Term vs. Universal Life Insurance in Canada: What’s the Difference?

Life insurance is one of those things most Canadians know they should have — but fewer feel confident explaining. And once you start comparing term vs. universal life insurance, it can feel less like a financial decision and more like a pop quiz you didn’t study for. Both are legitimate life insurance products, both can protect your family, and both get recommended a lot. The catch? These products are built for very different jobs.

This article breaks down how term and universal life insurance work in Canada, how they differ in cost, flexibility, and purpose, and the situations where each one can make the most sense.

Key takeaways

• Term life insurance and universal life insurance serve different purposes. Term life is designed for affordable, time-limited protection, while universal life is meant for lifelong coverage with added flexibility and tax-advantaged features.

• Term life insurance is often the simplest and most affordable way to protect your family during key financial years, like while you have a mortgage or a young family to support.

• Universal life insurance is generally more complex, but also more flexible. It can include a savings component that grows on a tax-deferred basis and may support long-term goals like estate planning or business succession.

• The right choice depends on your goals, budget, how long you need coverage, and how involved you want to be in managing the policy.

• Your needs can change over time. Many Canadians start with term life insurance and later consider permanent options as their financial situation evolves.

How universal life insurance works

Universal life insurance is a type of permanent life insurance, designed for Canadians who want lifelong coverage that can help protect their income during their working years, leave behind a legacy, and build additional value for their estate. When you pass away, it pays a tax-free death benefit to your beneficiaries. 

Universal life insurance also includes a tax-advantaged savings component that can grow inside the policy over time. How this works is a portion of what you pay goes toward the cost of insurance, which is the minimum amount needed to keep the policy in force. If you choose to pay more than the minimum amount, the extra dollars can go into a savings portion that may grow on a tax-deferred basis, as long as it stays inside the policy.

Depending on the insurer, you can usually choose how that savings portion is invested and how your premiums are paid. For example, with universal life insurance, you can select from different interest options and choose between plans with or without bonus interest. That built-in flexibility can be helpful if your income, priorities, or long-term plans change over time.

Learn more about permanent life insurance.

Key features of universal life insurance

• Lifetime coverage: Coverage is designed to last your entire life, rather than a set term.

• Tax-free death benefit: Your beneficiaries will receive a lump sum, tax-free benefit if you pass away.

• Premiums: You’re not locked into one fixed payment for a term. As long as you stay within required minimums and maximums, you can adjust how much you contribute and how often you pay (e.g., monthly or annually). Paying more than the minimum can also help build value inside the policy over time.

• Broad range of investments: Depending on the insurer, you can choose from different interest or market-linked options and adjust those choices over time if your comfort level or goals change.

• Tax-deferred growth: Growth is not taxed while it remains in the policy.

• Access to funds. If savings have built up, you can typically access the cash value through withdrawals or policy loans. The policy can also be surrendered for its cash value, although accessing funds may affect coverage and taxes.

• Built-in flexibility: Premium amounts, payment timing, and investment choices can often be tweaked as your income or priorities change.

• Living benefits: Some policies may offer living benefits, such as a compassionate advance if you become terminally ill or a disability benefit paid from the policy’s accumulated value.

• Riders: Extra coverage can often be added to suit your needs, such as a children’s term rider, accidental death benefits, or supplemental term insurance.

How term life insurance works

Term life insurance is designed to be simple and affordable. It provides coverage for a set term (e.g., 10, 20, 40 years), and if you pass away during that time, your beneficiaries receive a tax-free death benefit.

You pay a monthly or annual premium for the length of the term you choose. If the term ends and you’re still alive, coverage typically ends or can be renewed at a higher cost, depending on the policy.

Term life insurance is most often used for income replacement and temporary protection, such as covering a mortgage or supporting your family while children are still financially dependent. It doesn’t include a savings or investment component, so there’s no cash value — premiums go entirely toward coverage, which is why it’s often a more affordable option.

That said, some insurers like RBC Insurance may allow you to convert all or part of your term life insurance policy into a permanent policy later.

Learn more about term life insurance and how it works. 

Key features of term life insurance

• Affordable coverage: With RBC Insurance, rates can start at less than $13/month, depending on your age, health, coverage amount, and term length.

• Tax-free death benefit. If you pass away during the term, your beneficiaries receive a tax-free lump sum payment. With RBC Insurance, the amount generally ranges from $50,000 up to $25 million.

• Set terms and premiums: Coverage lasts for a defined period — commonly between 10 and 40 years — with premiums that stay the same for the length of the term. Policies can often be renewed at the end of the term, typically at a higher cost.

• Flexibility: Term life insurance lets you match coverage to specific needs, such as replacing income or covering a mortgage. Many policies also allow you to add riders or convert some or all of your coverage to permanent life insurance later on.

• Simple by design: There’s no cash value and no investing — just straightforward protection for the years you need it most.

Difference between universal life vs. term life insurance

Universal life insurance and term life insurance both provide protection — they just go about it in different ways. Here’s a simple, side-by-side look at how they compare.

Is term life insurance better than universal life insurance?

The short answer: neither is term life or universal life insurance “better” across the board. Term life insurance and universal life insurance are built for different goals, different timelines, and different comfort levels.

The right choice depends on what you’re trying to protect, how long you need coverage, and whether you’re looking for straightforward protection or a longer-term planning tool. For many Canadians, the “better” option is simply the one that fits their life right now — and that can change over time.

Why universal life insurance might be right for you

Universal life insurance can make sense if you’re looking for more than just basic protection. It’s often a better fit for people who:

• Want lifelong insurance coverage that doesn’t expire.

• Are interested in tax-advantaged growth inside a life insurance policy.

• Have a higher income and may already be maximizing other registered savings options.

• Are thinking about estate planning, leaving a legacy, or covering future tax obligations.

• Own a business and need help with business succession, shareholder planning, or key person protection.

• Are comfortable with a policy that requires some ongoing attention and decision-making.

• Like the idea of having a built-in cash value you can leverage if your plans change or a new opportunity arises.

In short, universal life insurance tends to suit people who see life insurance as part of a broader financial or estate plan — not just a safety net.

Why term life insurance might be right for you

Term life insurance is often the right choice if your goal is clear, time-bound protection. It’s commonly a good fit for people who:

• Want a simple, affordable way to protect their family.

• Need coverage during a specific age and stage, such as while paying a mortgage or raising children.

• Are focused on income replacement, not building savings inside an insurance policy.

• Prefer something that’s easy to understand and easy to manage.

• Want the flexibility to reassess their needs later or convert to permanent insurance down the road.

Term life insurance may work well when your biggest financial responsibilities are temporary, and when keeping costs predictable matters. If you’re leaning toward term life insurance, you don’t need to guess what it might cost. You can get a personalized quote online in just a few minutes with RBC Insurance’s term life insurance quote tool.

Get the right life insurance policy for your needs

At the end of the day, choosing between term life insurance and universal life insurance isn’t about picking the “best” product — it’s about choosing what works for your life. Term life insurance may make sense if you want affordable, no-frills coverage for a set period. Universal life insurance can be a better fit if you’re thinking long-term and want flexibility around estate or tax planning. If you’ve got questions, a licensed insurance advisor can help. A quick conversation can go a long way in clarifying your options and making sure the coverage you choose matches your goals and your budget.

FAQs about term vs. universal life insurance

What are alternatives to purchasing universal or term life insurance?

Term and universal life insurance aren’t the only options available to Canadians. Other types include whole life insurance (lifelong coverage with built-in savings), guaranteed life insurance (often no medical exam, but generally higher costs and lower coverage), and term-to-100 life insurance (coverage to age 100 with fixed premiums and a tax-free death benefit). Each option serves a different need and budget.

What is the difference between term insurance, whole life insurance, and universal life insurance?

The main differences between term insurance, whole life insurance, and universal life insurance come down to how long coverage lasts and whether there’s a savings component.

• Term life insurance covers you for a set period and focuses on affordability.

• Whole life insurance provides lifelong coverage with guaranteed premiums and built-in savings.

• Universal life insurance also offers lifelong coverage, but with more flexibility around premiums and how savings are managed.

Generally, all three pay a tax-free death benefit but are designed for different goals.

Can I switch from term life insurance to permanent life insurance?

In many cases, yes, you can switch from term life to permanent life insurance. Some term life policies allow you to convert part or all of your coverage to permanent life insurance (such as whole or universal life). Conversion options and timelines vary by policy, so it’s a good idea to review the details or speak with a licensed insurance advisor.

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