What are the Pros and Cons of Universal Life Insurance?

Understand Universal Life Insurance Before You Buy

When buying universal life insurance you should understand the major pros and cons of the policy. Universal life insurance is still the most popular life insurance contract in Canada, with more premiums being paid into universal life insurance contracts than Term Life or Whole Life policies.

Universal life insurance is a very complex product, and you should really understand what you are buying before you sign the application. This article will look at the major pros and cons of the universal life, and you will see that in most cases the benefits and the drawbacks/risk are two sides of the same coin.

Pros of Universal Life Insurance

Very flexible in plan design to meet your unique needs

Universal life insurance truly is the most flexible life insurance policy in Canada. It is made up of two parts. One the one side you have your cost for insurance. You can either select a Guaranteed Level Cost of insurance for life (this option is increasing in price in Canada) or a Yearly Renewable Term cost, where the cost for life insurance risk protection is very low in the early years and increases as you age. Then, on the other side of the plan are your investment options. You can chose from guaranteed investment accounts with a guaranteed minimum rate of interest (3% is a normal minimum guarantee) or you can be very aggressive and build an entire equity portfolio. The whole spectrum of investment options is available inside a universal life insurance contract, so it is up to you.

Provides an excellent tax shelter for investments

Life insurance is one of the few financial investments Canadians can make that are tax-sheltered and could even been tax free (upon death). Excess money over and above the cost of insurance is invested into your chosen investment options inside the universal life insurance policy which will grow totally tax sheltered. This means compound interest inside the policy will not be shrunk by taxation and can grow very quickly in later years. Unlike an RRSP, you do not get a tax deduction for the life insurance premiums. However, even more beneficial is that you are not forced to withdraw money and be taxed on it in retirement, like you are in an RRSP, and upon death the entire tax-sheltered investment account converts into a tax-free death benefit for your heirs.

Provides lifetime protection for you and your family

Universal life insurance is a permanent life insurance policy. Once issued, the life insurance company can never take your policy away from you or cancel it. So long as the minimum premium is paid (the cost of insurance) your contract will remain in force. Also, if you selected the level cost of insurance option your minimum premium will remain the same for life and never increase. This is a stable long-term insurance plan upon which you can build other investments and financial plans.

Cons of Universal Life Insurance

Cash values and premium payments are NOT guaranteed

The underlying cash values that MOST Canadians select inside their universal life insurance policies are equity based funds. Equities and bonds do not have a guaranteed rate of return, and the riskier investments might even have negative returns if the markets go down. Unless you were to elect the minimum guaranteed investment accounts with minimum rates of return (3% is most common on universal life insurance policies in Canada) then you are subject to market risk. If you have designed a policy to be paid off in 20 years, based on an assumed 6% annual growth rate of money, and you did not get 6% annual growth, you will need to keep paying premiums.

Minimum funded policies will never work for you

Universal life insurance was designed to be a tax-sheltered investment policy as well as life insurance. It is a high performance, high maintenance life insurance contract. If you set up a universal life insurance policy to be minimum funded (just pay for the level cost of insurance for life) you will never use the investment option of your policy, which is highly beneficial, and you likely are overpaying for your life insurance. There is a lifetime level cost of insurance policy with no cash values in Canada. It’s called Term 100. There are no investment accounts and investment options in Term 100 life insurance. This makes the policy less expensive, and will serve your needs far better than an investment based life insurance policy where the investment options are never used.

Requires ongoing management and investment expertise

If you are investing into universal life insurance, you will need to monitor your investments over time. Just like your mutual fund portfolio or your stocks and bonds, you must make adjustments based on market conditions or your changing risk tolerance. This is not a set-it and forget-it type policy. For many Canadians this extra level of investment management is too complex for them and they want their life insurance to be simple and guaranteed. If you are one of these Canadians, then universal life insurance is probably not the best option for you.

Learn more about the Pros and Cons of Universal Life Insurance

At Life Guard Insurance our team of life insurance brokers across Canada are very experienced deigning and explaining universal life insurance to clients. Please contact us and we will match you up with a professional life insurance broker in your area who can show you the pros and cons of universal life insurance.

The article was written by +Mitch Reynolds. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article about the pros and cons of universal life insurance would be very much appreciated.

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