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Key Takeaways:
The primary differences between term and universal life insurance are:
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.
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.
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.
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."
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:
Managing your policy for universal life insurance is a large time commitment, unlike term life insurance.
There is one main type of policy for term life insurance and three types of policies for universal life insurance in Canada:
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.
Whether term or universal life insurance is better for you depends on your age, financial status and family situation.
Term life insurance is better for the average Canadian family when they have people that rely on them financially.
For example:
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.
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:
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."
Now that you’ve learned about the difference between universal and term life insurance in Canada, here are some next steps:
Universal life insurance can seem appealing with its lifelong coverage and investment component, but it does have some drawbacks compared to term life insurance. One major downside is the cost. Universal life insurance premiums are generally higher, which can be a strain on your budget. Unlike term life insurance, which offers straightforward, affordable coverage for a set period, universal policies are more complex and can become expensive over time, especially if the investment component doesn’t perform well.
Another disadvantage is the complexity. Universal life insurance combines insurance with an investment account, requiring more hands-on management and understanding of how the investments work. This complexity can be daunting if you're looking for something simple and easy to manage. For many Canadians, especially those focused on protecting their family’s financial future without the need for a long-term investment vehicle, term life insurance is a more straightforward, cost-effective choice. It provides peace of mind with clear, predictable premiums and coverage that lasts for the term you select.
Term life insurance is often the go-to for Canadians looking for straightforward, affordable coverage. It's designed to provide financial protection for a specific period, like 10, 20, or 30 years, making it ideal if you need coverage during key life stages—say, while your mortgage is still active or your kids are growing up. Because it’s temporary, term life insurance usually comes with lower premiums compared to whole or universal life insurance. This means you get the coverage you need without breaking the bank, which is a huge plus if you're working within a budget.
On the other hand, whole or universal life insurance policies come with a savings component and cover you for life, but they’re also more expensive. If you're just looking to ensure that your family can pay off debts and cover living expenses if something happens to you, term life might be your best bet. Plus, with term life insurance, you can always reassess your needs and convert to a permanent policy later on if your circumstances change. It's a flexible, cost-effective way to get the peace of mind you need right now.
If you outlive your term life insurance, the policy simply expires. You've had coverage for a set period—say 10, 20, or 30 years—but once that term is up, so is the protection. No payout happens, and you’re left to decide if you want to renew, get a new policy, or go without. Keep in mind, renewing or getting a new policy will likely cost more due to your age and any health changes. So, it’s worth considering your future needs well before your term ends.
With universal life insurance, outliving the policy is a different story. Universal life insurance is designed to last your entire life, provided you keep up with the premiums. If you live a long, healthy life, you’ll still have coverage, and your beneficiaries will receive the payout when you pass away. Plus, the cash value component of your policy continues to grow over time, potentially providing a financial cushion you can tap into during your lifetime. For Canadians looking for lifelong protection and a flexible financial tool, universal life insurance might be the way to go.
