The Drawbacks and Benefits of Universal Life Insurance

There are many distinct benefits of universal life insurance that sets this type apart from all the rest.

The Drawbacks and Benefits of Universal Life Insurance

A universal policy includes traditional life insurance death benefits plus unique tax-deferred investment opportunities.

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The premiums are higher than what you would pay for a term life policy for the same amount of coverage, because part of the premium is deposited into an investment account.

The insurance company deducts the cost of the insurance, administration fees and charges for other riders and options you have selected. The remainder of the premium payment is then invested.

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You may choose to only pay the minimum premiums to cover these costs. This means you get life insurance coverage, but not the investment option. Most universal life insurance policies have a minimum premium and a maximum. So, unlike other investments, there is a cap on how much you can earn and how much you can deposit into your investment account.

So What's New?

So far the benefits of universal life insurance may not be all that obvious. But wait. The unique part about a universal policy is that you choose where the money will be invested.

You are told how much the company charges for coverage and administration and how your investment interest is calculated. With a whole life policy this information is not disclosed to you, and the company invests the money wherever it chooses.

There are many investment choices. You can choose an equity indexed policy, which allows you to invest in indexes such as the Dow Jones Industrial.

Or you can choose a variable universal life insurance policy that gives you the option of investing in separate accounts with varying rates of return.

All of the interest and returns on your investments are tax-deferred. As long as you leave the money in the account, you do not have to pay any taxes on the earnings. Once you withdraw the funds, the amount you take out is taxable income.

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You can customize your universal insurance plan to suit your goals and make changes when needed to reflect changes in your life or changes in your financial goals.

What Are the Benefits of Universal Life Insurance?

Here are the main benefits of universal life insurance:

  • Tax-deferred growth to maximize your capital. The earnings in your investment account are tax exempt up to a maximum as determined by the Income Tax Act. The policy is tested annually and adjustments are made, if necessary to ensure the funds retain tax-exempt status.
  • Funds are safe from creditors. In the event of your death, your creditors can not make a claim for repayment from the accumulated funds if your beneficiary is a member of your family or if a beneficiary designation is irrevocable.
  • No probate charges or taxes on benefits. Proceeds from your universal life insurance policy are paid directly to your beneficiary. Benefits are not taxable and not included in your estate, where they would subject to delays and probate charges.
  • Flexibility. No other type of life insurance offers as much flexibility as a universal plan. You are in complete control. You can adjust your death benefit option, increase or decrease your premium payments, make unscheduled payments, stop and restart making payments, or pay your premiums from your accumulated cash value funds.
  • Accessible cash. The money in the cash value fund is yours. You can make a withdrawal at any time. There are convenient withdrawal methods, or you can borrow the funds. But, remember, if you make a withdrawal, the amount you take out is taxable income and you may also be charged some surrender fees.

Universal Life Insurance is Complicated

While there are many benefits of universal life insurance, such a policy is not a one-size fits all. You cannot just fill out a quote form and apply online.

The Drawbacks and Benefits of Universal Life Insurance

With so much flexibility, so many investment options and different ways to use your policy, you really have to sit down with a professional and plan the best strategy for your personal financial goals.

Your goals should be long term. A universal life insurance policy is not an investment you buy today and sell tomorrow. Most policies have very high surrender costs and penalties during the first few years.

This type of policy is best suited to someone with a high net worth and a steady income. Not everyone is able to reap the full benefits of universal life insurance policies.

Getting the Most Out of Your Policy

Buying life insurance coverage does not have to be only about providing financial security for your loved ones. You can turn it into a wise investment for the future and a neat little tax shelter.

A universal policy can be very useful if you have maxed out your annual RRSP contributions and need another way to shelter your money from the tax man.

Other investment options, such as bonds, mutual funds, equities and GICs have taxable growth. Any money you earn with these investments is included in your taxable income. This may put you into a higher tax bracket and leave you with less money to invest. Universal life insurance is the perfect solution.

Tax-Free Growth

Because the earnings are not taxable, they can grow much faster than other investments. Additionally, the earnings are compounded. This creates a powerful and lucrative way to make your investment grow.

Over time, this combination becomes even more powerful and lucrative. This is why universal insurance plans are considered long term investments.

The longer you hold on to your plan, the bigger and faster it is able to grow. Also, after about ten years the surrender charges become much lower.

Another thing that sets a universal life insurance plan apart from a whole life plan is that your beneficiary is awarded the death benefit plus the accumulated cash value amount.

With a whole life plan, your beneficiary only gets the face value amount, that is the insurance portion, and the cash value amount goes back to the company.

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We're waiting to help you! Click here to ask any question about the benefits of universal life insurance. We'll contact you with your answer, or to make an appointment, free of charge.

When it comes to securing your future and getting the most out of your money, the benefits of universal life insurance can not be ignored.

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