Universal life insurance in Canada: how UL works, and when it is the right permanent policy
A UL policy is two things living under one contract: life insurance you pay for every month, and a tax-sheltered account you choose how to invest. Getting the balance between them right is the whole job.
After participating whole life, universal life is the product I like most, and it is also the one I see bought badly most often. A UL policy can be a very efficient way to pay an estate tax bill or move money to the next generation. Set up with the wrong cost of insurance, or funded at the bare minimum and then forgotten, it can quietly run itself out of money in your seventies. This page is what I explain at the kitchen table before anyone signs.
The two halves of every UL policy
Each month the insurer takes the cost of insurance and policy fees out of your account. Whatever you deposit above that sits in an investment account inside the policy, where it can grow without annual tax as long as the policy stays exempt under the Income Tax Act. You pick the cost of insurance type (level or yearly renewable term), the death benefit option and the investments. The death benefit of an exempt policy is paid tax-free. Nothing about the account is guaranteed unless you choose guaranteed interest options, and if the account cannot cover the monthly charges, the policy can lapse.
How universal life works, month by month
The Financial Consumer Agency of Canada puts it simply: universal life is permanent life insurance that combines life insurance with an investment account. It has a cash value, it allows withdrawals and loans, and you can raise or lower your deposits within the limits in the contract.
Here is what actually happens to a dollar you pay in. It goes into the policy account. Once a month the insurer deducts the cost of insurance for that month and any policy or rider charges. What is left stays invested in the accounts you picked, and it earns whatever those accounts earn.
That structure is why UL behaves so differently from whole life. With a whole life contract the insurer sets the premium and carries the investment risk inside its own fund. With UL, the insurer guarantees the insurance charges in the contract, and you carry the investment decisions. The FCAC is blunt about the consequence: your premiums could increase if returns on your chosen investments fall.
So a UL policy is only as good as three choices made on day one and one habit after that. The choices are the cost of insurance type, the death benefit option and the funding level. The habit is reading the annual statement.
UL at a glance
- Coverage
- Permanent, while the account can pay the monthly charges
- Insurance cost
- Level for life, or yearly renewable term (YRT)
- Deposits
- Flexible, between a minimum and the exempt maximum
- Investments
- Guaranteed interest, index-linked or managed accounts
- Growth
- Not taxed each year while the policy is exempt
- Death benefit
- Tax-free to the beneficiary on an exempt policy
Level or YRT cost of insurance: the choice that shapes everything else
Insurers word this differently. iA calls the options "level cost" and "yearly renewable term (YRT) costs of insurance". RBC calls them "Level to 100" and "Annually Increasing Cost of Insurance".
Yearly renewable term (YRT)
With YRT, you are charged each year for one more year of insurance at your age that year. At 45 that is cheap. At 75 it is many times higher, because the chance of a claim in any one year rises steeply with age, and the insurer has to collect enough from everyone that age to pay the claims. Nothing is wrong with the policy when the charge climbs. It is doing exactly what the contract says.
YRT makes sense when you plan to fund the policy heavily in the early years, so the account grows large enough to absorb the higher charges later, or when the insurance need will shrink over time. It is the setting people regret when they chose it only because the first-year number looked low.
Level cost of insurance
With level cost, the monthly insurance charge for the base coverage is set at issue and does not rise with age. You pay more than YRT in the early years and much less in the later ones. This is the setting I use for most estate tax plans, because the need is permanent and the bill arrives at the end, when YRT would be at its most expensive.
Some insurers let you pay a level-cost policy over a shorter period. iA, for example, offers optional 10, 15 or 20-year quick-payment terms on Genesis level-cost policies. Desjardins describes a cost that stays fixed for 10 or 20 years and then rises each year, as well as one that stays fixed for life. That term-cost design, often called Term UL, is what sets Desjardins apart: as far as I know, it is the only insurer in Canada offering it, and I can place it in all seven provinces where I am licensed.
| YRT cost of insurance | Level cost of insurance | |
|---|---|---|
| Early years | Low monthly charge | Higher monthly charge |
| Later years | Rises every year with age | Stays the same |
| Room for the account to grow early | More, if you deposit above the minimum | Less at the same deposit |
| Lapse risk if underfunded | High in later life | Lower, if minimum deposits keep coming |
| Fits | Heavy early funding, shrinking need, wealth growth plans | Estate tax, final costs, a fixed legacy |
What your family receives: the three death benefit options
Names differ by insurer, and not every contract offers all three.
Level (face amount only)
The family receives the face amount. The account helps pay the insurance cost, so as it grows, the insurer's amount at risk shrinks, which keeps YRT charges lower than they would otherwise be. RBC's level protection pays the coverage amount or the accumulated amount, whichever is greater.
Level plus fund value
The family receives the face amount plus the account value. More money at death, but the insurer stays at risk for the full face amount, so insurance charges run higher than with option A. iA calls this "face amount + fund"; Equitable calls its version Account Value Protector.
Increasing (indexed)
The face amount grows on a set schedule to keep pace with a need that rises, such as a tax bill on a cottage that keeps going up in value. Each increase costs more insurance, so check exactly how the contract defines it.
Some options only work with one cost of insurance type. iA states that its "face amount + fund with wealth maximizer option" is available only with YRT, and Equitable limits its Level Protector to YRT. The illustration and contract decide what is available.
Where the money inside the policy is invested
You are not buying mutual fund units. The insurer credits your account with interest tied to the option you choose, under the rules in the contract.
| Account type | How it is credited | What to watch |
|---|---|---|
| Daily interest | A short-term rate the insurer declares | Safe, but low returns; good as a parking spot for new deposits |
| Guaranteed interest (GIA) | A fixed rate for a term, like a GIC inside the policy | RBC lists 1, 3, 5 and 10-year terms; Equitable lists 1, 5 and 10 years. Early withdrawal rules vary |
| Index-linked | Follows a market index, such as a Canadian or U.S. equity index | Can go down as well as up. Check any fee or spread taken before the return is credited |
| Managed or fund-linked | Mirrors a fund or portfolio the insurer names | Fees matter over 30 years; compare them with the retail version of the same fund |
| Smoothed or diversified | Spreads market returns over time to reduce swings | Manulife offers a smoothed-yield option; iA offers diversified strategy accounts |
The range is wide. Sun Life lists 21 investment options on SunUniversalLife II, Desjardins says it has over 30, and Manulife offers an account linked to its Performax Gold Investment Fund with a 1% minimum guarantee. I keep the money that pays near-term insurance charges in guaranteed or daily interest, and only put true long-term money in market-linked accounts.
Minimum funding, maximum funding, and the exempt line
Every UL illustration shows a minimum deposit, which keeps the coverage in force on the insurer's assumptions, and a maximum, which is the most you can put in before the policy would stop being "exempt" for tax purposes. You can deposit anything between the two.
The exempt test is the part people find mysterious, so here it is plainly. The CRA's own explanation is that an exempt policy is one "issued mainly for insurance protection and not for investment purposes". Section 306 of the Income Tax Regulations turns that into a measurement: at each policy anniversary, the savings inside your policy cannot be more than the savings inside an imaginary benchmark policy with the same death benefit. Sun Life's technical summary explains that for policies issued from January 1, 2017, that benchmark is an 8-pay endowment at age 90.
Insurers track this limit with a figure their illustrations often label MTAR, short for maximum tax actuarial reserve. Think of it as a ceiling that rises each year. Stay under it and growth inside the policy is not taxed each year. Go over it, and the insurer will act to keep the policy exempt, usually by moving the excess out of the policy, which can itself be taxable.
There is also an anti-dump-in rule, the 250% test in section 306, aimed at people who fund lightly for years and then pour money in. If you want a well-funded policy, it is better to plan the deposits from the start than to catch up later.
Minimum funding buys insurance at the lowest outlay and leaves no cushion. Maximum funding uses the policy as a tax-sheltered savings vehicle on top of the insurance. Most of my clients land in between: enough above the minimum that a few bad market years, or a missed deposit, do not threaten the coverage.
The tax rules, in my words
On an exempt policy, investment growth inside the account is not reported as income each year. A non-exempt policy can be taxed annually on its accrued growth.
When the insured person dies, the payment under an exempt policy is not a "disposition" under section 148 of the Income Tax Act, so the beneficiary receives it tax-free.
A withdrawal or a policy loan from the insurer is a disposition. You are taxed only on the part above the policy's adjusted cost basis (ACB), and the insurer reports it on a T5.
Pledging the policy as security for a bank loan is specifically excluded from the definition of disposition, which is why bank loans are used in retirement strategies.
Rules can change, and your accountant should confirm how they apply to you.
Using the account later: withdrawals, policy loans and the insured retirement idea
There are three ways to get value out of a UL policy while you are alive. They are not equal.
A withdrawal takes money out of the account for good. The death benefit usually drops, and part of the withdrawal can be taxable above the ACB.
A policy loan from the insurer borrows against the account. Interest is charged, an unpaid loan is subtracted from the death benefit, and the loan counts as a disposition for tax.
A bank loan with a collateral assignment is the basis of what the industry calls an insured retirement program. You build up a large account value over many years. In retirement, a bank lends you money each year, with the policy assigned as security. You do not repay it while you are alive. At death, the tax-free death benefit pays the bank first and the rest goes to your family.
Why I treat the insured retirement program as a concept, not a promise
- The bank sets the loan terms, not the insurer. Rates, lending limits and the policy to lend at all can change over a 30-year horizon.
- Interest usually compounds onto the loan. If it grows faster than the policy, you can be asked to pay down the loan or post more collateral, often when markets are down.
- The policy has to stay in force until death. A lapse with a large loan outstanding is the worst outcome.
- It only makes sense once RRSP and TFSA room is used, and when you also need permanent insurance.
When I show this, I show the bad-market version next to the illustrated one.
How an underfunded UL policy runs out of money
The pattern is predictable. A policy is set up on YRT at the minimum deposit, with the illustration assuming a healthy rate of return. For years nothing looks wrong. Then the returns come in lower than assumed, the insurance charges keep climbing with age, and the account starts shrinking. By the time the owner is in their seventies, the monthly deductions are bigger than the deposits, and the insurer sends a letter asking for much higher payments to keep the coverage.
If the account cannot cover the monthly charges and no payment arrives, the policy enters a grace period and then lapses, with no death benefit. For someone in their late seventies, replacing that coverage is often impossible on health grounds.
What I look for on an annual statement: is the account value rising or falling, are deposits above the monthly deductions, and what return has the account actually earned compared with the illustration? If the trend is wrong, the fixes are easier early: deposit more, move money to more suitable accounts, reduce the face amount, or change the death benefit option where the contract allows it.
What universal life is actually good for
The tax bill at death
The CRA treats capital property, like a cottage or a non-registered portfolio, as sold at fair market value just before death. A RRIF's full value is generally income on the final return unless a spouse takes it over. A joint last-to-die UL on level cost puts the cash there when the second spouse dies. See estate tax and life insurance.
Business owners with surplus in the company
When a private corporation receives a death benefit, the proceeds minus the policy's ACB are added to its capital dividend account, and, with the required election, capital dividends can generally be paid to Canadian-resident shareholders tax-free. Corporate-owned UL is a common way to move retained earnings to the family. Your accountant has to be part of this.
Moving wealth to the next generation
Grandparents with money they will not spend can fund a policy at the higher end, so more of it goes to children or grandchildren as a tax-free benefit rather than taxable investment income. The death benefit is paid directly to a named beneficiary, outside the estate, which also matters for probate fees.
A worked illustration of the planning, with no rates
This is a made-up couple to show the reasoning. There are no premiums or returns here, because those come only from an insurer's illustration for real people.
Raj is 62 and Meena is 60, both in good health, in Mississauga. They own a cottage that has gone up a lot in value and expect to leave a large RRIF behind. Their accountant estimates that if the second of them died today, the tax on the cottage gain and the RRIF would be about $400,000, and that figure is likely to grow. They want the cottage to stay with the children.
The design I would start with is a joint last-to-die UL for about $400,000, on level cost of insurance, with the level death benefit and an increasing option priced as an alternative so they can see the cost of keeping up with the rising tax. I would illustrate it at the minimum and at a deposit somewhat above it, and run the same couple on participating whole life at 20-Pay. Then we compare what is guaranteed in each, what depends on investment results or dividends, and what happens to each policy if they stop paying at 75.
If they asked about putting extra money in to grow tax-sheltered, I would show the maximum-funding version too, and use the investment calculator to compare it with simply investing outside the policy.
UL vs participating whole life, compared fairly
I sell both and often illustrate both for the same client. Neither one is the better product in general.
| Universal life | Participating whole life | |
|---|---|---|
| Guarantees | Insurance charges are set in the contract; account returns are guaranteed only in guaranteed options | Guaranteed premium, death benefit and cash values |
| Growth | Depends on the accounts you pick | Dividends from the par account, declared by the board, not guaranteed |
| Who decides investments | You | The insurer's par fund managers |
| Deposit flexibility | High: pay more, less, or pause if the account allows | Low: a set premium for a set period |
| Cost transparency | Charges and account visible separately | Bundled into one premium |
| Main risk | Underfunding and poor investment results leading to lapse | Lower dividends than illustrated |
| Suits | People who want control, a precise estate tax match, or corporate flexibility | People who want guarantees and a hands-off policy |
For a fixed paid-up date, see 10-Pay and 20-Pay whole life. The full explanation of par policies is on whole life insurance.
UL vs buying term and investing the rest
For a family whose need ends when the mortgage is paid and the children leave home, term plus disciplined investing in an RRSP, TFSA or FHSA usually wins. It is cheaper, simpler, and the money stays fully yours. My term vs whole life comparison goes through that case in detail.
UL starts to win when two things are true together: the need is permanent, and you have already filled your registered room. At that point, the choice is between a taxable investment account and a tax-sheltered one that also pays a tax-free death benefit. Work out the size of the need first with how much life insurance you need.
Who should not buy universal life
- Anyone whose only need is temporary, such as a mortgage or young children.
- People who have not used their RRSP and TFSA room yet.
- Anyone who will only ever pay the minimum on YRT and never look at a statement.
- Buyers who are sold UL as an "investment" without a real insurance need behind it.
- Anyone uneasy with market swings who has not budgeted for higher deposits later. Par whole life is usually a better fit.
How I compare UL carriers
These are the universal life products I checked on each insurer's own website in November 2026. Product features change; the insurer's illustration and contract govern.
| Insurer | UL product | Points from the insurer's site |
|---|---|---|
| Manulife | Manulife UL | Increasing or non-increasing insurance costs; smoothed-yield option; Performax Gold account |
| Canada Life | Universal life insurance | Index and managed accounts; a business version is also offered |
| iA Financial Group | Genesis universal life | Level or YRT; three death benefit options; guaranteed, index, diversified and active management accounts |
| Equitable Life | Equitable Generations | YRT or level; Account Value Protector and Level Protector; daily interest and 1, 5 and 10-year guaranteed accounts |
| Desjardins | Universal life insurance | Daily interest, guaranteed interest and index-linked options |
| Sun Life | SunUniversalLife II and SunSpectrum Universal Life II | 21 and 13 investment options respectively |
| Co-operators | Universal Life | Tax-deferred growth with portfolio options |
| BMO Insurance | Wealth Dimensions | UL for individuals and business owners, with term and accidental death riders |
| RBC Insurance | RBC Universal Life (also with bonus interest) | Level to 100 or annually increasing cost; level or increasing protection |
What I line up, in this order
Same design everywhere
Same face amount, cost of insurance type, death benefit option and deposit, or the comparison means nothing.
Insurance charges
The guaranteed cost of insurance and policy fees, which matter far more over 40 years than the first-year deposit.
Account options and fees
Guaranteed rates, how index accounts are credited, and the fee on managed accounts.
A lower-return test
Every illustration rerun at a lower rate, to see when, or if, the policy runs short.
Bonuses and conditions
Any bonus interest or persistency bonus, and exactly what you must do to keep it.
Underwriting
Which insurer will give you the best health class. That can outweigh everything else.
Questions people ask me about universal life
Why can't I get an instant online quote for universal life?
Because a universal life price is the result of how the plan is structured, not a single number from a rate table.
The same person can see very different deposits depending on the cost of insurance type (yearly renewable term, term cost or level), the death benefit option, how many years you want to pay, how much you put into the investment account and which accounts you choose. I build several versions and compare them with you before anything is applied for.
What do you need from me to prepare a universal life illustration?
Your age, sex, smoking status and a general idea of your health, the amount of coverage, and what the policy is for.
The goal matters most: covering tax at death on a cottage, RRIF or business, leaving a set amount to children, building tax-sheltered savings, or using the policy later as loan collateral. Tell me also how much you can deposit each year and for how many years, whether you or your corporation would own it, and how much investment risk you are comfortable with. Call or WhatsApp 647-640-2222, or email Pankaj@InsureInCanada.ca.
What is universal life insurance in Canada?
Universal life is permanent life insurance that combines insurance coverage with an investment account inside the policy, where you choose how deposits are invested.
Each month the insurer deducts the cost of insurance and fees from the account. Coverage lasts as long as the account can pay those charges.
Is universal life insurance a good investment?
Only when you also need permanent life insurance and have already used your RRSP and TFSA room.
Its value comes from tax-sheltered growth plus a tax-free death benefit. Bought purely as an investment, the insurance charges and fees usually make it a poor choice.
Why does the cost of insurance in my UL policy keep going up?
If your policy uses yearly renewable term (YRT) cost of insurance, the charge is recalculated each year at your new age, so it rises every year by design.
A level cost of insurance does not rise. If your YRT charges are now bigger than your deposits, ask for an in-force illustration to see how long the account will last.
What does it mean when a universal life policy is exempt?
An exempt policy meets the Income Tax Act test for a policy held mainly for insurance protection, so growth inside it is not taxed each year and the death benefit is paid tax-free.
The insurer tests the policy every anniversary and caps deposits so the savings stay under the exempt limit.
What happens if my universal life account runs out of money?
If the account cannot pay the monthly charges and you do not make a payment, the policy goes into a grace period and then lapses with no death benefit.
Watch the account value on your annual statement. Deposit more, cut the face amount or change investments while there is still time to fix it.
Can I use my universal life policy as collateral for a bank loan?
Yes. Many banks will lend against a UL policy's cash value with a collateral assignment, and the Income Tax Act says an assignment to secure a loan is not a disposition of the policy.
The bank sets the terms and can change them, interest usually builds on the loan, and the policy must stay in force until death so the benefit can repay it.
Can my corporation own a universal life policy?
Yes. A private corporation can own and pay for a UL policy, and when the death benefit is paid, the amount above the policy's ACB is credited to its capital dividend account.
Once the corporation files the required election, that amount can generally be paid to Canadian-resident shareholders as a tax-free capital dividend. Plan it with your accountant.
Want UL and par whole life on the same page?
I'll illustrate both designs for you at two or three insurers, explain each column, and show what happens at a lower return before you decide anything.
About the author: Pankaj Bhatia, PFA, CHS
Insure In Canada Inc. · Advocis member · Licensed in Ontario, Alberta, British Columbia, Manitoba, Saskatchewan, New Brunswick and Nova Scotia
In 11 years Pankaj has placed more than 1,250 life policies. He builds universal life and participating whole life designs for estate, business and family needs, and tests every UL illustration at a lower return before recommending it. He is not licensed in Quebec, but Quebec residents can call him and he will arrange the policy.
Call 647-640-2222 · WhatsApp · Pankaj@InsureInCanada.ca · About Pankaj
Where these facts come from
- Financial Consumer Agency of Canada: Life insurance (universal life)
- CRA IT-87R2: Policyholders' income from life insurance policies (archived)
- Income Tax Act, section 148 (dispositions, policy loans)
- Income Tax Regulations, section 306 (exempt policies)
- Sun Life: The tax-exempt test, an in-depth view (PDF)
- CRA: Deemed disposition of property at death
- CRA RC4178: Death of a RRIF annuitant
- CRA IT-430R3: Life insurance proceeds received by a private corporation (archived)
- Manulife UL
- Canada Life: Universal life insurance
- iA Financial Group: Genesis universal life
- Equitable Life: Equitable Generations universal life
- Desjardins: Universal life insurance
- Sun Life: Universal life insurance
- Co-operators: Universal Life
- BMO Insurance: Wealth Dimensions
- RBC Insurance: Universal life
General information only, not tax, legal or investment advice. No premiums, rates or returns are shown on this page; the worked example is hypothetical. Universal life account values and returns are not guaranteed except in guaranteed interest options. Tax rules can change. The insurer's illustration and policy contract govern. Pankaj Bhatia, PFA, CHS is not licensed in Quebec; Quebec residents can call him and he will arrange the policy.