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Universal life insurance is also known as flexible premium adjustable life insurance. It was originally introduced to the market in the early 1980s as a more flexible alternative to whole life insurance. This type of life insurance offers a savings element that is also tax-deferrable. Your insurance company will invest some of your premiums in mortgages, money market funds or bonds, and your return on investment will be credited to your policy. The company will guarantee a certain return on your money, normally 4 percent.
With universal life insurance, you can choose two different options regarding death benefits. You can decide to have the cash value of the policy pay your death benefit. The company will owe less insurance if you build higher cash value which is why it costs less. The second option is to pay the face amount indicated in your contract, as well as any cash values earned over the years. That’s why this option will cost you more than the first one. Most universal life policies will offer a no-lapse guarantee until you reach the age of 100 or sometimes 120, as long as you continue to pay the minimum premium.
One advantage of universal life insurance is the ability to adjust your death benefit according to your specific needs. You also have the flexibility to pay larger or small premiums to suit your financial circumstances. A disadvantage is the fact that your policy may lapse and leave you unprotected if you make payments that are too small for too long a period. The interest return will also drop if the investments of your insurance company perform poorly. This can result in higher premiums later on down the road.
What Is It
Universal life insurance, also called flexible premium adjustable life insurance, was first introduced in the early 1980s. At that time, people were looking for an alternative to whole life insurance that offered more flexibility. Universal life insurance provides the opportunity to enjoy tax-deferrable savings. Your insurance company will invest a portion of your premiums in bonds, mortgages or money market funds. The return on investment will then be credited to your policy, providing you with higher cash value. Most insurance companies guarantee a minimum return on your money; the standard is approximately 4 percent. The majority will also guarantee no lapses until you reach a certain age—normally between 100 and 120—as long as you pay the minimum premium.
Who Is It Best For
Because of the flexibility offered by universal life policies, this type of insurance appeals to a wide variety of individuals. However, you must be prepared to assume a certain degree of risk. You can choose to increase or decrease your premiums according to your financial circumstances; this offers you greater security and peace of mind. You can also choose different options and features such as cash value accumulation or lower premiums.
Anyone who earns a high income and has already maximized their RRSP contributions should also consider purchasing universal life insurance. They can enjoy greater tax-deferred investment options with this type of insurance. Many business owners also choose universal life because it provides a tax-efficient method of protecting the value of their business. If you are a parent or grandparent who wishes to maximize your estate for your children or grandchildren, you may want to purchase a universal life policy.
Advantages
Tax-Deferred Savings
Universal life policies enable you to build up your savings. Your insurance company will invest a portion of your premiums in a variety of funds such as stocks, mutual funds or bonds.
You won’t have to pay taxes on any interest earned on your universal life insurance until you decide to withdraw the funds. This can save you a lot of money and help you plan for your retirement more effectively. In addition, the death benefits are normally not charged income tax which means you beneficiary will receive more money if you happen to die.
Flexible Death Benefits
One of the main advantages of a universal life policy is the fact you can change your death benefit to suit your needs. When you purchase universal life insurance, you have two different options concerning your death benefits. You can choose to have your death benefit paid from the cash value of your policy. If you build high cash value, your insurance company will owe less insurance which keeps the costs down for this option. You can also choose to pay your death benefits with any cash value earned as well as the face amount specified in your contract. This option is more costly.
Flexible Premiums
Another advantage to universal life is flexibility regarding your premiums. Unlike other insurance types that require fixed premiums, you can choose to pay small or large premiums depending on your financial situation. You have the choice of single premiums, fixed premiums or flexible premiums.
Permanent Insurance
Unlike term insurance, universal life insurance offers you permanent insurance for the remainder of your life. It is unique because it also offers you a wide range of investment options. As long as you continue to pay your premiums, you can enjoy security and peace of mind knowing you and your family is protected. You can also choose a guaranteed death benefit that will be paid to your beneficiary when you die.
Disadvantages
No Guaranteed Return
One disadvantage of universal life insurance is the risk involved with your investments. If the investments chosen by your insurance company perform poorly, the interest on your policy will also drop. This may result in less available money to pay the death benefit portion of your policy and higher premiums in the future.
Low Rate of Return
Most universal life insurance policies offer a lower rate of return than some other types of insurance. You can expect to receive an approximate rate of between 0 and 4 percent, depending on your insurance company.
Risk of Policy Lapse
If you purchase universal life insurance, you also risk having your policy lapse if you make payments that are too small for an extended period. This could cause problems if suffer a major illness or encounter an unexpected change in your financial circumstances. It could also leave you and your loved ones completely unprotected if you happen to die without insurance coverage.
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