Universal Life Insurance: A Complete Guide To This Complicated Product

• Provides a guaranteed monthly cost and a guaranteed coverage amount 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

• 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 Insurance is an unbundled product offering you a wide range of asset class choices. This gives 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

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.

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).

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.

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 know this. In the event, you sustain a disability, critical illness or require long-term care you can withdraw the cash you’ve 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.

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 pay off high-interest debt.

Fighting and surviving and illness can be physically and emotionally draining and 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). 

Heads up! 

It should be noted that 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 reduces 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 Insurance 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!

All things considered equal, for similar amounts of coverage, Universal life insurance premiums are a bit lower because of the lack of guarantees. 

Whole life insurance is known for it’s fixed premiums and guarantees. However, many people 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 of dollars. 

If you’ve accumulated enough cash in your policy, you can take a break from paying your premiums. 

The insurance company withdraws them out of your cash value account.  

This is convenient if you’ve lost your job or are experiencing a cash crunch. 

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. This allows it to 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.

NOTE* This strategy can also be achieved with a whole life policy. 

This is one of the biggest challenges with universal life insurance and one of the reasons why I don’t recommend it to many clients. If you’re looking for something super straight forward and easy to understand, this ain’t it. 

A Universal life insurance policy is best suited to financially savvy individuals who have long-term investment needs and are looking for tax-advantaged investment and estate planning opportunities.

If you want a “set it” and “forget it” solution, Whole Life insurance is definitely a better choice. 

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.

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. This goes for whole life insurance as well. 

Keep in mind, it usually takes about 10 years to build up anything decent cash-wise. 

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.

Ouch!

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.

The downside of choosing how cash is invested in your Universal life Insurance 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. 

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 probably isn’t 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 – 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.