Universal Life Insurance

What is UL?

Universal life insurance has two key components, life insurance and investments. The policy owner pays premiums into the policy, which are used to pay for the cost of insurance and policy-related expenses. Any amount over what is required to pay for the insurance is put towards the tax sheltered investment component.

UL policies offer a wide range of features, costs, insurance coverage, bonus structures and provisions in the insurance contract itself.

UL Product Details

Universal life insurance policies can be looked at as two separate contracts combined in one legal agreement. There is a pure insurance component like term insurance, and there is a saving component or "fund" that is similar to a bank account. Premiums, net of applicable provincial premium taxes, are deposited into the fund. Insurance charges and administration fees are paid from this fund. The remaining saving component can be invested in many different types of investments as permitted by the policy and grows based on the net returns of those investments.

The most significant component, in the case of permanent life insurance policies, which include whole life and universal life (UL), is that the earnings within the investment fund that accumulate on a tax-free basis, as long as the policies are exempt policies. UL policies usually have a number of key features. Generally, UL policies provide a wide range of investment options, including equity-linked investments, flexibility in premium payments and several death benefit options. These features can result in substantial accumulation of capital for the estate of a deceased. In order to be considered an exempt policy, there is a limitation on the size of the investment component relative to the amount of pure insurance.

The use of the investment fund is not limited to funding the death benefit. This investment component or cash surrender value (CSV) can be withdrawn, providing funds to supplement retirement income or for emergency situations or it can be used as collateral for a bank loan. However, access to the investment fund through surrender or policy loans results in a disposition for tax purposes which may mean tax consequences to the insured.

Another effective method of accessing the CSV of an insurance policy is by using it as security for a bank loan. Because this is not a policy loan, there are no immediate tax consequences. This loan can be used for any purpose, including as a means to provide regular cash flow on retirement. If used for business or investment purposes, the related interest is likely tax-deductible. To provide a supplementary retirement stream, the policy's CSV could secure a bank line of credit. The insured could then draw on the line of credit at regular intervals or as needed and the agreement could be structured such that no repayments would be required until death, at which time a portion of the tax-free death benefit would be used to repay the loan. If the debt load exceeds the security limit, premature repayment could be required and where cash is limited, this may mean surrender of the policy, which could result in significant tax liability.

Universal life insurance has become immensely popular, because of its flexibility. What is simple in the concept is that contributions over and above what is required for the cost of the death benefit can be banked, either to defray future premiums or to build up cash value on a tax-deferred basis. That creates all sorts of investment, tax and estate planning options.

Key features of universal life's selling points are its flexibility related to premiums, investments and coverage which enables it to be adapted to the client's situation over time.

These policies also provide the insurance company with the flexibility to adjust certain charges to reflect their expense experience and changing market conditions.

Universal life products offer insurance and tax sheltered investments. UL is considered permanent life insurance.

The favourable tax attributes of life insurance have made it a key element in most estate and retirement plans. It can be used to protect an estate or to create an estate and in some cases, it can even be used to accumulate capital for retirement. But the most significant tax benefit of life insurance is that the proceeds received on death are not taxable.