The purpose of Universal Life Insurance is two-fold. First and foremost, Universal Life Insurance is an insurance product designed to help you take care of your beneficiaries by providing them with financial support and long-term insurance protection to help safeguard the legacy you’re building for them. It also gives you the opportunity to invest and build additional wealth over time, within the same policy. Plus, the added advantage is that it gives you an opportunity to invest and build additional wealth over time – tax-free!
Universal Life Insurance is flexible enough to be used for canceling debt obligations, such as mortgages or business loans; for minimizing taxes on death; for estate planning and business continuity strategies; for fair share inheritances and for funding partnership buy-out agreements.
With Universal Life Insurance, the proceeds of the policy are paid to beneficiaries tax-free. You can also decide whether you want the investment portion included in the death benefit received by your beneficiaries. This gives you an important tax advantage over other investments, like RRSPs, which are subject to income tax in the year they are received. Proceeds and funds payable to your beneficiaries on death are also generally protected from certain creditors of the insured if the appropriate beneficiary designations are in place.
No matter your marital and family status or whether you earn your livelihood as a business owner, partner or corporate employee, Universal Life Insurance can give you the amount of protection you need. Have peace of mind knowing that your beneficiaries and financial obligations will be taken care of.
How Universal Life Insurance Works
Universal life insurance uniquely combines Permanent Life Insurance protection with the benefits of tax-advantaged investing. You may have heard the saying: “buy term insurance and invest the difference.” Well, Universal Life takes care of both … all in one policy.
With Universal Life Insurance, you pay an amount of money (usually monthly) that is deposited into one or more investment accounts. Each month, the insurance company takes out money to cover the cost of the insurance and administrative costs. The money left in the investment account earns a return (either positive or negative) based on the performance of the investment account(s) you’ve chosen. The money within your investment account(s) is called the account value.
While Universal Life Insurance does have an investment component, you can decide to pay only the insurance and administrative costs each month and not use the investment component at all. However, if you’re saving for the future, any excess deposits that you make can grow on a tax-advantaged basis within your policy. What’s unique about Universal Life Insurance is you don’t have to pay tax on any growth in the investment accounts because it is part of a life insurance policy, provided your policy value does not exceed an amount prescribed under the Income Tax Act.
Most universal life policies provide you with options and features so you can create a policy to meet your needs. A good Universal Life Insurance plan lets you change your policy as your needs change.
How is Universal Life Insurance Structured?
Typically, the amount you pay for your insurance is structured in one of two ways:
- You either pay a level cost of insurance that spreads the actual cost of your coverage evenly over a certain period (10 or 20 years or level for the life of the policy)
- Or a yearly cost that gradually increases each year to equal the actual cost of insuring you as you grow older.
These two cost structures allow you to tailor your policy to suit your specific needs. With the level structure, higher insurance costs are deducted in the early years of your policy, resulting in slower growth of your account value. However, higher growth occurs in the later years when lower insurance costs are charged. The yearly increasing structure, on the other hand, provides higher account value early in your policy and slower growth in later years when the costs to ensure you increase.
It’s also possible to get the best of both worlds because in some cases you can switch from yearly increasing to level. For example, you can start your policy with the increasing cost of insurance to build up your early values, then switch to the level option to produce greater value over the long term.
You can also choose the type of death benefit (or insurance proceeds) your policy provides. The most
common options are:
1. Level face: The death benefit remains the same as long as you own your policy.
2. Face plus: The death benefit includes the amount of insurance coverage you’ve selected plus the value of your investments.
3. Account value on each death: The value of your investments is paid as a pre-determined percentage at the time of death, per insured person. The death benefit includes the amount of insurance coverage you’ve selected and is paid when the last of two insured dies.
Investing in your Universal Life Insurance Policy
As mentioned earlier, one of the key benefits of choosing Universal Life Insurance is that it not only offers you quality, permanent life insurance protection, it also offers you the opportunity for tax-advantaged investing. Most insurance companies offer their customers a wide variety of investment accounts within in Universal Life. And often, the choice between which Universal Life Insurance policy to choose is based on which accounts are available with each Insurer.
Most Canadian insurers offer their own Universal Life Insurance product with varying unique features and options available. When you are selecting the right plan for you, an illustration from the Insurer will be provided giving you a snapshot of how your policy will perform over time based on different investment assumptions as well as different investment conditions. It is important to remember that illustrated values are NOT GUARANTEED, as there are many factors that affect interest rates that are beyond the insurance company’s control.
What are the Key Differences Between Whole Life Insurance and Universal Life Insurance?
Whole Life Insurance policies have a fixed premiums, meaning you pay the same amount each and every year for your coverage. They have the potential to accumulate cash value over time, creating an amount you may be able to borrow against. A Whole Life Insurance policy may be a good choice for you if you want a policy that will:
- Provide level premiums for the life of the policy
- Provide cash value accumulation that you can use while you’re still alive
- Provide protection that you can’t outlive as long as your required premium payment are made
Universal Life Insurance policies offer flexible premiums that may allow you to adjust how much you will pay each year, by accessing some of the policy’s cash value. Depending on your policy’s cash value, it may be used to skip a premium payment or be left to accumulate in value.
The Universal Life Insurance policy has the potential to earn more than a Whole Life Policy as there are minimum interest crediting rates that are outlined in your contract by the insurance company when you buy your policy. And if your investment portfolio earns more than the minimum interest rate, then the excess interest is credited to your policy. A Universal Life Insurance policy may be a good choice for you if you want a policy that will:
- Provide the flexibility to adjust your premiums and coverage amounts
- Provide cash value that you may be able to borrow from while you’re still alive
- Provide Permanent Life insurance protects and access to cash values
Universal Life Insurance policies are extremely complicated! Each insurer offers very subtle differences in the structure of their plans as well as the various optional benefits that are available. Education is a must to ensure that your Universal Life Insurance policy will work for you in the manner it is intended long term!
At Health Risk, we believe that it is imperative that we first of all have a clear and concise understanding of what your insurance needs and priorities are, and then we will proceed to conduct thorough research of the Universal Life Insurance programs that are available to ensure that you are purchasing the right policy to fit your requirements. We will enlist an experienced professional team to ensure that you are receiving the absolute best financial advice for your individual needs! You can count on us!
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DISCLAIMER: Please be advised that the information on this website is intended to present a broad variety of general information as simply and accurately for your knowledge as we possibly can. In no event does this information form part of or apply as a legal document. Therefore, please note that rules, conditions and industry practices discussed may be changed over time.