So, what is Universal Life Insurance?
Universal Life Insurance is a unique, more flexible form of Permanent Life Insurance that also has an investment savings element to it, as well as cheap premiums that make the policy reminiscent of Term Life Insurance.
You will find that most Universal Life Insurance policies have a flexible premium option. But, some policies instead require a single premium (or single lump-sum premium) or a fixed premium (or scheduled fixed premium).
How does Universal Life Insurance work?
There are two parts to Universal Life Insurance: the cost of insurance (COI amount), and the savings parts, which is called the cash value.
Since Universal Life Insurance is the more flexible cousin of whole life insurance, you also get the option to adjust your death benefits and premiums.
A Universal Life Insurance policy’s COI is the minimum amount of the premium payment needed to keep your policy open. The COI is made up of several things combined into a single payment. These things are the policy administration charge and mortality charge, amongst the other expenses that are needed to keep the policy going.
However, the COI charge will end up as a different amount depending on the age and insurability of the policyholder, as well as their insured risk amount.
Premiums that are collected in excess of your Universal Life Insurance’s cost will accumulate in the policy’s cash value portion.
As time passes, the cost of your Universal Life Insurance will go up as you age. But, if the accumulated cash value is enough, it will cover the increased COI.
What’s good about Universal Life Insurance?
As we touched upon earlier, similarly to a savings account, your Universal Life Insurance policy can accumulate a cash value. But conversely, with a Universal Life Insurance policy’s cash value, interest is earned based on either the minimum interest rate or the current market rate, whichever is doing better.
What’s more is, you are also permitted to access a part of the cash value as it accumulates, without this affecting your death benefit.
What’s bad about Universal Life Insurance?
But, if you do withdraw from the Universal Life Insurance plan’s excess cash value, you will have to pay taxes on each withdrawal.
Plus, earnings are only available as either first in, first out (FIFO) funds, or last in, first out (LIFO) funds. This depends on when you make your policy and premium payments.
As well as this, your insurance company will hold onto any cash value that remains when you die. Your beneficiary will only receive your policy’s death benefit.
You do have the ability to borrow against your accumulated cash value with no tax implications. But, there will be interest calculated on the loan’s amount. There will also be a cash surrender fee. As well as this, if the loan is unpaid, it will shrink the death benefit by the outstanding amount, with the loan’s unpaid interest also deducted.
How flexible is Universal Life Insurance?
Standard whole life insurance policies can only have a premium that remains fixed for the entire life of the policy. This is in stark contrast to Universal Life Insurance policies, which are able to have a flexible premium that changes throughout the policy.
If the premium is greater than the COI, you can remit it. Then, the premium gets added to the cash value, where it accumulates interest. If you have accumulated enough cash value, you can even skip payments without worrying about the policy lapsing!
What should I look out for with Universal Life Insurance?
All this being said, as you get older, you must be attenuative about the fluctuating cost of insurance, and plan for it correspondingly.
As well as this, you may not always have enough of a cash value to keep the policy open, depending on the credited interest. If this occurs, any payments that are missed need to be paid promptly, within a specific time frame, or you risk the policy being closed.
What are some alternatives to Universal Life Insurance?
If you are interested in Universal Life Insurance, but some of these disadvantages have put you off, you might be interested in some of these alternative options, which provide a similar amount of coverage to Universal Life Insurance, but which are slightly different.
What is the Personal Health Spending Account?
Our first alternative is the Personal Health Spending Account or PHSP. You’re probably well aware that most benefits programs for employees in Canada have certain restrictions and limits on their usage. And, if you don’t have access to a plan like this, of course, you must pay for health care using your own money.
This is what’s good about the PHSP. The Personal Health Spending Plan is a government benefit which offers a good strategy for health care mainly aimed at people who own incorporated businesses or who are self-employed. If you are someone who claims expenses on income tax, you may not be able to take full advantage of the PHSP. But if you are thinking about Universal Life Insurance for this reason, the PHSP offers a great alternative. Check out this website to learn more.
What about Whole Life Insurance?
Whole Life Insurance is a form of coverage that’s similar to Universal Life Insurance in that it too has an investment element to it. With this form of insurance, your insurance company takes a part of every premium payment to put towards an investment account or high-interest bank account.
With each premium payment you make, your cash value goes up and up, on a tax-deferred basis.
You can also borrow against a Whole Life Insurance policy’s cash value, and a Whole Life policy offers dividends, too. A flexible feature, you can either let these dividends accumulate interest, use them to get a reduction on your policy’s premiums or purchase additional coverage with them.
Unfortunately, Whole Life Insurance is very expensive, unless you purchase the policy at a very young age.