Pros and cons of universal life insurance in Canada
- Universal life is permanent coverage that lets you adjust premiums and the death benefit as your needs change.
- The flexibility comes with more moving parts, and an underfunded policy can lapse even though it's meant to last for life.
- It suits people who want to actively manage a policy over decades, more than people who want a simple, set-it-and-forget-it plan.
The short answer
Universal life insurance is permanent life insurance that lets you adjust the premium and the death benefit within limits, and usually lets you choose how the cash value inside the policy is invested. That flexibility is the whole appeal, but it also means the policy needs some ongoing attention. An underfunded universal life policy can lapse, which surprises people who assumed "permanent" meant "guaranteed no matter what."
How it differs from whole life
Whole life is fixed: one premium, one death benefit, one cash value schedule, set at purchase. Universal life is closer to a chassis you configure: you generally choose how much to pay (within a range), how much coverage you want, and where the cash value is invested. We compare the two directly in pros and cons of whole life insurance.
The two common cost structures
- Yearly renewable term (YRT) cost of insurance: the cost of insurance inside the policy rises each year as you age, similar to a term renewal. Lower to start, more expensive later.
- Level cost of insurance: a flat cost for the life of the policy. Higher to start, but more predictable over decades.
Which one fits depends on whether you'd rather pay less now and more later, or a steady amount the whole way through.
Pros of universal life insurance
- Flexible premiums. You can often pay more in strong years and less in lean ones, within the policy's limits.
- Adjustable death benefit. Coverage can typically be increased or decreased as your needs change, more than a whole life policy allows.
- Choice over cash value investments. Many policies let you pick from a menu of investment options for the cash value, with the potential for more growth than a whole life policy's fixed schedule.
- Coverage lasts for life, like any permanent policy, so the death benefit is generally paid to your beneficiaries tax-free whenever you die.
Cons of universal life insurance
- More complexity. More choices means more to understand and more that can be set up wrong.
- Requires active management. The policy needs to be checked periodically to confirm it's still funded enough to stay in force, especially under a YRT structure where costs rise with age.
- Investment risk sits with you. If the cash value is invested and underperforms, you may need to pay more to keep the policy funded.
- Premiums are still much higher than term for the same coverage amount, since it's still permanent insurance underneath the flexibility.
A concrete example
Consider a 48-year-old with a permanent estate planning need who also expects income to fluctuate over the next 15 years while a business scales up and down. A universal life policy lets them pay more into the policy in strong years and scale back in leaner ones, while still keeping the coverage in force, something a whole life policy's fixed premium wouldn't allow. The cost of that flexibility is having to actually track the policy's funding level over time, ideally with an advisor's help, rather than being able to set it and forget it.
What to watch for on your annual statement
Most universal life policies come with an annual statement showing the cash value, the current funding level, and a projection of how long the policy will stay funded at your current payment. It's worth actually reading this each year rather than filing it away. A projection showing the policy running out of funding in 15 years while you expect to need it for 30 is a signal to increase payments now, while you're still healthy enough that the alternative, applying for a new policy, is realistic.
Who it actually suits
Universal life tends to fit people who already have a permanent life insurance need (estate planning, a lifelong dependant, tax or business planning) and who want to actively manage the policy's funding and investments over time, ideally with professional help. If you want simple, predictable, set-it-and-leave-it permanent coverage, whole life is usually the simpler fit. If your need is really just protecting your family for a couple of decades, term life insurance is almost always the more affordable answer.
What to do next
Not sure if you need permanent coverage at all, or which structure fits your situation? Start with our overview of permanent life insurance, or book a call to go through your specific numbers with us.
FAQ
Can a universal life policy lapse even though it's permanent?
Yes. If the policy isn't funded enough to cover the cost of insurance and fees, especially with a yearly renewable term (YRT) structure where those costs rise with age, it can lapse. Permanent means it's designed to last for life, not that it's guaranteed to regardless of funding.
What's the difference between YRT and level cost of insurance inside universal life?
YRT charges you the actual cost of insurance each year, which is lower early on but rises as you age. Level cost of insurance spreads a flat cost across the life of the policy, so it's more predictable but starts higher.
Do I need a financial advisor to hold a universal life policy?
You don't need one to buy it, but because the cash value and funding level need periodic attention, most people benefit from checking in with an advisor every few years to make sure the policy is still on track.
Philip Setter has been a licensed life insurance advisor since 2014 and founded Affinity Life in 2020. He's a climber, ice climber and ski tourer based in Calgary.