For 2023, LIMRA stated that more than 32% of Canadians would “possibly” buy a permanent Life Insurance policy, eg, an Indexed Universal Life (IUL) policy. But most had no idea how the cost was calculated. The reality? The price you’re paying for an Indexed Universal Life Insurance Policy is based on a lot more than just your age and health. Market performance, policy design, carrier underwriting rules, and a couple of strategic decisions you didn’t realize you were making could have an impact on the premium.
Assuming you are serious about retirement planning with Indexed Universal Life Insurance, or tax-free income and legacy protection through IUL. In that event, it’s time to explore the less apparent factors in your cost.
We’ll uncover 5 of the most important hidden factors that influence Universal Life Insurance levels in Canada, so that you don’t end up overpaying or putting too little money into your policy.
1. Participation Rates And Caps Tied To Market Indexes
Unlike Traditional Whole Life Policies, Indexed Universal Life Insurance links your cash value growth to an index like the S&P/TSX Composite. However, your actual return is limited by the insurer’s cap and participation rate.
- Participation rate: The percentage of the index’s growth you get. For example, if your rate is 70% and the index gains 10%, you only receive 7%.
- Cap rate: A ceiling on how much return you can earn, regardless of how well the index performs.
These figures change year to year and vary by provider. A lower participation rate or tighter cap restricts your growth, which directly impacts how much premium is required to meet your coverage or accumulation goals.
Bottom Line: The less growth your cash value earns, the more premium you may have to pay to keep your policy alive or hit retirement targets.
2. Cost Of Insurance Charges (COI) That Increase With Age
One of the least understood components of Universal Life Insurance premiums is the Cost of Insurance (COI). This is the internal fee deducted monthly to cover the death benefit. It’s based on your:
- Age
- Gender
- Smoking status
- Risk class (Standard, Preferred, etc.)
And here’s the kicker: COI charges increase as you age. Even if your premium stays level, a larger portion goes toward insurance costs and less toward cash value accumulation.
In your 30s and 40s, this might not hurt. But after 60, it can get expensive fast. If the policy isn’t properly funded early on, you may be forced to inject more capital later or risk policy lapse.
Key Tip: Pay attention to funding illustrations and make sure your advisor is stress-testing scenarios where index returns underperform.
3. Minimum Premium Vs. Target Premium Vs. Maximum Premium
In Canada, many Indexed Universal Life Insurance Policies allow flexible premium payments. But the range between minimum premium, target premium, and maximum allowable premium can drastically affect long-term performance.
- Minimum premium keeps the policy in force, but may barely cover COI.
- Target premium aims for a balance between insurance and cash value growth.
- Maximum premium (also called guideline limit premium) pushes as much money as legally allowed into the policy without turning it into a taxable investment contract.
Here’s the trap: If you only fund to minimum levels, your cash value might not grow fast enough to offset rising COI. That could shrink your coverage or increase future out-of-pocket costs.
Strategy Alert: If your goal is retirement with Indexed Universal Life Insurance, consider funding closer to the maximum premium to build faster cash accumulation.
4. Policy Loans And Withdrawals That Affect Future Growth
One of the advantages of an Indexed Universal Life Insurance Policy is tax-advantaged access to cash through policy loans or withdrawals. But these features come with long-term consequences.
- Loans accrue interest and reduce your death benefit.
- Withdrawals reduce both the death benefit and cash value permanently.
If you take too much, too soon, or fail to repay loans, it can trigger a tax event or cause the policy to lapse. Worse, reduced cash value may not be enough to cover COI later in life.
This means you could face higher Universal Life Insurance costs down the line just to keep your policy from expiring.
Pro Tip: Always review in-force illustrations before taking distributions and work with an advisor who models multiple scenarios.
5. Guaranteed Vs. Non-Guaranteed Components
Not all parts of Universal Life Insurance Policies are guaranteed.
- Guaranteed Universal Life Insurance in Canada provides level premiums and death benefits regardless of market conditions—but usually lacks strong cash value growth.
- Indexed ULs offer potential for tax-sheltered growth but come with non-guaranteed elements like index performance, COI increases, or changes in participation rates.
What you see is not always what you get. Illustrations often assume average index returns and stable caps. But if those values change, your cost to maintain the policy can skyrocket.
Smart Move: Ask your provider for a “guaranteed” and “current” projection comparison, so you understand both the best and worst-case scenarios.
Bonus: Administrative Fees And Riders Add Up
It doesn’t stop at base premiums. Many Indexed Universal Life Insurance Policies come with optional riders like critical illness, disability waiver, or children’s term insurance. Each rider has their own fee. Add to that:
- Policy admin charges
- Monthly processing fees
- Transactional charges for loans or withdrawals
Over time, these hidden fees can erode your cash value, leading to higher funding needs.
Always read the policy breakdown carefully, and don’t assume all fees are upfront or flat. Many increase over time.
Conclusion: Why Cost Clarity Matters For Indexed Universal Life Insurance
Indexed Universal Life Insurance can be a powerful tool—offering protection, flexibility, and potential tax-sheltered growth. But without understanding the five hidden factors above, your cost expectations could be way off.
When comparing Universal Life Insurance premiums, look beyond just the quote. Scrutinize the assumptions behind the numbers. Ask your advisor:
- What are the current cap and participation rates?
- How does COI change over time?
- What’s the difference between target and max premium?
- How will loans or riders impact policy value?
Your ability to retire comfortably using Indexed Universal Life Insurance depends not just on how much you pay, but how well you understand what drives the cost.
Learn More: When Life Insurance Proceeds Are Subject to Probate and When They’re Not