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Universal appeal

Consider enhancing your legacy with universal life insurance. 

It’s no secret that life insurance is considered an essential part of a well-rounded financial plan. However, not all insurance products are the same, and many people may not realize how advantageous universal life insurance can be. It provides permanent protection just like other insurance products, but what sets universal life insurance apart is that it offers flexibility and a range of customizable options (see the sidebars for examples), making it easy to accommodate a policy owner’s budget, needs and priorities. 

How does it work?

With universal life insurance, the owner makes deposits into the policy’s account from which the insurance company deducts a fee to cover administration costs and taxes. The remainder goes towards covering the cost of the insurance. Together, the fee and the cost of insurance represent the minimum deposit required to keep the policy in force.

When an owner deposits more than this minimum into their policy, they can take advantage of valuable opportunities such as: 

  • A wide range of investment options to choose from
  • Tax-sheltered investment growth 
  • The potential for bonus payouts, interest rate enhancements and reduced management fees

These opportunities can help increase the growth of a policy’s value, generally referred to as “account value.” What makes universal life insurance so special is that this account value can be used in a number of beneficial ways. It can be:

  • Added to the death benefit as an additional tax-free payout to the beneficiary 
  • Used to reduce the owner’s cost of insurance by subsidizing the death benefit payable to the beneficiary 
  • Used to cover future costs of the insurance by essentially functioning as prepayment 
  • Used to provide funds during the owner’s lifetime

Another perk of universal life insurance is that the owner can always change the amount they deposit, making it a very flexible product.

This diagram helps illustrate this: Your deposit, less deposit fee, deposit into the investment account(s) you choose, cost of insurance and fees (A portion of your deposit covers the cost of insurance and any investment fees), gives you insurance protection and Account value (your investments earn a return (negative or positive) based on their performance.

What investments are available?

Investment accounts within universal life insurance often provide access to a wide variety of investments, which may include savings accounts, guaranteed interest accounts, indexed accounts (mirroring market performance), balanced accounts and managed accounts tracking brand-name mutual funds. 

If the policy owner needs to access the account value, it’s generally easy to make a cash withdrawal. However, it’s important to ask about any tax consequences that may be associated with a withdrawal or fees that may be charged if, for example, the owner redeems an investment before its proper maturity date. 

Because of the flexibility universal life insurance provides – in investments and in how the account value can be used – it has a widespread appeal to people who may be looking for:

  • Insurance protection for life
  • Tax-deferred investment growth that can build long-term wealth
  • The opportunity to increase the death benefit
  • The option to increase deposits to build the account value faster
  • Access to the account value if needed
  • Potential for rate enhancements that increase returns

Business owners can also benefit from a universal life insurance strategy that maximizes tax-free money transfers out of a corporation. 

If you’re looking for an innovative mix of permanent protection and wealth accumulation, talk to your advisor about whether universal life insurance belongs in your financial plan.


Two ways to structure the cost of insurance

As people get older, the cost of insurance goes up. Universal life insurance may allow policy owners to choose between:

  • Yearly increasing cost of insurance that gradually rises to align with increasing age; this allows the account value to increase quicker in the early years, if the owner is depositing more than the minimum, while the cost of insurance is lower.  
  • Level cost of insurance, which takes the total of the yearly increasing costs as the life insured ages and averages them out. Guaranteed not to change for the life of the policy, the level deposits will be larger than the actual cost of insurance in the early years when the insured person is younger. The benefit comes in the later years when they are still paying the same level cost, even though the actual cost, attributed to the insured’s older age, is higher. 

Depending on the product, it may be possible to start off with a yearly increasing cost of insurance and then switch to a level cost of insurance. 

Two types of death benefit

Universal life insurance policies are set up to pay either:

  • Face plus death benefit: the sum of the death benefit and the account value; the total amount is paid tax-free to the beneficiaries
  • Level face death benefit: the death benefit amount selected at issue does not change. The death benefit amount is subsidized by any account value in the policy. The insurance company is therefore on the hook, or at risk, for the difference between the death benefit and the account value. As the account value grows, this amount of risk shrinks and therefore so does the cost to the owner.

Universal life insurance extras

Riders are insurance add-ons that provide extra benefits. Universal life insurance policies may include the option to purchase:

  • Child protection rider: insures children and protects their future insurability
  • Business value protector rider: insures the future growth of a business
  • Term insurance rider: provides additional temporary protection for a fixed number of years
  • Waiver of premium rider: protects against disability

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