Universal Life
Universal Life Insurance in Canada is a flexible type of Permanent Life Insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance) which is invested to provide a cash value buildup. The death benefit, savings element and premiums can be reviewed and altered as a policyholder’s circumstances change. In addition, unlike whole life insurance, Universal Life Insurance allows the policyholder to use the interest from his or her accumulated savings to help pay premiums.
Universal Life Insurance was created to provide more flexibility than whole life insurance by allowing the policy owner to shift money between the insurance and savings components of the policy. Premiums, which are variable, are broken down by the insurance company into insurance and savings, allowing the policy owner to make adjustments based on their individual circumstances. For example, if the savings portion is earning a low return, it can be used instead of external funds to pay the premiums. Unlike whole life insurance, universal life allows the cash value of investments to grow at a variable rate that is adjusted monthly. Within limits imposed by the income tax act, money can grow tax-free in a Universal Life policy and the cash surrender value built up in the policy may be withdrawn at any time. Loans may be taken out against the cash surrender value of the policy up to the specified limits. In the event of death, the death benefit will be reduced by the outstanding balance of the loan plus interest. The policy owner has the option of placing the non-insurance portion of the premiums in various investments such as a daily interest account, guaranteed term deposits, funds that track specific market indices (linked accounts) or segregated funds and mutual funds. The tax-deferred investment growth in a universal life policy can be a great financial planning tool for many reasons. Whether it’s to create a source of supplemental retirement income or a tax effective way to invest excess wealth, universal life can combine the insurance you need with a great way to invest your money.
The Major Advantages of Universal Life Insurance in Canada and Ontario
1-Tax-Free Death Benefit
2-Tax-Deferred Investment Vehicle similar to an RRSP
3-Tax-Free Retirement Income through leveraging
4-Flexible Premium (Minimum & Maximum Premium amounts)
5-Maximizing & helping to Preserve your Assets/Estate
6-Supplementing your retirement Income
Investing in a Universal Life Insurance Plan
Universal Life is commonly used by Canadians as Investment Vehicles that accumulate assets in a tax sheltered environment. This tax-free growth is much the same as tax-deferred investment growth within a Registered Retirement Savings Plan (RRSP). In fact, tax-exempt life insurance is often used by individuals who are maximizing their RRSPs or TFSAs and looking for an additional way to continue Tax-deferred investing. The minimum Premium payment will cover the cost of Insurance & any money deposited above that amount & up to the maximum will be invested on a tax deferred basis. This can be done each year up to the maximum amount for the year. An Example of this would be a Male aged 49 with $200,000 of Universal Life Insurance Coverage:
The minimum contribution amount would be the cost of Insurance of $2,700/Year
The Maximum contribution amount to maintain the Tax-exempt Status would be $12,700/Year
If the Full $12,700 maximum & allowable total Premium is utilized, the difference between the maximum & minimum contribution amount ($10,000) would be invested within the Insurance Policy on a tax Deferred basis. This will allow the policy holder to invest $10,000 every year for as long as possible under the Tax-Exempt Rules. If the total account Value reaches $400,000 in 20 years based on deposits of $200,000 & Investment growth of $200,000, the total amount of the Investments ($400,000) & Death benefit ($200,000) would be paid out to the beneficiaries on a Tax-Free basis.