Interest rates can affect how life insurers invest your premiums, how they price new insurance products, and the interest rates used to illustrate your policy’s non-guaranteed values.
Our team has done its homework on the Bank of Canada’s policy interest rate page, the Financial Consumer Agency of Canada’s life insurance guide and FSRA’s review of universal life insurance sales to summarize what happens to your universal life insurance contract when interest rates change.
We also explain what remains guaranteed, what you need to monitor, and what to look for when you review your policy or new insurance illustrations.
How Do Interest Rates Affect Life Insurance in Canada?
Interest rates affect life insurers’ investment returns. Interest rates are used to determine the actuarial pricing of annuities, cash values, policy dividends, credited interest rates and other features that depend on interest-rate assumptions.
The Bank of Canada’s interest rate is not exactly the same as an insurer’s portfolio yield, dividend scale or universal-life credited rate. A change in one does not necessarily cause an immediate or equivalent change in the others.
Different types of insurance can respond differently:
- Term insurance premiums set out in an existing contract will not go down in response to high interest rates.
- Participating policy dividends are not guaranteed.
- The cash value of universal life insurance can rise or fall based on the selected investment accounts, credited or investment returns, policy costs and charges.
The Bank of Canada continues to target the overnight rate at 2.25%, as it did in December 2025. This was unchanged as of September 2, 2026.
How Higher Rates Can Affect Cash Values and Dividends
Life insurers invest premiums. Higher interest rates can mean higher yields on reinvested assets, which can increase overall earnings on new investments.
Higher investment yields for insurers do not equate to higher yields for policy owners. Higher interest rates won’t necessarily increase the cash value of whole life insurance quickly, and existing guaranteed values do not change.
If you have participating whole life insurance, you can ask your insurer for an in-force illustration showing what happens with the current dividend scale and a scale with lower dividends.
Policy owners can use policy dividends to purchase paid-up additions or lower premium payments. Read your policy for details on dividends and their ultimate impact.
Read More: Compare Whole and Universal Life Insurance
Changes in Life Insurance Product Offerings
It is not uncommon for insurers to introduce new life insurance products that include changes to pricing, crediting assumptions or other illustration assumptions. The availability of a new product does not necessarily mean that replacing your existing policy is a good idea.
Replacement can have adverse effects, including new underwriting, new contestability and suicide-exclusion periods under the new contract, policy fees, tax consequences and surrender fees.
Consider Insurance Alongside Other Retirement Options
Permanent insurance may make sense if you have a long-term need for insurance, understand the policy’s guarantees and can keep paying the premiums. However, permanent insurance isn’t a good place to stash money you may need in an emergency if cash values are low at first.
In a 2023 review, FSRA examined 24 client files involving agents contracted with three managing general agencies operating under a tiered-recruitment model. It found that 80% of the files did not demonstrate that the universal life policies sold aligned with the customers’ needs or circumstances.
The review also identified unrealistic or misleading illustrations and recommendations that did not match the client’s needs.
Read More: See Whether a Life Insurance Retirement Plan Is Worth It
What Should Policyholders Review?
- Get your policy, your latest annual statement and a current in-force illustration from your insurance company.
- Decide which aspects are guaranteed and which are not, such as premiums, death benefits and cash values.
- Itemize policy loans and interest, withdrawals, anticipated taxable gains and surrender charges.
- If you have universal life insurance, figure out what rate of return is required for the policy to perform as expected and see how it would perform at lower rates.
- Once you understand how your policy works, decide whether the coverage meets your current death-benefit needs and whether you’re comfortable paying the premium.
Read More: Read Whether Whole Life Insurance Is a Good Investment
Know Your Life Insurance Needs
Determine how much insurance you need, how long you’ll need it, and who needs it and why.
If you need the death benefit for only a fixed amount of time, don’t buy whole or universal life insurance simply because the rates look good.