Universal Life (UL) insurance combines both
insurance coverage and an opportunity to invest in a
"tax-sheltered" investment environment. In
Canada, UL insurance is the only vehicle outside of RRSPs
where you can accumulate money on a tax-sheltered basis.
The difference however, is at death, UL is paid out totally
tax free compared to RRSPs which are fully taxable at death.
Premiums are paid with "after-tax" dollars,
therefore are not tax deductible.
Universal Life is purchased for those who
have a permanent need for insurance and/or also wish to have a
tax-sheltered investment account. It is an ideal vehicle
for those who have maximized their RRSP contributions and wish
to further shelter other investments from taxation. UL
is also used extensively in Estate and Succession planning to
provide the liquidity needed when taxes are due so that the
estate and/or business can continue without being eroded.
As well, UL is used for those who wish to establish a
Charitable Planned Gift to their favourite charity upon their
death. By doing so, the estate has not been diminished
by the charitable gift and the insurance gift may offset or
even eliminate taxes owing in the estate.
This product is more complex than
10 or Term
100 life insurance plans. We will briefly
explain how a UL plan works.
Deposits are made to the plan either on a
monthly or annual basis. You have the choice of
paying between a minimum premium and a maximum premium
which, you can change at any time. These premium
amounts are determined by the amount of insurance, your
age, and health status. The minimum premium
basically represents the cost of the insurance,
administration fees, and other associated costs with the
plan. The maximum premium represents the amount that
may be deposited into the plan that keeps the policy
exempt from tax.
You choose what investment options you
want with the deposits above the minimum premium.
These range from daily interest, Guaranteed Medium and
Long Term Interest accounts, various conservative, growth,
or aggressive portfolios, links to various indexes such as
the S&P 500 or NASDAQ, or linked to a vast array of
mutual funds and mutual fund portfolios.
Each month, the company withdraws the
cost of the insurance, administration fees, and other
associated costs from the plan for as long as it is in
As long as the investments remain inside
of the plan and the deposits are within the given limits,
they will remain exempt from taxation. Compared to
similar investments outside of a UL plan, these funds will
grow faster as they are not reduced by the effects of
If the plan is being funded over the
minimum premium, premiums may only have to be made for a
projected period of time given assumed rates of return on
the investment account. In other words, once there's
enough interest being generated from the investment
account to cover the annual costs of the plan, no more
deposits will be needed given an assumed rate of return.
Once this happens, the cost of insurance is being paid
with "before tax dollars".
Upon death, the face amount of insurance
plus the investment account (if the increasing death
benefit is chosen) are paid out entirely tax free
to your intended beneficiary(s). If a beneficiary
other than your estate is chosen, the benefit will also
escape probate, legal, executor, and any other associated
estate costs and will be paid out promptly without having
to wait for the estate to be settled.
The investment account can be accessed by
either a withdrawal, policy loan, or by using the policy
as collateral for a "Leveraged Life" strategy.
The insurance portion of the plan can either
be based on a level cost of insurance (Term 100) or on a
yearly renewable term (YRT - increasing) cost of insurance.
The YRT option has very low insurance costs
in the earlier years of the plan but very high costs in later
years. Most plans have an option to change to a level
cost of insurance at a future time at your then attained age.
People who choose this option are usually looking to maximize
their investments in the plan and are less interested in the
Most often in estate and succession
planning, the level cost of insurance option is chosen with
the death benefit that pays out the face amount of insurance
plus the investment account. Most people want to know
that their costs are locked in and guaranteed throughout their
lifetime so that their plans will stay the course.
Benefits and riders, such as a Child Term
Rider, Accidental Death Benefit, and Disability Waiver, are
usually optional features with most Universal Life Insurance
UL plans vary greatly in the options and
benefits they provide. Upon your request, we can provide
you with the information you need to make this informed
A complete analysis of your life
insurance needs with a qualified and experienced insurance
professional, will help you to determine what your need for
insurance may be. For a no obligation analysis of your
insurance planning needs, please contact us to discuss and
review your options for your unique situation.