Fact CheckedUniversal life insurance. Bet you’ve heard of it…
But do you understand it?
…it’s a pretty well-known life insurance term, but it’s a bit of a confusing product. Don’t let that put you off though!
A Universal Life Insurance policy is one of the valuable tools we, as insurance agents, have in our arsenal.
This post has been a long time in the making. I want to shed some light on what I think is an excellent product.
Grab a coffee and put your feet up to learn more about Universal Life Insurance Canada.
I guess you’ll be left asking, “Where have you been my whole life?”!!
Life Insurance Recap
Have you ever met someone who assumed you knew what they were discussing?
You know what I mean…when you go to Best Buy and get bombarded with Tech talk. Grrr! It can be frustrating.
So, I will cover the basics for those new to the life insurance world.
If this is your first time looking for information about Universal Life Insurance features, it will be entirely new to you.
In a nutshell, there are two categories of life insurance you can purchase:
- Term Life insurance
- Permanent Life Insurance
Let’s check them out now!
Term Life Insurance
Well, chances are you’ve heard of Term Life Insurance, as it’s the most common and affordable product on the market.
…and in my humble opinion, it’s the right choice for 95% of people.
Term provides temporary, inexpensive protection for a defined period, usually 10, 20, or 30 years.
The coverage and premiums are guaranteed for the length of the term. For example, if you purchase a $500,000, 10-year term policy for $30 per month, that $30 monthly cost is locked in for ten years, guaranteed.
If you’re looking for protection that ends at some point in the future, your best and cheapest option will always be a term life policy.
Permanent Life Insurance
Many clients want coverage from the day they sign on the dotted line until they die.
I can’t blame them. There is something to be said for that sort of surety.
As I mentioned above, there is a time and place for Permanent coverage. But you need to know that it is significantly more expensive (think 6 to 10 times the cost of term).
OUCH!
…but this isn’t the whole story…
There are three types of permanent coverage:
- Whole Life Insurance
- Universal Life Insurance
- Term to 100
In general, Whole Life and Universal Life Insurance are very similar. They are both designed for a permanent need and offer protection for life rather than a specific term.
Who doesn’t want to be covered until their death? It’s a pretty good thing—especially if you have dependents or beneficiaries you’d like to see inherit some cash.
There’s also a money-saving component. Cash value accumulates when you get a permanent policy, which you can access under certain conditions.
This is why universal life and whole life are known as cash-value life insurance.
Term to 100 is a pure cost insurance guaranteed for life and has no cash value. You pay for the cost of the insurance, nothing more, nothing less.
Let’s look at the broad strokes of Universal Life right now!
How Does a Universal Life Insurance Work?
Similar to whole life, Universal life has two pieces: an insurance component and an investment component. Simply put, a portion of your insurance premium each month pays for the pure cost of your life insurance. The portion leftover is put into and investment account inside your policy to grow long-term. Over time, you can access or borrow against the equity in your policy for any number of reasons including mitigating estate taxes. This product is often talked about in conjunction with the term infinite banking.
A Universal Life Policy:
- Provides a monthly premium and death benefit that may be adjusted over time during the life of the policy and is generally not guaranteed
- It can be used to build up cash value
- You can borrow against the cash value of the policy
- Universal Life Insurance is an unbundled product offering you various asset class choices. This gives you the ability to manage your investment mix actively. As your financial objectives or risk tolerance change, you can adjust these variables over time. In other words, you decide how the cash in the policy is invested!
- Because you are accepting some risk by choosing the investments, premiums are lower, and the potential upside is higher
PROS
As with EVERYTHING, Universal Life Insurance has some strong points. There are some excellent reasons you would purchase this product:
1. Universal Life Insurance Offers Coverage for Life
You have permanent protection for the rest of your life if you pay your premiums.
2. Universal Life Insurance is Flexible
Life isn’t straightforward. Let’s face it: there are curve balls. That’s why more flexible products like Universal Life Insurance exist. You can modify the policy in various ways in the future, which means that as your life changes, so can your policy.
For most of us, family protection is the most important thing early on, but as we get older, we make more money (or at least that’s the plan)…
…which means there is room to find new ways to protect hard-earned cash. This is where all the Universal life insurance features come into play.
It’s a fantastic tool for shifting the focus of your coverage from protection to investment savings and estate planning without missing a beat.
3. Universal Life Insurance: You Choose How Your Money Is Invested
Do you like being told how to spend your money? I don’t.
A Universal Life Insurance Policy offers you various fixed-income and equity investment options.
This means cash accumulating in your account may be divided or spread out among several asset classes.
Wow, now this is what I like to hear!
A Universal life insurance investment account is simply a wrapper; you choose what goes inside: treasury bills, GICs, or index funds linked to the performance of equity, bond, or money markets.
This is similar to deciding what to put in your registered retirement savings plan (RRSP).
4. Universal Life Insurance: Higher Potential for Growth than Whole Life
If you make savvy investment decisions regarding what you put inside this wrapper, growth can be substantial compared to the guarantees offered by Whole Life. However, this means you assume some risk.
5. Universal Life Insurance: Cash Value Feature
Some years are great – you get that raise, and life ticks along…
…and others are leaner! You watch as your savings account balance starts to dwindle.
With Universal Life Insurance, you can pay the same monthly premium for guaranteed coverage.
…or if you have a little extra cash in your pocket (not that I’d know a lot about that lately with two kids and a mortgage 😉
…you can overpay your premiums to build up cash value in your policy. The general idea is to sock enough money away early on so you can do several things:
1) lower your premiums
2) pay no premiums at all or,
3) build as much cash value as quickly as possible to achieve maximum growth for estate planning purposes. Yep, this is a terrific tool if you have some equity you want to leave to your beneficiaries.
As you can see, this is one of the most popular features of universal life insurance.
This brings me to another aspect of the cash value that I feel deserves its little blurb:
6. Universal Life Insurance: Use Cash for Living Benefits (Critical Illness)
Health is a fantastic thing. When you have it, you take it for granted, and when you don’t, let’s say everything gets turned upside down.
Thankfully, many insurance companies know this. If you sustain a disability or critical illness or require long-term care, you can withdraw the cash accumulated in your universal life insurance investment account.
…tax and surrender charge-free!
These circumstances fall under living benefits. Which means you can access these monies while you are alive.
Why YOU should care about this!
Perhaps you’re diagnosed with a heart attack, stroke, cancer, major medical procedure, or some other disability or long-term care condition…
You can borrow against the cash value accumulated in your policy to pay for treatment above and beyond what you may receive through group coverage or your traditional health care plan.
You are free to spend the money in any manner you choose.
Travel to an out-of-country clinic, purchase drugs, modify your home with specialized medical equipment, or even pay off high-interest debt.
Fighting and surviving an illness can be physically and emotionally draining, and financial stress is the last thing you need at a time like this.
My favorite part?
Instead of spending after-tax income on treatment and medicine, use the money borrowed against your universal life insurance policy tax-free. Then, the receipts will be submitted to the Canadian Revenue Agency (CRA) for additional health expense tax credits.
Taking a loan out while you are alive also reduces your death benefit. Nevertheless, it’s a great feature that, hopefully, you’ll never have to use.
7. Universal Life Insurance: Tax-Sheltered Investing
The tax man takes a big bite out of almost everything.
I like to do my part, but some savings don’t hurt the bottom line.
A universal life insurance policy enables you to generate savings completely protected from tax if they form part of the death benefit.
…or tax-deferred if they are withdrawn before death.
This allows tax payable on that growth to be deferred until the policy is surrendered…
…or if the death benefit includes the account value, the growth may never be subject to tax!
How about that!
*note, no financial advisor would ever recommend withdrawing cash directly out of the policy if it could be avoided.
8. Universal Life Insurance: Slightly Cheaper than Whole Life
All things considered equal, Universal life insurance premiums are a bit lower for similar amounts of coverage because of the lack of guarantees.
Whole life insurance is known for its fixed premiums and guarantees. However, many don’t realize that guaranteed universal life insurance (GUL) also offers fixed premiums.
Often for slightly less money.
You have to look for savings where you can find them! Remember, a few dollars over a month or lifetime adds up to thousands.
9. Universal Life Insurance: Premium Holidays
If you’ve accumulated enough cash in your policy, you can take a break from paying your premiums.
This is known as a premium holiday and the insurance company simply draws them out of your dividend account.
This is convenient if you’ve lost your job or are experiencing a cash crunch and it’s a strategy to avoid having your policy lapse.
10. Universal Life Insurance: Tax-Free Income, Insured Retirement Plan (IRP)
We are all working hard to provide for our families, and our goal is to build personal wealth.
Who doesn’t dream of being in the highest tax bracket when they retire?
Ahhh, yes, you’re a high net worth person who owns real estate, has maxed out your tax-free savings account (TSFA) and are looking for a place to put some extra money to avoid overpaying the CRA?
Why don’t you overfund your Universal Life Insurance policy?
Using this approach, you can generate tax-free growth in your investment account. When you retire, you obtain a series of loans, using the cash value as collateral.
No income tax is triggered because loans are not categorized as taxable income. Technically, you’re not withdrawing money directly from your policy. You’re borrowing against it so the investment value remains intact. This means it to continues to compound tax-free.
NOTE: The loan can be capitalized so that you can make no principal or interest payments while you’re alive. The policy proceeds wipe out the debt, and any cash left over flows tax-free to your beneficiaries.
This strategy is known as an Insured Retirement Plan (IRP), and you can read about it in my Cash Value Life Insurance post.
Contact Policy Architects today. Although this concept may be difficult to understand, it’s a great way to access tax-free dollars during retirement.
NOTE* This strategy can also be achieved and may be more advantageous using a whole life policy.
YOWZA!
Now, those are some pretty compelling reasons to purchase Universal Life Insurance! But as we all know, nothing in life is perfect.
Let’s check out the cons now!
CONS
1. Universal Life, “Why do you Have to go and Make Things so Complicated?”
This is one of the biggest challenges with universal life insurance and why I don’t recommend it to most clients:
If you’re looking for something super straightforward and easy to understand, Universal Life isn’t it!
A Universal life insurance policy is best suited for financially savvy individuals with long-term investment needs looking for tax-advantaged investment and estate planning opportunities.
Whole Life insurance is a much better “set it” and “forget it” solution.
2. Universal Life Insurance: You Need to Stay on Top of the Investment Account
You, the policyholder, must actively monitor the performance of the policy assets and make adjustments when needed.
If you don’t have the time, inclination, or ability to manage the investment side of things, you’re probably better off with a Whole Life Insurance policy with fewer moving parts.
3. Universal Life Insurance: Hard to Change Course Once You’ve Started
If you’ve decided to invest in Universal Life Insurance to build up cash value, remember that you won’t have access to that money until the beginning of year 6. This goes for whole life insurance as well.
Remember that building up anything decent cash-wise usually takes approximately ten years.
It isn’t easy to extricate yourself if you decide to change your mind within the first ten years and do something else with your money. You’re stuck unless you’re okay with losing some cash.
Most insurance carriers in Canada impose serious surrender penalties for withdrawing money early from your policy.
These fees range from severe in the first three years to more moderate in the remaining seven years, and they are on a declining scale.
Ouch!
Before taking the plunge, ensure that Universal Life Insurance is the right fit for you. That’s why you should always contact an independent life insurance agent who has experience with these products.
*Note: There are some situations where you can deposit large sums in the early years of the policy and have access to cash value sooner.
4. Universal Life Insurance: Less Guarantees for Death Benefit and Cash Value
The downside of choosing how cash is invested in your Universal life Insurance policy means you’re on your own when assuming the risk. Because you’re the one who’s made the investment decisions, the insurance company provides you with fewer guarantees.
Why is this a problem?
When you decide to take out a loan against your UL policy, banks will limit the amount you can borrow because the insurance company offers less guarantees. Conversely, consumers are allowed to borrow more against a guaranteed whole life policy.
4. Universal Life Insurance is Expensive compared with Term
In the early years of a Universal Life insurance policy, the premiums are way higher than if you bought Term Insurance.
If you are on a tight budget, this product is definitely not for you. Sometimes, people skimp on coverage because they are looking for cheaper premiums. Don’t do that. This applies to whole life as well.
You’re better off buying the right amount of term insurance rather than being underinsured with a Universal Life or Whole Life Insurance product.
Some pundits argue—and I think they have a point—that if you’re considering investing in a permanent life insurance product such as Universal Life or Whole Life, you may be better off buying term and investing the difference in an index fund or ETF.
Final Thoughts About Universal Life Insurance
Now that’s a LOT of information…I’m not sure what I think!
I hear you. It’s one of the main reasons you should work with an independent life insurance agent. We can help you. Here are some of my final thoughts.
So what is Universal Life Insurance?
A Universal Life Insurance policy is best described as insurance with a savings component – but not only that, it’s flexible.
Lifelong coverage accumulating “cash value” can be employed in various ways, including business, estate planning, and living benefits.
…or you can keep it simple with a fixed monthly premium and level death benefit. You can also choose how your ‘cash value’ is invested and modify this over time. Talk about options!
Remember, though, that as much as Universal Life Insurance is known for its options and the control it provides, you’ve got to stay on top of it! So, this is NOT the right choice for those who lack investment knowledge.
Why Policy Architects?
Life insurance is complicated, and Universal Life Insurance is likely one of the more complex offerings. Generally speaking, I don’t recommend it often to clients unless they’re looking for a minimum-cost GUL.
Remember, Universal Life Insurance features differ dramatically from one carrier to another, so you must work with a trusted independent broker – like Policy Architects – who can give you accurate, unbiased advice.
Have you ever heard the saying, “Analysis, Paralysis”?
Get in touch with Policy Architects Today! Click the button below to get a free Universal or Whole life Quote.
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