Insurance Basics: Universal Life Policies Canadian-Style

3 Dec

0
0
0
0
0
0
0
0
0
or copy the link

Financial advisers often recommend universal life policies to their clients as a way to avoid paying taxes in Canada. According to one financial expert, universal life insurance allows for tax-deferred growth, and with proper planning, every dollar can be extracted with no taxes.

But universal policies are not for everyone. It’s not something you should consider if you’re not at the stage where you need life insurance or a tax shelter.

How Universal Life Works

Universal life policy holders have the option to pay more than the cost of their insurance. One portion of the premium goes into a reserve fund to cover your insurance costs. The rest of the money goes into a tax-shelter fund where it earns interest.

You maintain complete control of the funds in reserve and decide how the money should be invested. The investments may be fixed-income investments or mutual funds.

When you die, your beneficiaries will receive the death benefits as well as the money from the savings component of the policy.

There are a few caveats: If you want to get out of the policy before the first 10 years, the insurance company has the right to charge extra fees. Those surrender charges can significantly reduce the savings in your reserve account, so make sure you know what the fees are before you close the account.

Is A Universal Life Policy Right For You?

This type of policy is not for the faint-hearted. It’s complex and requires thorough leg work before you make a decision. First you need to decide what is most important to you: Do you want to protect your dependents or need a savings plan and tax shelter?

It’s difficult to compare universal life policies since premiums, interest rates on the investment fund, and death benefits can fluctuate. But for your peace of mind, here are some things to consider.

Level cost of insurance (COI) versus increasing cost of insurance: Decide which one is best for you. A level COI keeps your premiums fixed for the life of the policy. An increasing COI starts off low and increases annually. An increasing COI has a higher cash accumulation in the early years, but if the investment component doesn’t perform as expected, you’ll be forced to pay escalating premiums with no real returns. Companies like Kanetix.ca can assist you in working this out.

Level versus increasing death benefits: Choose the death benefit option that’s best for your needs. When you sign up for a universal life policy, you’ll have to choose between an increasing death benefit (the basic amount plus any cash accumulation) and a level death benefit (a basic face amount).

Your investment options: Your next task would be to choose the investment option. With most universal life policies, you can choose indexed based investments, GIC, or a savings account.

Since many policies have high surrender costs, you’ll have to find out when you’ll have access to the cash value. Always work with a reputable independent broker – you’ll benefit tremendously from the unbiased advice.

Robert Conway worked in the insurance industry for many years. Now semi-retired, he likes to help others by sharing his know-how on several blog sites.

No comments yet

Leave a Reply