Universal Life Insurance – A Complicated Product or Just What YOU Need?
Universal life insurance. Bet you’ve heard of it…
But do you REALLY understand it?
…it’s a pretty well-known life insurance term, but it’s also a confusing product, but don’t let that put you off!
The thing is, a Universal Life Insurance policy is one of the most useful tools, we as insurance agents, have in our arsenal.
So I think this post is a long time in the making. The idea is to shed some light on what I think is an awesome product.
Grab a cuppa coffee, put yer feet up to find out more about Universal Life Insurance.
My guess is you’ll be left asking “where have you been my whole life”!!
A word to the wise before we get started....
Comparison shopping is the ONLY WAY to go to get the best premiums.
That's why my top tip is to seek the advice of an independent agent. Yeah I hear ya - I bet you think I'm saying this simply because I'm an independent agent...
NOPE. I would give you that advice even if I decided to go back to a career in music.
You see the thing is, if you go directly to an insurer or financial institution for a quote - they'll only sell you their own products. You can imagine how that might pan out.
That being said, Policy Architects has access to nearly 20 different carriers which means we'll do all the comparison shopping for you!
...AND There's no obligation on your end. Just sweet savings and GREAT coverage.
The Ins and Outs of Basic Life Insurance
Hmmm, have you ever met someone who assumed you have knowledge, you may or may not have?
You know what I mean? When you go to buy an electronic gadget and you get bombarded with shop talk. Grrr! It can be frustrating. So I’m going to cover the basics for those of you who are new to the world of life insurance.
‘Cause chances are – if this is the first time you’re looking for information about Universal Life Insurance features this will be ALL 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 ’em out now!
Term Life Insurance
Well, chances are you’ve heard of Term Life Insurance as it’s the most common and affordable product out there…
…and in my humble opinion, it’s the right choice for 90% of people.
This is a bit of a controversial point. There are agents who are partial to permanent insurance – which includes whole life.
While there absolutely is a time and place for permanent insurance, term is the meat and potatoes of the industry.
If you ask the person next door why they’re buying life insurance – dollars to donuts they’ll tell you it’s to replace income. That’s why term is such a great deal. It’s super affordable AND you can get high face values.
It's clean and simple.
Term provides temporary, inexpensive protection for a defined period of time, usually 10, 20 or 30 years. The amount of coverage and premiums are guaranteed for the length of the term – Basically, you rent the coverage until you don’t need it anymore. 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.
Hey, guarantees are PRETTY nice as you get older and things start to fall apart as they inevitably do!
Another perk? Term life insurance is also renewable (albeit at much higher rates) or convertible to permanent insurance without providing any medical evidence. This is a good thing in the event your health declines significantly and you become uninsurable – it happens.
Hmmm James, I'm not sure what you mean when you say the premiums are guaranteed for the length of the term...
Life Insurance Companies Like to Make $$$
All life insurance companies view you as a risk.
Come on, it’s a business people! Although life insurance is a great service – at the end of the day, the companies want to make a profit.
So to keep it plain and simple, they’re in this for the money.
Don’t get me wrong, these are absolutely legitimate companies that serve their clients interests…
BUT that being said, they would go out of business in a New York second if they didn’t assess risk properly.
So when you go in for that exam, they calculate your health rating and this determines what they’ll charge for the period of time you require coverage.
Then this figure is broken out into monthly payments – say over a 30-year term that is guaranteed to remain the same until your coverage expires.
But at the end of the day their honour claims...
You may think that business is all about profit, business people are unethical and business in general is a black art of guile and greed. Over the years I have found this to be mostly untrue.
The story that business people are bad and what they do is morally questionable is false. For every Enron, there are 10,000 good companies. And most companies, like most people, are trying to do the right thing.
This is AWESOME. Especially if your health takes a downward spiral. The life insurance company has to honor the promise they made despite any changes.
For example, if a 40-year-old man has $500,000 of Term 20 life insurance at a cost of $55/ month, he is guaranteed that rate of $55 per month until he is 60 years old no matter what.
Permanent Life Insurance
A lot of my clients want coverage from the day they sign on the dotted line ’til the day they die.
Can’t really blame ’em. 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 the thing is, you need to know it is significantly more expensive (think 6 to 8 times the cost of term).
…but this isn’t the whole story…
There are 2 types of permanent coverage:
- Whole Life
- Universal Life
Huh? So whats the difference between whole life and universal life James?
Don't worry I've got that covered!
In general, Whole Life and Universal Life Insurance are very similar - in that they are designed for a permanent need and offer protection for life rather than a specific term.
Who doesn't want to be covered 'til the day they die? Hey 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. Which means when you get a permanent policy there's an accumulation of cash value, which you can access under certain conditions. This is why universal and whole life are known as cash value life insurance.
...and yeah there are some differences. Let's take a look at the broad strokes of Universal vs Whole Life Insurance right now!
NOTE: There is also s product called Term 100 – so while most term insurance does not protect you ’til death, this one does. The thing is it really is permanent insurance – despite being referred to as term. I’m going to write a more in depth post on this later and leave this to the side for this particular article.
How Does a Whole Life Insurance Policy Work?
- Provides a guaranteed monthly cost and a guaranteed death benefit over the life of the policy
- Builds up guaranteed cash value over time
- When the investment side of the policy performs according to the insurance company’s historical projections, the cash value may exceed the guaranteed amount
- Policyholders can borrow against the cash value of the policy
- Whole life is a bundled product meaning that you have little or no choice over how the cash in the policy is invested…that isn’t necessarily a bad thing though
- Has higher premiums because of the guarantees provided
How Does a Universal Life Insurance Policy Work?
- Provides a monthly premium and death benefit that may be adjusted over time during the life of the policy and is generally not guaranteed
- Can be used to build up cash value
- You can borrow against the cash value of the policy
- Universal Life is an unbundled product offering you a wide range of asset class choices, giving you the ability to actively manage your investment mix: 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
Universal Life Insurance Pros
You've brought up some GREAT points...but why would I buy Universal Life Insurance?
Let's look at the pros now!
As with EVERYTHING Universal Life Insurance has some strong points. There are some VERY good reasons you would purchase this product:
Coverage for Life
You have permanent protection for the rest of your life as long as you pay your premiums.
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 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 some room to look for new ways to protect hard earned cash. This is where all the Universal life insurance features come in to play.
It's an awesome tool to shift the focus of your coverage from protection to investment savings & estate planning without missing a beat.
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 a wide array of fixed income and equity investment options.This means cash accumulating in your account may be divided or spread out to a number of different 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 a lot like deciding on what you're going to put inside your registered retirement savings plan (RRSP).
Higher Potential for Growth than Whole Life
If you make savvy investment decisions with regards to what you put inside this wrapper, growth can be substantial in comparison to the guarantees offered by whole life. Obviously this means you assume some risk.
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 have the option of paying the same premium monthly for guaranteed coverage.
...or of 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 a number of things:
1) lower your premiums
2) pay no premiums at all or,
3) build as much cash value as quickly 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.
When you take a break from paying your premiums ('premium holiday"); the insurance company simply draws them out of your cash value account. This is convenient if you've lost your job or are experiencing a cash crunch. You can also borrow against or withdraw the funds and still keep your policy in force. I'm going to talk a little bit more about a premium holiday later in this post.
As you can see, this is one of the most popular Universal life insurance features.
Which brings me to another aspect of cash value that I feel deserves it's own little blurb:
Cash Value & Living Benefits
Health is an amazing thing – when you have it you take it for granted and when you don’t – well let’s just say everything gets turned on its head.
Thankfully, many insurance companies allow the cash value you’ve accumulated in your universal life insurance investment account to be taken out and used tax and surrender charge-free, in the event that you sustain a disability, critical illness or require long-term care.
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 organ transplant, or some other disability or long-term care condition...
You can use the cash value accumulated in your policy to pay for treatment above and beyond what you may be receiving through group coverage or your traditional health care plan.
In fact, 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 to pay off high interest debt. Fighting and surviving and illness can be physically and emotionally draining, financial stress is the last thing you need at a time like this.
My favourite part?
Instead of spending after-tax income to pay for treatment and medicine, use the money from your universal life insurance policy tax-free and then submit those receipts to get additional health expense tax credits from the Canadian Revenue Agency (CRA).
It should be noted; this benefit isn't available until the 6th policy year and your illness has to meet certain eligibility requirements based on definitions of the illnesses set out in your policy. Obviously, taking cash out while you are alive will reduce your death benefit as well. Nevertheless, it's a great feature that hopefully you'll never have to use.
The tax man takes a big bite out of almost everything.
Hey I like to do my part - but then again some savings sure doesn't hurt the bottom line.
A Universal Life policy enables you to generate savings that are completely protected from tax if they form part of the death benefit, or tax-deferred if they are withdrawn prior to 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!
Slightly Cheaper than Whole Life
All things considered equal, for similar amounts of coverage, Universal life premiums will be a bit lower because of the lack of guarantees.
Whole life insurance is known best for it's fixed premiums and guarantees, however, many people don't realize that there is a guaranteed universal life insurance as well which also offers fixed premiums.
Often for slightly less money.
You have to look for savings where you can find them and a few dollars over a month or lifetime, can add up to thousands of dollars.
If you've accumulated enough cash in your policy, you can take a break from paying your premiums. The insurance company will draw them out of your cash value account.
This could be convenient if you've lost your job or are experiencing a cash crunch.
Tax-Free Income: Insured Retirement Plan (IRP)
We are all working hard to provide for our families and the goal is to build personal wealth.
Who doesn't dream of being in the highest tax bracket when they retire?
Ahhh yes, you've maxed out your tax-free savings account (TSFA) and RRSP's but where do you put ALL that extra money to avoid overpaying the CRA?
Why don't you overfund your Universal Life Insurance policy? Using this approach you can generate good tax-free growth in your investment account. So when you retire you obtain a series of loans, using the cash value as collateral. Because you're not actually withdrawing money from your policy, no income tax is triggered and, the policy investment value remains intact so it can continue to compound tax-free.
NOTE: The loan can be capitalized so that you make no principle 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. This concept may be tough to wrap you're head around but it's a great way to access tax-free dollars during retirement.
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!
Universal Life Insurance Cons
"Why do you Have to go and Make Things so Complicated?"
This is one of the biggest problems with universal life insurance: If you're looking for something super straight forward and easy to understand, this isn't it.
A Universal life insurance policy is best suited to financially savvy individuals who have long-term investment needs and may be looking for tax-advantaged investment and estate planning opportunities. If you're looking for more of a "set it" and "forget it" solution, Term or Whole Life insurance is probably a better choice.
You Need to Stay on Top of the Investment Account
It is imperative that you, the policyholder, 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 Term or Whole Life Insurance policy which has a lot less moving parts.
Lack of Flexibility
If you've decided to go for a Universal Life Insurance investment with a view to building up cash value, remember you won't have access to any of that money until the beginning of year 6.
Please keep in mind, it usually takes about 10 years to build up anything decent - generally speaking.
Should you decide within the first 10 years to change your mind and do something else with your money, it's very difficult to extricate yourself. You're kinda stuck - unless you're ok with losing some cash.
Most insurance carriers in Canada impose surrender penalties for withdrawing money early from your policy. These fees range from severe, in the first 3 years, to more moderate in the remaining 7 years on a declining scale.
Just make sure that Universal Life Insurance is the right fit for you before you decide to take the plunge. That's why you should always contact an independent life insurance agent such as those at Policy Architects.
Death Benefit and Cash Value Not Guaranteed
The downside of choosing how cash is invested in your Universal life policy means you're on your own when it comes to assuming the risk. As mentioned above, a UL policy can be designed with a guaranteed level premium and guaranteed death benefit, however, it won't have any cash value to speak of.
Costs More Than Term Insurance
In the early years of a Universal Life insurance policy, the premiums will be way higher than if you bought Term Insurance.
If you are on a tight budget, this product probably isn't for you. Sometimes people skimp on coverage because they are looking for cheaper premiums. DON'T do that.
You're better off buying the right amount of term insurance rather than being underinsured with a Universal Life Insurance product.
Some pundits argue - and I think they have a point - if you're thinking of investing in a permanent life insurance product such as Universal life, you may be better off buying less costly term insurance.
...and investing the difference in a better performing vehicle.
My Final Thoughts About Universal Life Insurance
Now that's a LOT of information...I'm not sure what I think!
I hear 'ya. It's one of the main reasons you should work with an independent life insurance agent. They can help you. Here's some of my final thoughts.
So here goes – what is a Universal Life Insurance Policy?
A Universal Life Insurance policy is best described as insurance with a savings component – but not only that it’s flexible.
Lifelong coverage that accumulates “cash value” can be employed in a variety of ways including business & estate planning and living benefits…
…or you can keep it simple with a fixed monthly premium and level death benefit. You also get to choose how your ‘cash value’ is invested and can modify this over time. Talk about options!
As your life and needs change, within limits, your Universal Life Insurance policy can adapt. You can:
- pay fixed premiums
- build up value with higher premiums
- take a premium holiday
- pay lower premiums or
- pay no premiums at all
As long as there is enough 'cash value' to sustain the policy, your insurance will stay in force.
Remember though, 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 of you who want to set it and forget it.
Also if you run into financial issues early on and default on your premiums – it could be costly.
If you are struggling and don’t think you can afford enough Universal Life Insurance coverage – I suggest opting for term. Being underinsured isn’t a good thing.
Remember, Universal Life Insurance features differ dramatically from one carrier to another so it’s imperative that you work with a trusted independent broker like Policy Architects, who can give you accurate, unbiased advice.
Sample Rates for Universal Life Insurance
Well I think Universal Life Insurance works for me....but how much is it gonna set me back?
Let's talk turkey....
OF COURSE! You want to see the rates. At the end of the day this is ALWAYS what it comes down to. The dollars and cents of it all.
BUT - I want you to know - these numbers don't mean a whole lot.
Sure they'll give you an idea of what a person will pay who falls into these specific circumstances should expect, but frankly this isn't you. You have to qualify for the health rating to get these premiums and that's a whole other article.
To put it simply underwriting varies substantially from one company to another. Some are more lenient when it comes to specific medical conditions than others. Which means if you don't pick the right insurer for you, you could spend thousands more over the life of your term.
This is why you should call an independent life insurance agent like those at Policy Architects. We'll give you a personalized quote AND find you the best fit in terms of carrier.
|35 Year Old Male||$75.00||$300.00|
|35 Year Old Female||$65.00||$255.00|
|40 Year Old Male||$89.00||$380.00|
|40 Year Old Female||$77.00||$320.00|
|45 Year Old Male||$111.00||$500.00|
|45 Year Old Female||$95.00||$419.00|
|50 Year Old Male||$132.00||$592.00|
|50 Year Old Female||$115.00||$520.00|
|55 Year Old Male||$166.00||$776.00|
|55 Year Old Female||$141.00||$652.00|
|60 Year Old Male||$229.00||$1,050.00|
|60 Year Old Female||$191.00||$871.00|
|70 Year Old Male||$403.00||$1,909.00|
|70 Year Old Female||$356.00||$1,646.00|
*Quotes above are monthly, for Standard Health Class and an average of the top insurance companies in Canada. Your rates may differ depending on your unique circumstances. May 2018.
Why Policy Architects?
I bet keeping your promises is important to you, especially if you have dependents.
We all have plans. My goal is to go to St. Lucia before 2020…
…but stuff happens, you and I both know this.
Life insurance helps you keep those promises from falling through the cracks if you’re not there.
Yeah I know, no one wants to talk about this little detail, but the simple fact that you are looking for life insurance coverage means you are on the right track.
Sure life insurance is complicated and Universal Life is likely one of the more complex offerings.
That’s why it’s so important for you to speak to an independent life insurance agent, like those at Policy Architects BEFORE you sign on with ANY company. We work for you, NOT the insurance carriers!
Because We Can Help!
Age, gender, lifestyle, health status and family history all play a role in determining your eligibility and the cost of your premiums.
Insurance companies and banks are marketing more products than ever and frankly, it can be overwhelming to sift through it all!
…ever heard the saying, “Analysis, Paralysis”?
Our experienced agents will identify the right product for you – at the best possible price and this can save you thousands over the term of your policy!
Best of all, our boutique approach won’t cost you a dime. Save TIME, MONEY & HASSLE by calling us today.
…and the best part? You’re a client for life, as your needs change, we’ll be there to provide ongoing guidance and support.
Get in touch with Policy Architects Today!