Considering Universal Life? Make sure you get both sides of the story before you purchase.
Universal life insurance is a modern type of permanent life insurance – life insurance that is intended to be kept for your entire life and pay a death benefit when you pass no matter how old you are.
Unlike other permanent life insurance policies, universal life insurance has a discrete life insurance section, and a separate investment section. These two sections are trackable, individually so you can see exactly what’s going on.
When you pay your premiums into a universal life insurance policy, insurance costs and administration fees are deducted. If there’s any premium left over then it’s deposited into the investment section of the policy (where it’s invested into an investment of your choice, and ideally grows and earns interest).
If your premiums are not enough to cover the full insurance costs and administration fees, the life insurance company will deduct the difference from the investment portion of the policy.
Now that you’ve got an understanding of how the policies work, lets look at the pros and cons of these policies.
- Investments normally have high fees compared to other available investment types (i.e. mutual funds).
- Insurance costs may increase over time, to the point of being unaffordable. Ensure that your policy has a “level cost of insurance”. This will keep the insurance cost the same throughout the entire life of the policy.
- Difficult to compare insurance costs to other policies, as costs can vary over time.
- Investments may not be liquid without penalties and fees. Particularly in the first 5-10 years of a policy there could possibly be deferred sales charges.
- Complex and often misunderstood.
- Because premiums can come either from out of pocket, or from the investment portion you have the ability to pay varying levels of premiums over the years.
- Investments are tax sheltered. Investment earnings are taxed until they are removed from the policy. Until there’s not normally any taxes on the growth – similar to an RRSP or TFSA.
- Investments paid out tax free. Upon your death, any investments inside the policy are paid out as part of the death benefit, without any taxation. This includes any growth in the policy, growth that grew on a tax sheltered.
The combination of tax sheltering and discrete investments means that universal life insurance lends itself to a large variety of tax-sheltering and savings strategies. Far more than can be encompassed in a single article.
If you’re interested in a universal life insurance, please call us for a more detailed explanation and suggestions on tax strategies. Experienced life insurance brokers available by calling 1-877-344-4011 or emailing us at email@example.com.