Matt Hands, VP, Insurance and MoneySense
Universal life insurance is a type of permanent life insurance that offers more flexibility than whole life insurance or term life insurance. Universal life insurance covers you for life and incorporates a potentially high-earning investment account.
It won't suit everyone, but it's an excellent tool to build wealth over the long term. If you want your life insurance policy to help you save and invest money, as well as provide opportunities for tax-sheltered growth, or just want a flexible life insurance policy that you can make changes to, then universal life insurance might be for you.
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Universal life insurance is more flexible than whole life insurance, with greater customization of your investment mix. While whole life insurance is also a permanent life insurance policy, it’s a simpler product with cheaper premiums. Here are are the three main differences between whole life insurance and universal life insurance:
- Premiums (or investments): A whole life insurance policy generally guarantees steady premiums for life. This is a benefit over term life insurance, which increases in cost with age. Universal life insurance, however, doesn’t have steady premiums, and the policyholder can invest as much or as little as they want, as long as the regular deductions are covered.
- Death benefit: Whole life insurance generally has a set death benefit, being the amount of money your beneficiary receives when you die. Because the regular deductions of universal life insurance can change over time, the death benefit can too. Generally, there is a lot of flexibility around the death benefit of a universal life insurance policy, and it can be negotiated with the insurance company.
- Investments choice: Both universal and whole life insurance have investment components, but they don’t offer the same control over the investment mix. In whole life insurance, your cash value becomes part of a larger investment mix of the life insurance company, and you cannot control the investment mix. Universal life insurance lets you control where you invest your money.
For more information, check out our dedicated article on whole life insurance vs. universal life insurance.
There are three main advantages of universal life insurance, especially compared to term life insurance. Universal life insurance offers a flexible investment account to help grow your wealth, has the ability to shelter your investments from tax, and offers very flexible premiums.
1. Flexible investment account
Similar to how a whole life insurance policy grows a cash surrender value (CSV), universal life insurance accumulates a cash value, in the form of an account balance. Unlike whole life insurance, universal policies allow you to control this balance as a powerful investment account. As the policyholder, you make regular investments into the account balance, from which your life insurance company will make regular deductions to cover the cost of your insurance coverage. The remaining account balance can be invested in whatever you want - stocks, bonds, or exchange-traded funds for example.
2. Tax advantages
Up to certain limits, the investment returns on universal life insurance account balances are typically tax-deferred. That gives them additional money-making power, thanks to the compounding nature of interest rates. You’ll eventually pay tax on any withdrawals, but universal life insurance gives you the flexibility to do that when it best suits your situation. Note that the tax advantages of universal life insurance policies are generally only worthwhile if you’ve already maxed out your contribution to your TFSA accounts and/or your RRSP contribution limit. Because of this, the tax benefits of universal life insurance are only really usable by high net worth individuals. There are also similar tax benefits available to participating whole life insurance accounts, which are cheaper overall, so that might be a better option if universal isn’t quite right for you.
3. Premium flexibility
Universal life insurance lets the policyholder decide when and how much they invest into their account balance, as long as there’s enough money in the account balance to cover the insurance company’s regular deductions. For a mature policy, it’s possible that the interest earned on the account balance could cover the regular deductions completely! The downside of this includes the risk of losing money if the investments perform poorly.
Get the best universal life insurance rates in Canada.
Universal life insurance isn't for everyone, as it can a more complex and expensive product than someone needs. Premiums are more expensive than term or whole life insurance, mostly due to higher administration fees. Universal life insurance also requires regular attention from policyholders, so make sure the investment mix still suits their needs. Universal life insurance also comes with the risk that investments may drop in value over time.
Universal life insurance is an incredibly powerful and flexible product, but it gets very complicated, very quickly. If you're considering universal life insurance coverage, I'd recommend taking the time to make sure it's right for you.
Think about it - term life insurance is literally a temporary policy, only lasting for a given term. Universal life insurance, on the other hand, is a permanent policy, that will last your entire life. Getting the right policy from the right provider is important!
Is universal life right for you?
One of the main things to consider is whether you can truly take advantage of the advantages of universal life insurance. These include:
- Flexible investment options
- Tax-sheltered growth
- Premium flexibility
The trouble is, these benefits really only pay off properly with a healthy account value. If you have enough money to invest, the investment options of universal life insurance give you some great alternatives to typical investment products. Similarly, the tax benefits of universal life insurance will help you most if you're a high-income earner, paying a higher rate of income tax.
You should definitely consider universal life insurance if you have enough wealth to take full advantage of these benefits. Remember that you'll also need the time to manage the policy - or you'll need to be able to pay someone else to do it.
If you’re after a simpler or cheaper form of life insurance, you might want to consider whole life insurance or term life insurance instead.
The bottom line
Universal life insurance is an important policy to exist in the Canadian market, but it's a very specific tool for a specific need. If it's right for you, then it's a great way to grow your wealth while providing for your family. Compare life insurance quotes today to find a great policy.
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Matt Hands, Business Director of Insurance
With 6+ years of experience at Ratehub.ca, Matt’s focus has been on growing its newest business unit, Insurance. He is a thought leader and a valuable resource to respected publications across Canada. read full bio