Universal Life Insurance
Universal life insurance policies were designed to provide an answer to the notion that you should “buy term insurance and invest the difference”; by investing thru a insurance policy it gains the added benefit of making the income of the investment tax sheltered.
In addition Universal life policies provides an answer to some of the complaints about Whole Life Insurance’s failure to disclose how the premium is allocated between the cost of insurance, administration costs, and investment portion and to provide investment options that you can choose.
Universal life was created for these people looking to be insured and in the same time invest the other portion of the money and still be in control of the investment, with the benefit of investing it in a tax sheltered vehicle, it provides more flexibility than whole life by allowing the holder to shift money between the insurance and savings components of the policy and to choose the type of investment for the money to be invested. Additionally, the main investment differences between this arrangement and investing individually are the tax advantages and fees that accompany the insurance policy.
The inner workings of the investment process are openly displayed to the holder, the premiums are mostly variable and are broken down by the insurance company into insurance and savings, and therefore, the holder can adjust the proportions of the policy based on external conditions. If the savings are earning a poor return, they can in most policies be shifted to other investments funds, or the money could be used to pay the premiums instead of injecting more money, and if the holder remains insurable, more of the premium can be applied to buy more insurance, increasing the death benefit.
Universal life is a combination of term coverage and what could be also thought of as an investment and savings account to pay the future higher term premiums. You are generally over funding the coverage in the early years and more of the payments go towards an accumulating investment account. Then in later years, as the premium deposits become insufficient to pay the term coverage premiums (the base Insurance cost at that age), money is taken from the savings portion to pay what is needed. If you reach zero in savings, then premiums would need to increase or coverage would lapse.
In universal life the cash value investments grow at a variable rate that is adjusted monthly. There is usually a minimum rate of return. These changes to the interest scheme allow the holder to take advantage of rising interest rates. The danger is that falling interest rates may cause premiums to increase and even cause the policy to lapse if interest can no longer pay a portion of the insurance costs.
This coverage is similar to whole life only in that it is designed to be held for a lifetime. The Universal policy in essence shifts the investment risk from the insurer to the policy owner who has a selection of “sub accounts”, sometimes as many as 50 or more which a policy owner can use to “invest” excess policy premiums not needed to pay for the term life insurance component in the policy. You may do better, about equal or worse than the insurer would have with your funds, but you are in control. You could vary your risk tolerance if desired from aggressive to conservative in most cases with either a phone call or online account access.
Money Tip 1: Universal policies frequently have assumptions about the returns you will get within the policy. For Universal Life or the dividends part of whole life, these are generally not guaranteed (except the Guaranteed cash value part in a whole life policy) so be careful that they are reasonable and that you understand that if they are not achieved, the outcome could be very different from the illustration. Ask to see several illustrations with different assumptions so you understand what could happen.
Money Tip 2: Universal Life Policies also have various bonuses built in that can increase the returns by 1.5% or more under certain circumstances. These circumstances usually relate to how much you are putting into the policy (referred to as funding), and how long the policy has been in effect. There are very significant differences between companies so ask to see illustrations from several companies.
Money Tip 3: Universal Life Policies may have an opportunity to purchase riders like Critical Illness or Long Term Care Insurance and term insurance. There can be some real tax advantages to doing this if you are able to over fund the policy or you have a large amount to put into the policy to start. The funds inside a universal life grow with no taxes on the profits, if you are paying for these other policies with funds outside a Universal Life policy you need to pay taxes on the income before you pay the premiums.
Money Tip 4: Some companies now offer preferred rates for Universal Life Policies and if you qualify, the savings can be very significant. Also some companies consider pipe and cigar smokers to be non smokers.
While some benefits of Permanent Insurance, such as providing extra cash for a loved one, is relatively straight forward, the use of an independent life insurance broker for most situations is recommended as many options are generally not known to the general public and even financial professionals like accountants and lawyers may not be familiar with some of them.
If you are in Quebec, email us at firstname.lastname@example.org with your date of birth, sex, smoker or non, and amount you would like us to quote on and we will get back to you.
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