Variable universal life insurance (VUL) is a complex policy that combines permanent life insurance coverage with investment features. This allows for potential cash value growth based on market performance. However, Variable universal life insurance also comes with risks and costs that make it unsuitable for many consumers.
This extensive guide examines VUL policies within the Canadian life insurance market. It covers how these plans work, pros and cons, suitable buyers, product offerings, tips for consumers, and alternatives to consider. Read on for an in-depth look at navigating variable universal life insurance.
What is Variable Universal Life Insurance?
Variable universal life insurance is a form of permanent life insurance intended to provide lifetime protection. As with other permanent policies, VUL has two primary components:
- Death benefit– This is the amount payable to your beneficiaries should you pass away while the policy is active. The death benefit does not decrease as you age.
- Cash value– Part of your premiums go toward building cash value that you can access while alive via withdrawals or policy loans.
The unique aspect of VUL is that the cash value portion can be invested in a variety of securities. These typically include stocks, bonds, mutual funds, ETFs, and money market accounts.
As the investments fluctuate in value, your cash value account also rises and falls based on their performance. This contrasts with whole life insurance that guarantees a minimum return on accumulated cash value.
How Does Variable Universal Life Insurance Work in Canada?
With a variable universal life insurance policy, part of each premium goes toward covering the cost of insurance and related administrative expenses determined by the insurer. The remainder gets invested into the accounts you select.
For example:
- You pay an annual VUL premium of $2,000
- $500 covers the cost of insurance
- The leftover $1,500 gets invested across your chosen cash value accounts
Read more : Discover How A Life Insurance Savings Plan Works for Canadians Update 2024
You have the flexibility to adjust your premium payments within limits defined by the insurance company. Paying more allows faster potential cash value growth while lowering premiums decreases those gains.
You also control how your cash value gets invested. Most VUL policies provide access to an extensive suite of investment account options, often 50+ sub-accounts. These are typically structured similarly to mutual funds covering assets like:
- Canadian and global equity funds
- Government and corporate bond funds
- Money market and fixed-income funds
- Index funds
- Sector-specific funds
As your selected funds fluctuate with market performance, your cash value balance will change as well. During bull markets, it has the potential to grow substantially if your investments do well. The tax-deferred growth can accelerate gains compared to non-registered investment accounts.
However, your cash value could also potentially decline during market downturns or if you choose poorly performing investments.
If the balance drops too low, you may need to increase premiums to keep the VUL policy active. Otherwise, it could lapse if the cost of insurance exceeds the available cash value.
Variable universal life insurance offers unique benefits but also has some clear drawbacks:
Pros and Cons of Variable Universal Life Insurance in Canada
Pros of VUL insurance
- Lifetime insurance protection
- Flexibility to adjust premium payments
- Control over investing your cash value
- Potential to earn higher returns than whole life insurance
- Tax-deferred growth on cash value
Cons of VUL insurance
- More expensive premiums than term life insurance or whole life insurance
- Risk of investment losses shrinking your cash value
- Ongoing monitoring and management required
- The complexity of managing numerous investment accounts
- Potential fees and restrictions imposed on transactions
The advantages depend largely on your investment experience and ability to actively manage your VUL policy. It also requires having adequate time to handle the added complexity compared to term or whole life insurance.
Who Is Best Suited for Variable Universal Life Insurance?
Given the higher costs and need for investment expertise, VUL insurance is likely only suitable for a narrow subset of consumers:
- High net worth individuals– The premiums may be manageable for those with ample disposable income. VUL also helps transfer wealth tax-efficiently.
- Savvy investors– Investors comfortable managing portfolio risks may appreciate selecting VUL cash value allocations.
- Maxed registered accounts– Once RRSP and TFSA limits are reached, VUL can offer tax-deferred growth potential.
However, VUL is often not the optimal choice for average Canadians simply seeking sound life insurance. Term life insurance will provide sufficient affordable coverage for most households.
Permanent protection options like whole life insurance also guarantee principal and returns without the risks of VUL investing.
Variable Universal Life Insurance Products Available in Canada
Most prominent life insurance providers in Canada offer some version of a variable universal life insurance policy. Here are some examples of VUL products in the Canadian market:
Sun Life Financial – Sun Universal Life II
- Over 50 investment fund options covering stocks, bonds, money market
- Additional insurance riders are available
- No-lapse guarantee ensures death benefits up to age 100
RBC Insurance – RBC Lifeline Variable Universal Life Insurance VUL
- Over 25 fund choices, including index funds and ESG options
- Guaranteed insurability rider to increase coverage
- Option for partial withdrawal from cash value account
ivari – Infinite Universal Life
- Over 30 fund choices across major asset classes
- Loyalty credits reward long-term policyholders
- Minimum death benefit guarantee of the original face amount
Canada Life – Canada Life Par
- Access to over 45 professionally managed fund options
- Reset option available to lower cost of insurance
- Policyholders can consolidate external assets into Par account
Equitable Life – Vivio VUL
- Over 45 fund options from leading investment managers
- Can hold cash value in side account earning interest
- Lifetime benefit guarantee up to age 100
The available investment funds within VUL policies generally cover all major asset classes. Most insurers partner with established third-party fund managers to provide diversified options and professional administration.
Detailed Comparison of Variable Universal Life Insurance VUL vs. Whole Life Insurance
Whole life insurance and variable universal life insurance policies are both forms of permanent life insurance. However, they differ notably in their cost structures, cash value features, and overall complexity.
| Factor | VUL | Whole Life |
|---|---|---|
| Premiums | Can be adjustable within limits set by insurer | Fixed premium payments |
| Cash value return | Variable based on performance of invested funds | Fixed rate of return guaranteed by insurer |
| Risk tolerance | Higher to accept volatility of cash value | Lower with guaranteed cash value growth |
| Management needs | Requires ongoing monitoring and fund rebalancing | Minimal once policy is in force |
| Fees | Generally higher with insurance fees + fund management expenses | Lower without investment fees |
| Withdrawals | Access cash value at any time | Limited availability specified by insurer |
| Policy lapse risk | Higher if market losses deplete cash value | Lower with guaranteed cash value |
| Tax benefits | Tax-deferred growth on cash value | Lower cash value accumulation provides fewer tax benefits |
| Suitable buyers | Experienced investors comfortable with risk | Average consumers wanting simple permanent coverage |
The main appeal of VUL is the opportunity for higher cash value growth compared to whole life. However, this comes with the trade-off of higher fees, investment risk, and time required for management.
Guaranteed whole life policies offer fewer risks and less complexity for most Canadians needing permanent life insurance protection.
Alternatives to Consider Before Purchasing Variable Universal Life Insurance
If you are considering variable universal life insurance, be sure to explore other options as well:
Term life insurance
- Pure protection at the lowest cost
- Coverage terms of 10-30 years
- Premiums start low when protection needs are highest
- No cash value accumulation
Whole life insurance
- Guaranteed lifelong coverage
- Steady premiums over the life of the policy
- Fixed minimum rate of return on cash value
- Limited liquidity to access cash value
Universal life insurance
- Flexibility to adjust premium payments
- Cash value earns interest at a variable crediting rate
- No investment risk exposure
Mutual funds and ETFs
- Wide selection of investment funds
- Total control over portfolio allocations
- Liquidity to buy/sell funds at any time
- No cost or features for life insurance coverage
For most average families, term life insurance often provides sufficient coverage at the lowest cost. Whole life also offers guaranteed protection for lifelong needs. Weighing all alternatives helps ensure you select the optimal policy.
Tips for Canadians Considering Variable Universal Life Insurance
If variable universal life insurance in Canada aligns with your priorities, here are tips to ensure it meets your needs:
- Speak with an independent insurance broker for unbiased guidance tailored to your situation.
- Only purchase variable universal life insurance coverage from highly rated, financially strong insurers.
- Thoroughly understand all fees, risks, and fund restrictions before buying a policy.
- Compare costs and investment features among VUL offerings to identify the best value.
- Assess your risk tolerance and invest conservatively in line with your comfort level.
- Review investment performance and rebalance fund allocations at least annually.
- Run long-term projections to ensure your policy meets financial objectives.
- Prioritize funds with low management expense ratios to maximize returns.
- Utilize the cash value account for long-term investing rather than short-term gains.
- Avoid withdrawing or borrowing too heavily against your cash value.
- Pay attention to the high fees charged for transactions like fund transfers or policy changes.
- Report policy transactions properly on your annual tax return.
Who Sells Variable Universal Life Insurance in Canada?
There are several distribution channels through which Canadians can purchase a Variable Universal Life Insurance policy:
Insurance agents– Independent insurance agents have contracts to sell policies from multiple insurers. They can present quotes and products across companies. Agents must hold a life insurance license.
Insurance brokers– Brokers also distribute policies from various insurers. However, they have a duty to provide unbiased advice on the best product for your needs. Brokers must hold a license.
Banks– Many Canadian banks like RBC, TD, Scotia, and CIBC act as dealers selling life insurance products, including VUL policies, from select insurer partners.
Financial advisors– Some independent financial advisors may choose to sell VUL policies along with other financial products. They must hold the proper insurance licensing.
Insurers– Agents who work directly for a life insurance company will sell their VUL products. However, they can only provide quotes from their singular insurer.
Canadians can purchase VUL insurance directly through an insurer or via an intermediary such as an agent, broker, advisor, or bank.
Working with an independent broker like Life Buzz Insurance often provides the greatest choice among insurer products and unbiased guidance.
Tax Considerations With Variable Universal Life Insurance
There are some important tax implications to understand with Variable Universal Life Insurance policies in Canada:
- Premiums paid are not tax deductible.
- The death benefit received by beneficiaries is not taxable income.
- Cash value growth is tax-deferred during the life of the policy.
- Withdrawals and loans from the cash value are tax-free up to your cost basis.
- Amounts accessed above your cost basis are taxed as capital gains.
- If the policy is surrendered, accumulated gains are subject to taxes.
- Policy loans not repaid become taxable upon death.
Consult with both an insurance advisor and accountant to develop a tax-efficient VUL strategy. Proper structuring of your policy and utilizing income tax brackets across your lifetime can maximize overall value.
Is VUL Insurance Subject to Part XII.2 Tax Rules in Canada?
Variable universal life insurance issued after 2016 is subject to new Part XII.2 passive investment rules in Canada. Under these tax rules:
- Policies issued to adults (age 18+) face annual accrual taxation on gains within the cash value account once they exceed $150,000.
- VUL insurers must provide annual statements to report income accrual amounts to be declared.
- Tax-exempt amounts are reduced going forward compared to pre-2017 policies.
- Minor-owned VUL policies can still accumulate tax-free gains until age 25.
These passive investment rules limit the tax deferral benefits for VUL insurance issued after 2016. Careful structuring with specialists is needed to minimize negative tax impacts.
Critical Factors When Considering Variable Universal Life Insurance
If exploring a VUL policy, here are some key considerations:
- Total premium cost– Project whether total lifetime premiums will be affordable to maintain the policy.
- Insurer financial strength– Choose only insurers rated very strong for supporting lifelong obligations.
- Investment skill– Realistically assess your experience with portfolio management and risk tolerance.
- Policy complexity– Understand the time obligation to actively monitor and manage your VUL.
- Cash growth expectations– Model projections, but be wary of illustrated optimistic returns.
- Policy lapse risk– Avoid potential lapse that would forfeit coverage after years of premiums paid.
- Quality advisor– Work with a top independent broker who offers unbiased guidance.
Take great care in evaluating these factors. Misalignment with your needs on any one of them can make VUL insurance ultimately unsuitable despite the unique benefits.
The Bottom Line on Variable Universal Life Insurance
Variable universal life insurance offers flexibility and the potential for market-based cash value growth that outpaces whole life insurance. However, VUL is also much more complex, with notable risks that make it inappropriate for many consumers.
For most Canadians simply seeking permanent life insurance protection, term or whole life policies are likely better choices. However, a subset of experienced investors willing to take on risk may benefit from VUL’s unique attributes and investment features.
Thoroughly analyze your insurance needs, investment acumen, and risk tolerance when considering VUL. Doing so helps ensure you select optimized coverage that aligns with your financial priorities now and throughout life’s changes.
Consult with advisers you trust for guidance specific to your situation.
Aricle Sources
The articles on Lifebuzz.ca aim to provide comprehensive, accurate information to help Canadians make informed choices about life insurance.
To ensure the advice presented aligns with the insurance industry’s best practices, it draws on insights from certified financial planners, insurance advisors, tax accountants, estate lawyers, actuaries, and other experts. Their guidance comes from extensive experience working with clients across Canada.
Statistics and data points cited are derived from authoritative government and industry sources such as Statistics Canada, OSFI, CLHIA, and LIMRA. This includes provincial-level demographic data and national insurance ownership rates.
The analysis of various policy options is grounded in rigorous independent research of prominent life insurance providers operating in Canada. Competitive pricing data enables recommendations explicitly tailored to Canadians’ budgets and coverage needs.
Lifebuzz takes great pride in producing objective, well-sourced insurance advice Canadian families can trust. All content adheres to strict editorial standards for accuracy, transparency, and independence, as our Editorial Policy outlines. We reference only reputable third-party sources and present insurance guidance readers can feel confident acting on.
We take great pride in being Canada’s most trusted life insurance news source for this topic : Variable Universal Life Insurance :
1. Variable universal life insurance – wikipedia
2. Variable Universal Life (VUL) Insurance: What It Is, How It Works – investopedia
3. Variable Universal Life (VUL) Insurance: Explained – forbes
Frequently Asked Questions
What is VUL Insurance in Canada?
VUL insurance also known as Variable Universal Life Insurance is a form of permanent life insurance that allows the cash value portion to be invested in various securities the policyholder chooses. It provides an opportunity to achieve higher gains than guaranteed policies like whole life insurance but also introduces more complexity, fees, and investment risk that make it unsuitable for many consumers.
Do variable universal life insurance premiums change in Canada?
VUL allows policyholders flexibility to adjust their premium payments within limits set by the insurer. Paying more can accelerate cash value growth while lowering premiums decreases upside potential. Minimums must be paid to keep the death benefit active.
Is the death benefit guaranteed with variable life insurance in Canada?
Unlike some permanent life insurance, VUL policies in Canada do not guarantee the initial death benefit amount for life. The death benefit can decrease if cash value is depleted and insufficient to pay the cost of insurance.
Can variable universal life insurance expire or lapse in Canada?
Yes, VUL policies can expire if the cash value falls too low to cover the insurance charges. Poor investment performance or withdrawing too much cash value can create a shortage, leading to lapse.
Is variable universal life insurance taxable in Canada?
Premium payments for VUL insurance are not tax deductible in Canada. The death benefit is paid tax-free to beneficiaries. Cash value growth is tax-deferred, while withdrawals and loans get taxed above your cost basis.
What is the minimum payment for variable universal life insurance in Canada?
The minimum payment is the amount required to cover the monthly charges for the cost of insurance and expenses. This minimum must be paid to keep the VUL policy active.
Can you lose money with variable life insurance in Canada?
Yes, it is possible to lose money with a VUL policy if the investment accounts perform poorly. Significant losses could mean having to pay higher premiums or the policy’s lapse.
How does variable universal life insurance work after age 100 in Canada?
After age 100, the cash value may be converted to a reduced paid-up policy with no further premiums due. However, the death benefit is then fixed based on the remaining cash balance.
Does variable universal life insurance require a medical exam in Canada?
In most cases, yes. VUL applicants generally must complete a medical exam so insurers can accurately assess mortality risk factors and determine pricing.
Can variable universal life insurance be cancelled in Canada?
Yes, VUL policies can be cancelled by the owner. However, surrender charges may apply if cancelled within the first 10-15 years. Any cash value is returned upon cancellation.
Is the investment return guaranteed for variable universal life insurance in Canada?
No, unlike some permanent policies, VUL does not guarantee any rate of return. The cash value fluctuations are up and down based on the performance of the invested funds.
How safe is the cash value account within variable universal life insurance in Canada?
Safety depends on the underlying investments. Money market and fixed-income funds are lower risk than equities. The overall risk is higher than a guaranteed permanent policy.
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