Universal Life Insurance
Universal Life Insurance is a flexible permanent insurance and investment plan that combines life insurance protection and a tax-deferred investment vehicle:
● the investments in the policy pay for the insurance coverage;
● existence of the insurance elements permits the investment growth to accrue within a tax-deferred environment.
Your investment in the policy may provide additional retirement income or the value of your investment may be added to the death benefit and will go to the assigned beneficiary without tax.
The flexibility of this insurance allows it to be adapted to a variety of life insurance application such as estate creation/preservation, additional retirement income and business application. Most Universal Life policies provide you with a variety of options and features so you can customize your policy to meet your needs. And a good Universal Life plan lets you change your policy as your needs change.
How does Universal Life Insurance work?
When you first buy your Universal Life plan, you start pay premiums to the insurance company. Upon receipt of your payment, the insurance company deposits your premiums less the provincial premium tax to the Investment Account (s) you selected on your application for life insurance.
Each month, monthly charges will be withdrawn from the Investment Account(s) based on the method you elected on the application. Monthly charges include cost of insurance charge, administration charge, charge for any riders and/or additional benefits attached to the policy. If you have accumulated funds over and above what is required to pay the monthly charges, these funds will form your Account Value. Your Account Value will earn interest. This interest is linked to the investments you select on your application for the life insurance. It may be positive or negative, and your Account Value may fluctuate. Growing funds in your Investment Account(s) may be used as a source of additional income (for example, retirement income) or added to the death benefit.
You have to select investments you want to put your money when signing the contract. The initial premium allocation to the Investment Accounts may be changed during the policy existence. Generally, you can choose to invest in any combination of:
As you make regular payments (or lump sum payments, if you choose to) the Account Value in your policy grows tax-deferred. You may make additional payments into the Investment Account(s) (besides regular monthly premiums, for example), up to the maximum allowed Canadian tax law (the Income Tax Act). When you reach the limit, the excess money is moved to an overflow fund. This fund also earns interest, but it’s not tax-deferred. You can withdraw money from this fund at any time. Any amount remaining in the overflow fund will be added to the amount of the death benefit.
You may stop making your monthly payments temporarily, if there is enough money accumulated in the Investment Account(s) to cover their costs. If for any reason (including the fluctuation of the Account Value), there are insufficient funds in your policy to cover the monthly charges, your policy will lapse.
Cost of insurance
You can choose the type of the cost of insurance, that is the amount the insurance company deducts from your Investment Accounts every month to pay for the insurance coverage. Typically, the amount you pay for your insurance is structured in one of two ways:
1. a level cost of insurance : the rate remains constant over the life of your policy or
2. a yearly cost of insurance: the rate increases each year to equal the actual cost of insuring you as you grow older.
You can access the Cash Value of your policy through a cash withdrawal (full or partial). The Cash Value is equal to the total Investment Accounts, less surrender charges and outstanding policy loans.
You may elect to surrender the entire policy at any time, in which case the Cash Value will be paid to you. A full surrender will terminate the policy. A partial surrender is the withdrawal of a portion of the Cash Value. There are the maximum and the minimum you can withdraw established by the insurance contract.
The Policy Loan feature allows you to borrow funds using a Cash Value of the policy as collateral security. The outstanding Policy Loan balance will reduce any proceeds on death or termination. Usually, a Policy Loan repayment may take place at any time.
Collateral Loan (Leveraging)
Collateral loan against Cash Value may be arranged with third party lending institution. It allows you to use a Cash Value of the policy as a source of a supplemental retirement income.
Such arrangements may provide tax-free retirement income with the accumulating loan paid off by the death benefit of the policy when the life insured dies – with any excess available for beneficiaries.
Types of coverage
1. Single Life: Coverage for one life.
2. Multiple Life policy: A multiple life policy can include up to five or six coverages. New coverages can be added at any time up to the allowed maximum. The policyholder can also substitute new insureds for those originally chosen, remove coverages or split the policy.
Customizing your policy with extra benefits
It is recommended a yearly review of your insurance policy to make sure it continues to meet your changing needs. And, if your needs change, it’s good to know that you have several options to change your current amount of insurance or type of coverage.
With your universal life policy, you can choose a number of “riders” or extra benefits. These extra cost options help customize your policy. Some examples include:
Healthy rewards for healthy living
If you consider yourself to be healthy and you lead a healthy lifestyle, you should choose an insurance company that offers preferred underwriting. This means that you may get further discounts on your insurance than someone who is not as healthy.
You can choose insurance plan from the Canada's top insurance companies: Manulife Financial, BMO Insurance, Equitable Life of Canada, Empire Life, RBC Insurance, Industrial Alliance, Canada Life and others.
Contact us for more information and consultation.
Revised: March 28, 2020.