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What is universal life insurance?
Matt Hands, VP, Insurance and MoneySense
Universal life insurance is a type of permanent life insurance product which combines a death benefit with an investment component. Like other types of life insurance, these plans pay out a set lump sum to your named beneficiaries upon your passing, offering coverage for various needs (such as estate planning). A portion of your premiums also go towards a cash value reserve – this is an investment account which allows your money to grow on a tax-deferred basis.
- 13%
Universal life insurance market in 2022
The Canadian Life & Health Insurance Association reported that individual universal life insurance made up 13% of the market in 2022. On the other hand, term life made up 40% (individual policies) and 35% (group policies) while individual whole life made up the remaining 12%.
How does universal life insurance work?
Although complex, a universal life insurance policy is still a form of life insurance coverage at its core. This means that by paying regular premiums, your insurance provider agrees to pay out a set death benefit to your loved ones upon your passing.
There are two components to your premium payments. Firstly, you'll need to cover the cost of insurance – this is the minimum amount you need to pay in order to keep your policy active, covering administrative fees. Anything paid on top of this goes towards your cash value account which is a reserve of funds you can access during your lifetime.
The cash value is used for investing as money within this account grows on a tax-deferred basis – you won't need to pay income tax on the gains until you take out earnings. In comparison to whole life insurance, the cash value account for a universal plan comes with more options. You can choose where you want your funds invested (e.g. stocks, bonds), depending on the level of risk you're comfortable with taking on. Some policies offer minimal guaranteed interest rates while others allow you to invest in index and variable funds.
As your cash value grows, you can withdraw or borrow from it. Withdrawals often come with tax implications, but if you're planning on paying the money back, you'll usually only be subject to interest. If there are enough funds, you can also use the cash reserve to cover the base cost of insurance, allowing you to lower your out-of-pocket premium payments.
Aside from the flexibility of your premiums, the death benefit on a universal life insurance policy is also flexible. If you find that you need more or less coverage, you can negotiate with your insurer – increasing the amount, however, may require a medical exam.
Because these policies are a form of permanent life insurance, the benefit will eventually be paid out after death. Your loved ones will receive a tax-free lump sum that can be used for anything – estate planning, succession planning, and more. Any unused cash value, however, is generally left with the life insurance company.
Is universal life insurance worth it?
Universal life insurance can be a worthwhile product, but it's not for everyone. If you only need coverage temporarily – say to cover an outstanding mortgage – then term life insurance will most likely be the more suitable, cost-effective option. And even if you've determined the need for a permanent policy, whole life insurance can offer more simplicity and less risk.
Universal life plans are designed to meet the needs of specific individuals – those looking for flexible policy options and tax-advantaged investing (especially after other accounts, such as the TFSA and RRSP, are maxed out). Here are a few sample scenarios in which this type of policy could come in handy.
High-income earners
Because of the tax advantages, universal life insurance is best-suited for high-income earners who have already maxed out other investment options (e.g. TFSA, RRSP).
Financially literate
The cash value earnings are based on your own investment choices, so having the financial knowledge can help. You may also choose to work with a financial advisor.
Business owners
Universal life plans can be used for various business needs – acting as key person insurance, funding a buy-sell agreement, or providing funds for a succession plan.
Estate planning
Universal life insurance can help with estate planning and wealth transfer needs. For instance, the death benefit can cover estate taxes owed upon death.
Charitable giving
You can also name a charity as a beneficiary, giving back in a tax-advantaged way (while reaping lifetime benefits with the cash value).
Retirement fund
Because you can withdraw or borrow from it, the cash value account can be used to supplement your retirement fund in a tax-efficient manner.
Universal life insurance sales in 2023
According to LIMRA's Canadian Life Insurance Sales Survey, the new annualized premium for life insurance within the country increased by 4% in 2023 to $1.86 billion – this number was the highest sales recorded in the Canadian market (since the survey was first established in 1993).
Universal life insurance took up 13% of the new annualized premium market share in 2023. Premiums totalled $248 million – a decrease of 14% when compared to year-over-year to 2022. The number of policies sold also saw a decrease of 8%. In comparison, term life new annualized premium market share amounted to 19% while whole life amounted to 68%.
Advantages and disadvantages of universal life insurance
Like all other life insurance products, there are various pros and cons to carrying a universal life plan. Here, we cover the main ones, so you can better understand if this is the right type of policy for you.
Lifetime coverage – Unlike term life insurance, your death benefit does not expire, guaranteeing a payout to your beneficiaries upon your passing (provided all your policy terms are met).
Flexible premiums – Your premium payments can fluctuate, up to certain policy limits. Having enough funds in your cash value reserve can also allow you to skip payments or make smaller contributions if needed.
Flexible death benefit – Coverage needs can change during your lifetime, making universal life insurance an appealing option. You can potentially negotiate a lower benefit (allowing you to pay smaller premiums) or a higher benefit for added protection. Increasing it, however, may require you to complete a medical exam.
Cash value reserve – Like whole life insurance, universal plans come with a cash value reserve. This is money that you can access during your lifetime through withdrawals or loans, allowing you to receive peace of mind with an emergency fund in place.
Tax-advantages – The investments in your cash value reserve grow on a tax-deferred basis, meaning you'll only need to pay taxes when you withdraw more than the amount you've put in – and you can choose to do this when it best suits your situation. Plus, like other life insurance products, the death benefit is paid out to your beneficiaries upon your passing without tax implications.
Policy complexity – It can be difficult to reap the full benefits of a universal life insurance policy because of its complex structure. Policyholders of these plans often have prior investment knowledge or choose to work with a financial advisor.
Risk of underfunding – With a universal life insurance, you'll need to monitor your policy carefully. If your cash value investments fall and your premiums don't cover the base cost of insurance, your policy can lapse, leaving you without any coverage.
Risk of underperforming – The ability to choose your own investments can also mean underperformance, implicating your case value reserve. If your earnings aren't high enough, you may also need to increase your premium payments to cover the base cost of insurance.
Cash value loss after death – Like whole life insurance, any unused funds in your cash value reserve typically won't be paid out to your beneficiaries. Instead, it'll be surrendered to the insurance company.
Expensive cost – Universal life insurance can be cheaper than whole life insurance, but because it offers lifelong coverage, it's still generally much more expensive than term life insurance.
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How much does universal life insurance cost?
While the cost of universal life insurance will differ on a case-to-case basis, here are three average rates we pulled from top Canadian providers. Keep in mind, however, that these numbers are representative of one hypothetical policyholder – to find the exact cost you'll be paying, be sure to compare universal life insurance quotes with us today.
- $1,410/year
Universal life policy with $150,000 coverage
minimum payment for a 42-year-old, non-smoking female
- $3,991/year
Universal life policy with $500,000 coverage
minimum payment for a 38-year-old, non-smoking male
- $5,324/year
Universal life policy with $300,000 coverage
minimum payment for a 55-year-old, non-smoking male
How are universal life insurance quotes calculated?
While the premiums you pay for a universal life insurance policy are flexible, you'll still need to make sure your cost of life insurance is covered – this is the minimum amount of money needed to ensure your policy stays active. Insurers offer quotes for minimum payments based on several different factors, including the following.
- Age
The older you are, the more expensive life insurance gets. While some universal life plans have a cost of insurance that's fixed, others may increase overtime.
- Gender
Men typically pay higher rates when it comes to life insurance. Statistically speaking, males have a shorter life expectancy than females.
- Health status
If you have a pre-existing condition, universal life insurance can get much more costly. This may also be the case if your family has a history of medical issues.
- Lifestyle
Smokers are subject to higher universal life insurance rates due to the added health risks. And working a high-risk job (e.g. firefighter) can also impact your rate.
- Coverage amount
The death benefit on a universal life insurance plan is flexible, and choosing a higher one will inevitably lead to a higher cost.
- Policy options
The type of investment plan you choose may impact your life insurance rate. Plus, adding on policy riders will only bring the payments up.
Universal life insurance vs. whole life insurance
Universal life insurance and whole life insurance are two of the most popular types of permanent plans – here, we cover the main policy features of the products, so you can better understand the similarities and differences.
Feature |
Universal life insurance |
Whole life insurance |
---|---|---|
Coverage period |
Coverage lasts your entire lifetime, provided your premium payments are enough to sustain the policy. |
Coverage lasts your entire lifetime, provided you make all your required premium payments. |
Premiums |
Premiums for a universal life policy are flexible – you can pay more or less within certain limits. With some plans, rates may also increase as time passes due to older age. |
Premiums for a whole life policy are fixed – you lock in a lifetime rate when you first purchase the plan. |
Death benefit |
The death benefit is set by the policyholder when the plan is purchased, but it can be adjusted later on if needed. |
The death benefit is guaranteed, meaning that the insurer will pay out the specified coverage amount upon death. |
Cash value |
The cash value growth is dependent on your selected investments, and you can withdraw or borrow from the reserve. |
The cash value growth is typically guaranteed by the insurer, making whole life insurance a more predictable investment option. You can also withdraw or borrow from the reserve. |
Cost |
Universal life insurance policies are generally more affordable than whole life ones as earnings are not guaranteed. |
Because earnings are guaranteed with whole life policies, these plans tend to be the more expensive option. |
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Frequently asked questions on universal life insurance
Are universal life insurance policies a good investment?
Universal life insurance can be a good investment, but these plans aren't right for everyone. For instance, if you only need temporary coverage, term life insurance may be the better option as it's more cost-effective. And if you do need permanent coverage, whole life insurance can offer a more simple, guaranteed solution.
If you're unsure which type of coverage is most suitable for your needs, be sure to speak to a licensed life insurance broker in Canada for guidance.
Does universal life insurance expire?
No, universal life insurance is a permanent life insurance product, meaning you'll be covered for an entire lifetime (unlike term life insurance). However, if your investments perform poorly – causing your cash value to decrease – and your premium payments aren't enough to make up for it, the policy can lapse.
Are universal life insurance premiums tax-deductible?
In most cases, the premiums paid out for a universal life insurance policy are not tax-deductible. One exception, however, is if the policy is used for business purposes (e.g. acting as key person coverage, funding a buy-sell agreement) – in this scenario, the premiums could potentially be deducted from the business's taxable income.
On the other hand, the cash value put into a universal life policy grows on a tax-deferred basis. This means you won't need to pay income tax on the earnings until you access it through a withdrawal. Plus, policy loans typically aren't taxed – although you may need to pay interest on the amount.
For more information on leveraging the tax advantages of a universal life insurance policy, be sure to consult a professional in Canada.
Can I withdraw money from my universal life insurance policy?
Yes, universal life insurance policies come with a cash reserve which can be accessed during your lifetime. While withdrawing from it can come with tax implications, it can be a good option for various reasons – such as emergency coverage for critical illness or supplemental funds for retirement.
Can you borrow against a universal life insurance policy?
Yes, borrowing from your policy's cash value is one way to access its funds during your lifetime. Although you typically won't need to pay taxes on the amount, keep in mind that you could be subject to paying interest. Unpaid loans can also decrease your policy's death benefit, so be sure you understand all the implications before taking money out.