Understanding Universal Life Insurance
Universal life insurance offers flexible premiums, a level or increasing death benefit, and a tax-deferred investment opportunity to the insured. With this kind of policy, you pay the premium of their life insurance as well as some additional money to build a cash value. This cash value gains interest and may be borrowed from or used to subsidize the cost of the life insurance policy in the future.
Universal Life Insurance is a type of Permanent Life Insurance. Unlike Whole Life plans, Universal Life offers flexibility, including an investment component.
The cost (referred to as the “premium”) is based on coverage amount selected, age, medical history, smoking status, current health and possible risky lifestyle circumstances.
A distinguishing factor of Universal Life Insurance, is the ability to accumulate cash value over time. Cash value, or cash-surrender value is the dollar amount that has accumulated over the life of the policy from investment growth or income. This cash value grows on a tax-deferred basis, which means that income and growth generated within the policy is not taxed until it is withdrawn.
The policy holder can borrow cash value from the policy or use accumulated cash value to subsidize premiums.
Universal Life Insurance offers flexible premiums. With Universal Life Insurance, you can tailor the policy to your life situation.
Universal life insurance has an investment component, which can impact the final available cash value, depending on the performance of the underlying investments. Care must be taken to clearly understand the fees underlying these investments which will ultimately impact the performance.
Universal life insurance remains in force for the rest of your life as long as you continue to pay the premiums.
If you do not want to continue paying the premiums or are experiencing cash flow challenges, there are a few options:
- You can use the accumulated cash value to continue paying the premiums as long as the investment performance is sufficient to continue paying the costs of insurance and fees or until the cash surrender value is exhausted.
- You can surrender the policy and receive the accumulated cash value.
Who is suited to Universal Life Insurance?
- Those who want to leave a permanent legacy for their survivors.
- Those who are looking to preserve their estate.
- Those who need protection for life.
Compared to term insurance, which may start cheaper, with a universal life insurance policy, you pay a level premium. This means that the rate you pay will never increase as your premium are determined by your age and health when the policy is issued. In contrast, as one gets older, a term life insurance policy becomes expensive to maintain as the premiums increase with age.
What Universal Life Insurance can do for you
- Pay the taxes owing to Canada Revenue Agency (CRA), especially from capital gains tax on the appreciation of illiquid assets like rental real estate, vacation properties and business interests.
- Provide tax-free cash to an estate in order to prevent selling assets at fire sale prices in order to pay obligations.
- Provide tax-free cash in order to equalize the estate when leaving assets to multiple beneficiaries.
- Provide an endowment to a special charity.
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