Variable life insurance combines permanent coverage with a market-linked component, so the contract can expose cash value and sometimes the death benefit to investment performance. To prepare this guide, our editorial team reviewed FSRA’s life-insurance policy-type guide, FCAC’s life-insurance guide, Finance Canada’s explanation of tax treatment inside life-insurance policies, and CLHIA’s segregated-fund contract guide.
Keep reading to learn how the Canadian category differs from universal life and a segregated-fund contract, how charges change the account, and what to verify before buying, borrowing or surrendering.
What Is Variable Life Insurance in Canada?
FSRA recognizes variable life insurance as a type of permanent life insurance with an investment component, such as stocks, bonds, indexes or funds. The cash values fluctuate based on the investment component. Premiums are typically guaranteed, but the death benefit may be guaranteed or may fluctuate above a minimum, depending on the insurance contract.
Watch out for similarly named products. Individual variable insurance contracts are commonly called segregated-fund contracts. Segregated-fund contracts are investment contracts issued by life insurance companies, not necessarily life insurance policies that pay a face amount at death. They include a guarantee of value at a future date and/or a guarantee of a death benefit.
Check your policy for investment options, charges, guarantees and flexibility of premiums.
Read More: Compare Whole and Universal Life Insurance
The Key Characteristics of a Variable Life Insurance Policy
Investment Component
What happens if returns are poor? Would you need to make additional premium payments to keep the policy in force?
Look closely at the investment menu offered and the risk of each. Some investments are indexed, some hold funds, and others may be credited in another way.
Death Benefit
Check the death benefit. Death benefits may be level, variable or based on a minimum guarantee. Losses, withdrawals and policy loans, including interest, may reduce the death benefit.
Policy Loans
Tax implications in Canada depend on the transaction details and the insurance policy’s adjusted cost basis. Ask the insurer for an illustration and an estimate of the tax reporting. Seek tax advice if the loan is significant.
The insurer determines how much you can borrow, the interest rate and its guidelines for lending against its policies. A policy loan can reduce the policy’s death benefit and cash value and increase the chance that the policy will lapse.
Read More: Read the Guide to Borrowing Against Life Insurance
Surrender Charge
Surrender value may be less than the value of the investment account because of charges, poor investment performance or policy loans. Full surrenders or partial withdrawals may result in taxation of policy gains.
Before proceeding, get the current investment account value, cash surrender value, taxable amount, death benefit after the transaction and the policy’s adjusted cost basis.
Tax Treatment Is Deferral, Not a Blanket Exemption
Loans, withdrawals or surrenders are not always tax-free. Policyholders are not taxed each year on returns inside an exempt policy; however, the insurer pays an investment-income tax on assets allocated to these policies.