If the policyholder wishes to access his/her accumulating fund at any particular time, a withdrawal can be made.  If this occurs in the early years of the policy, many UL plans have surrender charges that act as a penalty for early withdrawal.  And if the withdrawal occurs in the later years (usually beyond 15-20 years), at least a portion of the withdrawal will be subject to tax.    

Before a deposit is assigned to the policy, a provincial premium tax (varies by province) is deducted.  Universal Life contracts are characterized by their premium flexibility, allowing for increases or decreases in the deposit amount as well as for premium “dump-ins” and premium “holidays”.


The remainder is deposited to the tax-sheltered fund which accumulates interest without attracting tax.  Taxation may occur if the accumulating fund is accessed by either withdrawing funds from or surrendering the policy.  The maximum amount that can be in the fund at any time is dictated by CRA though an exempt test.


The tax-sheltered fund can be comprised of a variety of investment types - from daily interest and guaranteed interest accounts to bond and equity indexed accounts.  However, for the fund to be afforded tax-sheltered status, these funds must always be part of the General Funds of the insurance company.

On a regular basis (monthly or annually) deductions are made from the tax-sheltered account to cover the cost of insurance or mortality risk charges as well as expense or administrative costs.  The amount of the cost of insurance deducted varies from person to person depending on several factors - including their age, sex, smoking status, general health and the amount of life insurance coverage for the policy.  The pattern of the cost of insurance can also vary from plan to plan.  They can increase every year (yearly renewable term), be locked-in for life (term to 100) or have a pattern anywhere in between.  Costs of insurance can also be guaranteed contractually for life.

Universal Life

How Universal Life Works

All Universal Life plans basically work in the same way and share the same basic common components.  Also, since UL plans are “unbundled” (i.e., the various components of the plan such as insurance charges and earned interest can each be isolated and quantified), they are much easier to understand and explain than traditional “bundled” permanent life insurance products.


A deposit or premium is made by the policyholder. The size of the premium is often limited such that it is at least as large as a certain minimum premium and/or no larger than the maximum premium.  These amounts are usually specified in the policy contract and are a consideration for a limited period of time (1 to 5 years).