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Universal Life Insurance

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 Term 10 or Term 100 life insurance plans.  We will briefly explain how a UL plan works.

  1. 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.

  2. 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.

  3. 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 force.

  4. 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 taxation.

  5. 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".

  6. 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.

  7. 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 death benefit.

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 plans.

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 decision.

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.

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