Geller Law
An article on Moneysense.ca is intended to support the sale of universal life insurance (known as "UL insurance"). Read with care, this article also sheds light on why in practice this policies can be hazardous to consumers. The following addition of bold and italics (combined) are mine.
"What is universal life insurance?
Despite its complexities and cost, universal life insurance offers greater flexibility and some tax advantages. Here’s how it works.
Among your different life insurance options, a universal life insurance policy is one of the most complex. It requires more involvement than term and whole life insurance policies—so you can’t simply set it and forget it. And you have decisions to make regarding how much you pay for it, and how those premiums are used. You might be thinking: Life is short enough already, so why spend precious time managing a life insurance policy? Why not stick to a more straightforward solution, like term life insurance?
When the main objective is taking care of your loved ones after you’re gone, it pays to spend time figuring out how to care for them. That’s why you should familiarize yourself with the full slate of possibilities. For those looking for flexible premiums and the opportunity to accumulate wealth on a tax-deferred basis, universal life insurance can be a smart option. You may even be able to benefit from it during your lifetime. But due to their complexity and cost, these policies aren’t suited to everyone, so take the time to understand how they work before you buy.
What is universal life insurance?
Universal life insurance is a form of permanent life insurance, meaning it offers lifelong coverage as long as you keep making the payments. Unlike term life insurance, a universal policy does not expire at a certain age, nor after a predetermined number of years.
One of the most important features of universal life insurance is the inclusion of an investment account, allowing policyholders to invest and accumulate wealth on a tax-deferred basis. Think of universal life insurance as a policy and investment account all in one: a portion of your premiums is used to cover the cost of your insurance, and the remaining funds are yours to invest.
Here’s how it works: You make regular payments into your policy’s investment account. Each month, the insurer deducts your insurance premiums and policy fees from the account. Depending on the investment you choose, the rate of return on the leftover funds can be guaranteed or not. The interest earned in your insurance investment account is not taxed (up to a certain amount outlined by the government) as long as the money stays in the account.
Depending on your policy, you may be able to withdraw money or borrow against the cash value of your policy with an interest-bearing loan. The cash value refers to the amount that accumulates within your policy, and it is distinct from the death benefit. If you cancel a permanent life insurance policy, you get its cash value. However, in most cases, the cash value does not typically pass to your beneficiaries—only the death benefit does.
Who is universal life insurance for?
Universal life insurance is designed for a very specific type of individual, and it doesn’t make sense for everyone, says Steve Bridge, an advice-only certified financial planner with Money Coaches Canada. First, you’ll have a need for permanent life insurance, which provides coverage until you die, he says. “If you don’t have a need [for this type of coverage], then universal life insurance is not for you. The vast majority of people do not need permanent life insurance—term insurance is usually sufficient.”
Term life can provide sufficient coverage to someone who wants to protect their family’s financial health until the kids are out of the house and the mortgage is paid off—and it’s usually cheaper and simpler than universal life, says Bridge. On the other hand, “If you maxed out your RRSPs, TFSAs and RESPs and have a need for permanent coverage, then you could consider universal life.” (Read more about registered retirement savings plans, tax-free savings accounts and registered education savings plans.)
What are the benefits of universal life insurance?
Universal life insurance is more complex than other forms of life insurance. The premiums also tend to be higher than with term life insurance; they are generally more comparable to those for whole life insurance, but can fluctuate—unlike whole life premiums. And, depending on how the investment portion of the policy performs, the cash value is not guaranteed. For these reasons, a universal insurance plan isn’t a good fit for everyone. However, there are benefits for those prepared to spend the time to understand the nuances of universal life insurance:
Control over your policy: Unlike with other life insurance policies, the policy holder can decide how to invest the money in their account.
Flexible premiums: The premiums are also more flexible. You can pay more and invest the balance, or you can choose to pay less or even skip payments entirely, as long as you already have enough in the account to cover the premiums.
Withdrawals: You can borrow or withdraw funds from your policy account; however, each policy may have different requirements for withdrawals and loans.
Changes in the policy’s cash value: If your investments do well, you could end up with a larger cash value. Of course, the flip side is also true: You can also lose money, if your investments perform poorly.
What are the disadvantages of universal life insurance?
Like any financial product, universal life insurance does have its disadvantages. In fact, Bridge believes that “universal life insurance is really not suitable for most people. Term is better for most.” Here’s a look at some of the downsides of universal life insurance for Canadians:
Cost: Because it comes with high investment fees, universal life insurance tends to be more expensive than term life insurance.
Limited returns: Those high investment fees also cut into investment returns. In fact, depending on your policy, it’s possible to get better returns on the cash value of your account if you simply invest your money in a TFSA, RRSP or guaranteed investment certificate (GIC).
Complexity: Because it combines both a life insurance and an investment component, universal life insurance can be harder for Canadians to understand compared to policies like term life insurance.
Level of involvement: Universal life requires policy holders to regularly monitor the performance of their investments and to make adjustments if needed.
Universal life insurance vs whole life insurance
Even if you know you want permanent life insurance, you’ll still have to pick between universal life insurance and whole life insurance. Here are some of the key differences:
Investment options: Both universal and whole life insurance include investment components. However, only a universal life insurance policy holder can choose how their money is invested; with whole life insurance, the money is pooled and invested by the insurance company.
Premiums: Universal life insurance offers flexible premiums, whereas premiums for whole life insurance are fixed for the life of the policy.
Death benefit: The death payout for whole life insurance is usually guaranteed, whereas the death benefit of a universal life insurance plan can increase or decrease according to investment performance and changes in the policy’s cash value.
Should you get universal life insurance?
There are distinct advantages to universal life insurance, but because you’re paying to be covered for life (as opposed to a set amount of time, like with term life insurance), the premiums can be costly. It’s also more complex and requires more involvement from the policy holder.
That said, universal life insurance can serve as a wealth-building tool for someone who’s comfortable managing investments, and has the time and desire to be more involved. Generally speaking, universal life insurance is best for high-income earners who could take advantage of the tax benefits.
For the original version, please see: https://www.moneysense.ca/spend/insurance/life-insurance/what-is-universal-life-insurance/
