OverviewUniversal Life Insurance

Universal Life Insurance (UL) provides permanent insurance coverage with a twist. UL policies also have an investment component where you can choose the investments held, providing control for those looking for flexibility in their coverage.
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Universal Life Insurance

What Is
Universal Life Insurance

The easiest way to understand universal life insurance is to think about your policy in two distinct buckets. The two distinct components of your coverage are the insurance portion and the investment portion. The insurance is the base of the policy, and the investment component provides flexibility and opportunity for growth, but we will dive into this more later. With the additional flexibility and options, universal life insurance is more complicated and requires greater involvement than most other life insurance products. UL provides a one-time, tax-free, cash sum called the death benefit to your beneficiaries when you die, just like term or whole life insurance.

Universal Life Insurance

How Does
Universal Life Insurance Work?

Universal life insurance shares many similarities with other types of life insurances, but there are some key differences we will highlight. When you make your regular monthly or annual payment into your universal life policy, the funds are initially held in the investment side of the policy. The funds in the investment component will grow at a different rate, depending on the investment selection. It can be anything from an extremely low-risk interest option, that will act like a savings account, to a more aggressive investment in the stock market, which you can choose based on your goals and risk tolerance. Each month, funds will be withdrawn from this investment account to cover the cost of your life insurance coverage. The benefit of having this flexibility within your policy is that you can choose how much you want to contribute each month, as long as there is enough in the account to cover the insurance cost. This is particularly attractive if your income is variable from month to month, you want to have more control over the policy’s investments, and you require permanent insurance.

Universal Life InsuranceHow Much
Does It Cost?

Determining the cost of Universal Life Insurance is much the same as other types of insurance, with some additional unique factors that only pertain to UL. Like term and other permanent options, your age, health, coverage amount and any additional riders will affect the cost of your insurance. Where universal life differs, is in the flexibility of the payments that can be made into a UL policy. Each universal life policy considers all of the previously mentioned factors, but the actual amount of premiums that you will be required to contribute won’t be an exact amount – instead there is a minimum and maximum amount you can deposit in any given month. The minimum amount of premium would just cover the cost of insurance without having any extra leftover in the investment component of the policy. You may choose to have your insurance cost remain level throughout the entire existence of the policy, or you can choose to start with a lower premium that will increase over time. Your selection will affect the premiums. You also have the option to deposit higher amounts of dollars into the policy, up to the maximum calculated. This maximum contribution ensures that the investments within your policy will remain tax-sheltered.

In relation to the other forms of life insurance, universal life insurance generally falls between term insurance and whole life insurance in terms of cost. It provides permanent coverage, but at a lower cost than whole life insurance, however, there are more complexities and a focus on a more hands-on approach.

Universal Life InsuranceWho should Consider
Universal Life Insurance?

Universal life insurance coverage is a helpful tool for people with specific needs. Some of the most common reasons for purchasing a universal life insurance policy are:

Flexibility of payments.

If you have variable income or expenses like a salesperson, business owner, or anyone being paid commission, the flexibility of payments allows you to add more to your policy in higher income months, and decrease it in lower income months

Permanent coverage at a more affordable premium.

If you are looking for coverage for life at a less expensive premium than whole life insurance, a universal life policy with minimum premium payments is an appropriate option.

You want customization and control over your investments. 

Universal life allows you to select the investments that are held in your policy. If you want to have control over your investments with tax-deferred growth, a UL policy will meet that need.

Your RRSP & TFSA accounts are maxed out. 

Both whole life and universal life policies allow your investments to grow tax-deferred, so if you no longer have contribution room in your TFSA or RRSP accounts, you can use a UL policy to reduce some of your taxes

Universal life insurance isn’t the right choice for everyone, many people will find that term life insurance covers many of their needs earlier in their life, and whole life insurance may be more appealing later in life as it doesn’t require active management. However, for certain people, universal life can be exactly what they are looking for – flexibility, choice of investments and more affordable permanent insurance. In many situations, a combination of both term and permanent insurance will provide the protection you need today and in the future. Our team at Hometown Life Insurance is happy to work with you to develop your personal insurance strategy, and answer any questions you may have.

Copyright © 2021 Hometown Life Insurance.

Copyright © 2021 Hometown Life Insurance.