More

3. Cash value: Universal Life vs. Term Life

There’s no cash value for term life insurance, unlike universal life insurance.

But, the cost of insurance is usually more than the cash value of a universal life insurance plan.

Because term life premiums can sometimes be up to 10x cheaper than universal life premiums, Canadians can save a lot of money with a term policy. 

Then, you can invest the money you saved in more stable areas like RRSPs and TFSAs.

If you’re considering buying universal life insurance for the cash value growth, here are some important considerations from life insurance advisor, Erik Heidebrecht:

"You need a really good advisor who can (1) guide you through reading the policy and (2) meet with you regularly, once every six months to make sure that you’re paying what you need to be paying. 

Because premiums are adjustable, if you start paying a premium too small, then there is no death benefit to be paid out and it becomes a useless product."

This visual shows you how a universal policy can collapse onto itself:

The bottom line? Erik explains,"Universal life insurance is a product with a lot of risk. And "the reward" often isn't worth the work you'd have to put into it." 

4. Death Benefits: Universal Life Insurance vs. Term Life Insurance

The death benefit for universal life policies are only given if the policy’s cash value remains above zero. But term life insurance guarantees a death benefit if you pass away during the policy term. 

The death benefit for a universal life policy is paid out to your beneficiary whenever you pass away. 

For term life insurance, however, if you outlive your policy, there’s no death benefit. For example:

• If you get a 30-year term life policy and you pass away within 30 years, your family will receive your tax-free death benefit
• But if you pass away 31 years later, then your family will not receive any money from the policy

5. Managing your Universal Life vs. Term Life policy

Managing your policy for universal life insurance is a large time commitment, unlike term life insurance.

Term Life Insurance Policy Overview:

• Researching term companies to compare policy options
• Figuring out what policy term length and coverage amount you need. Not sure how much coverage you might need? Use our life insurance calculator to find out your policy needs
• After that, you’re responsible for making monthly premium payments
• Remember when your policy ends in case you want to renew it or shop around for a new policy

Universal Life Insurance Policy Overview:

• Universal policies are hard to understand and require you to be knowledgeable in investment/finance. So you'll need to allocate a lot of time to researching universal policies
• Beyond that, you need to make sure you have the time and energy to manage your policy well
• If you don’t continually pay into your policy and keep up with it, it can collapse
• Remember, universal life policies last your entire life, so you’ll need to make this time commitment to managing your policy for many years.

Types of Life Insurance Policies in Canada: Comparing Universal & Term

There is one main type of policy for term life insurance and three types of policies for universal life insurance in Canada:

1. Term Life Insurance: Temporary protection to cover your family during a set number of years (i.e. 10, 15, 20, 30); like while you pay off the mortgage or while the kids are young. There is no investment component
2. Guaranteed Universal Life Insurance: Little to no cash value, so premiums may be lower but whole life insurance is similar and a better option
3. Indexed Universal Life Insurance: Investment growth of the policy is tied to the performance of an index, like the NASDAQ 100 or the S&P 500
4. Variable Universal Life Insurance: Similar to indexed universal policy but here your investments are more like mutual funds so you have some choice but might pay management fees

Term vs. Whole vs. Universal life Insurance: Comparison

When comparing term vs. whole vs. universal life insurance, remember that whole and universal are permanent life insurance types and have a cash value component.

The difference between universal life, whole life and term life insurance is that universal and whole life are types of permanent life insurance. This means you get lifelong coverage.

Term life insurance covers you for a specific period of time. So premiums are usually cheaper for term life insurance compared to universal life insurance and whole life insurance.

• Term life insurance is best suited for the average Canadian family that want to cover their loved ones during the years when it matters most.
• Whole life insurance is best suited for Canadians that have already maxed out traditional savings/investment avenues (TFSAs, RRSPs) or for families with permanent financial obligations, like caring for a disabled child.‍
• Universal life insurance is best suited for younger Canadians with an exceptional income, time to tinker with their policies and aren't risk averse.

Is term life insurance better than universal life insurance for Canadians?

Whether term or universal life insurance is better for you depends on your age, financial status and family situation.

When Should You Choose Term Life Insurance?

Term life insurance is better for the average Canadian family when they have people that rely on them financially.

For example: 

• People with loved ones who rely on them financially
• People with a mortgage or other debt
• Business owners
• Canadians near retirement without enough savings

And if the people who rely on your finances won’t need your help after a certain year, term insurance has the most advantage.

For example, if your mortgage will be paid off within 15 years and your kids will rely on you to help pay for their education in the next 10 years, then you can get a 15-year term policy.

The upside is you only pay premiums for 15 years. If you outlive the policy, you won’t receive any cash, but you’ll save a lot of money by not paying for life insurance premiums anymore.

At PolicyMe, we’re intentional about the coverage we offer. We choose to focus on an affordable product best suited for most families: term life insurance. 

You can personalize and create a term life insurance policy that best suits your financial needs, selecting only the term length and amount of coverage that you need, not a penny more. 

Term or perm? Make an educated call with this head-to-head-guide.

Read More

When Should You Choose Universal Life Insurance?

Universal life insurance is better for Canadians when they are financially savvy, with a lot of time to dedicate to managing their policy, in a high-income tax bracket and/or younger.

‍For example:

• Universal life insurance policies are risky and you won’t see the returns for many years.
• Younger people with a high income can afford the time and money needed for accepting a risky policy
• And if you’ve maxed out your RRSP and TFSA because you earn a high income, universal life insurance is another way to invest your money and give your family an inheritance

Keep in mind that new tax rules in Canada gave life insurance policies less tax-exempt room. So you’ll have less room to fund policies and your beneficiaries receive fewer tax-free benefits when you pass away.

Life insurance advisor Erik Heidebrecht also has some guidance on who universal life insurance is right for:

"Your policy might end up being worth nothing, meaning you’d be paying premiums to essentially nothing. You have to be a seasoned investor to make sure that your policy doesn’t collapse

Generally speaking, even if you’re an investor, you might want to consider avoiding playing risk with life insurance

There is a niche where it works for some people, but it has to be a very unique situation for it to make sense compared to term insurance."

‍Next Steps: Choosing universal vs. term life insurance

Now that you’ve learned about the difference between universal and term life insurance in Canada, here are some next steps:

1. If you know you want affordable life insurance for a specific period, shop around for term life insurance. You can start by getting a term life insurance quote with PolicyMe
2. Still on the fence? Talk to a financial advisor about the pros and cons of each option based on your unique situation
3. If you want to buy or learn more about universal life insurance, talk to a financial professional before signing anything because the policies can be confusing and riddled with fine print

FAQ: term vs universal life insurance