How
Universal Life Insurance Works
Unlike
other types of insurance, universal life premiums actually involve two
separate parts: one part covers your term life insurance while the second
part makes up your investments.
The growth
of the investment portion of your premium is considered tax-deferred
by the CRA (Canada Revenue Agency). Because of this, Universal Life
investments tend to grow much faster than conventional investment methods.
Each universal
life policy has a minimum and a maximum premium. The minimum amount
is the cost of the actual term life portion of the premium. Everything
after the minimum premium and provincial taxes have been deducted is
then placed into an investment that you select.
The death
benefit on a universal life insurance plan includes both the amount
of the term life policy and the value of the investments (known as the
investment account) at the time of death.
Universal
Life Insurance Comes In Two Forms
Universal
life comes in two forms:
A
LONG TERM INVESTMENT
Compounding the return on your investment account combined with its
tax deferral status, creates a powerful and lucrative method of growing
your investment. Over time, the combination becomes more powerful and
more lucrative. For this reason, universal life is usually considered
a long-term investment. Holding on to your plan for at least ten years
not only minimizes early surrender charges but also gives your investment
account plenty of time to grow.
GUARANTEED
At least
one company now has a Universal Life policy with 7 investment options
which all guarantee preservation of capital.
At some
point, your investment account's value may exceed the allowable limits
for tax-deferred status set by the CRA. When that happens, the excess
amounts will be moved into a separate account. These funds will still
continue to grow, even though they will now be subject to taxation.
Once the allowable limits permit, those excess funds will be transferred
back into your universal life investment account.
Why
Universal Life Insurance ?
As you
may already be able to see, universal life has a number of benefits
that other types of insurance plans simply cannot offer, including:
Flexibility:
You can choose how much life insurance you want (subject to certain
requirements and limitations, of course) and you can adjust the death
benefit and premiums to fit your changing needs
Security: You can be securing your own financial security while
also ensuring that your family will not be faced with financial hardship
Tax Free Death Benefit: Your death benefit, including the value
of your investment account, will be tax free under current tax laws
Tax Treatment: You may not realize it now, but the money you
save through the tax-deferred investment portion of your universal life
plan will probably be more than the cost of your term life premium
Another
potential benefit, depending on your insurance provider, is that you
can borrow against your policy if you need to. This ability can come
in handy when unexpected expenses arise.
Universal
life is unique because it provides you with the protection of a solid
term life insurance policy with the advantages of a tax deferred investment.
