Universal life (UL), the most flexible form of life insurance, was developed to overcome drawbacks of whole life. This permanent insurance combines
- term insurance
- tax-deferred investment growth (like RRSPs)
- accountability
- unbundled: shows the cost of insurance, investment returns, administration expenses, premium tax
- often guarantees all but the investment returns and provincial premium tax rates
- not participating in the profits of the insurer
- no policy dividends
This is a powerful combination. Since most of us need life insurance.
It's emotionally appealing to "buy term and invest the difference", but you'll lose out on the tax-deferred growth which can give you better after-tax results.
Choices include
- investments: returns based on external references for fixed interest, market indexes, mutual funds, segregated funds
- cost of insurance scale: Yearly Renewable Term (YRT), level for life, YRT switching to level
- death benefit pattern: level, "face + fund"
- adding or substituting lives
Advantages
- accountability: unbundled —> easier to monitor investment performance and understand the charges
- you select the investments from the many choices available
- flexibility
- detailed policy statements annually and perhaps quarterly
- design not based on overcharging and then paying policy dividends, as with whole life
- cash withdrawals available (unique to UL)
- can have tax implications; may be better to take a policy loan or commercial loan
Disadvantages
- complexity
- need for ongoing monitoring
- you may lack the discipline to make the deposits you planned
Client Profile
Universal life can be a good choice for
- an active investor
- want accountability
- estate planning
- tax deferred growth
- flexibility
UL Investments
Universal life (UL) contracts offer three types of investments
- Guaranteed Interest Accounts
- Market Index Accounts
- Managed Accounts
You can find out more by visiting the website of your favourite life insurance company.
Only Credited Interest
With UL, you are not investing directly in the reference. Instead, you are credited interest (no dividends or capital gains) based on the performance of the reference.
Since UL policies are generally tax-exempt, the investment growth is tax-free.
