What is Universal Life Insurance?

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Universal life insurance is a type of permanent life insurance. It is lauded for being more flexible than other options, such as whole life insurance. However, while some view it as an investment strategy, others warn that the overall cost may outweigh the cash value. So, before you jump on board, here’s what you should know about this life insurance product.

What is universal life insurance?

Universal is a type of permanent life insurance, which means that it follows you throughout the entirety of your life rather than a set number of years, like term insurance. That is, as long as you continue to keep paying the minimum premium. 

Where a UL policy differs from other types of permanent life insurance is that a portion of your premium payments go towards the actual life insurance, while another portion is divided into both a savings account and investments. Any savings/investments are tax-differed, and you can borrow against or withdraw from the policy (assuming you meet the minimum cash value requirement), which can be very handy in case of an emergency. Plus, you still have the death benefit for your beneficiaries. 

What’s the cash value of universal life insurance?

While the idea of investing and saving part of your premiums does seem attractive, as said above, one of the biggest concerns with universal life insurance is that the payments will actually cost more than the cash value. Since a portion of your payments goes towards investments, the cash value of universal life insurance will fluctuate over time depending on the interest rates. In an ideal world, it would increase. However, since it is an investment, it can just as easily decrease.

Don’t get caught up too much in building cash value with universal life insurance. The point of life insurance is to protect your dependents if you were to suddenly pass. Making sure they have enough to live without your income is more important than any investments that you can build with your policy.

Universal life vs whole life insurance

Now that you know what is universal life insurance, you’ll want to understand how it compares to other life insurance products.

Both universal life and whole life insurance are types of permanent life insurance, so as long as you pay your premiums, you will have lifetime coverage. Both types of life insurance allow you to borrow against or withdraw the cash value from the policy. 

However, a whole life policy is consistent. You will pay the same amount in premiums and have a guaranteed cash value accumulation. Universal life insurance, on the other hand, is more flexible when it comes to premiums and death benefits which also means that it can have less expensive premiums. However, that flexibility comes at a price, and universal life insurance doesn’t have as many guarantees. One of the biggest risks with universal life insurance is that your account may become underfunded and lapse. 

Universal life vs term life insurance

Universal and term life insurance are even more different. Term life insurance, as the name indicates, is only valid for a term or a set amount of time (ie: 10 years), whereas universal life insurance is permanent life insurance coverage and is designed to last the span of your lifetime.

Term life insurance only offers a death benefit, whereas universal life insurance offers a death benefit plus a savings component that policyholders can borrow against or withdraw from the cash value, which a permanent life insurance like universal life insurance does.  That said, term life insurance typically offers much larger death benefit options than universal life insurance.

Most experts recommend getting term life insurance and investing the difference compared to a universal life insurance policy into a stock market index such as the S&P 500 or Nasdaq. By doing this, you’d be creating your own cash value account.

Who is universal life insurance good for?

Universal life insurance isn’t for everyone. It is more complicated than other life insurance options and requires management by someone, such as a financial advisor, who really knows what they are doing. So if you want something simple and affordable, it’s not the best choice. That said, universal life insurance may be the right choice for you if you are someone who wants permanent coverage and:

  • Wants access to cash that can be either borrowed or withdrawn throughout the duration of the policy
  • Wants flexibility to adjust premiums and/or death benefits over the years
  • Wants to have control over the investment portion

Typically speaking, this form of permanent life insurance is most commonly chosen by young Canadians who earn a high income and can afford to take on more risk since it’s a long-term investment and they don’t expect to need the money for many years to come or, individuals in a high-income bracket who have maxed out both their Registered Retirement Savings Plan and Tax-Free Savings Account.

How much does universal life insurance cost?

Universal life insurance premiums will vary depending on several variables and circumstances. That said, generally speaking, the cost of insurance will run you the following every month. 

  • Under $100,000 coverage – $40/month
  • $250,000 – $500,000 coverage – $81/month
  • $1,000,000 – $2,000,000 – $93/month

Keep in mind that these are just averages. Factors such as gender, age, health, profession, lifestyle etc., will all play a role in determining your premiums.

How to access money from cash-value life insurance

One of the draws of universal life insurance is being able to access the policy’s cash value. However, in order to be able to do that, you need to be aware of the requirements and possible repercussions.

  • It takes the cash value a while to build, and a minimum amount is required before you can borrow or withdraw.
  • Cash withdrawals will likely impact the death benefit on your policy.
  • There may be tax implications for withdrawing.

Pros and cons of universal life insurance

There are a lot of opinions on universal life insurance. Some people love the option and consider it to be a terrible product for the general public. So, before you decide, here are some main advantages and disadvantages of universal life insurance.

Universal life insurance pros

  • Permanent lifetime coverage
  • Potential of cash value growth over time thanks to investment strategies
  • Flexible premium payments 
  • Flexible death benefit amounts
  • Tax deferral strategies 

Universal life insurance cons

  • More expensive than term life insurance
  • Possible limitations on cash value (make sure you understand the fine print)
  • Hands-on and needs to be monitored
  • Building the cash value takes time
  • The investment portion can lose value as easily as it can gain value
  • Flexibility options likely will require a health exam which may increase the price of your premiums

Is universal life insurance a good investment?

So, is universal life insurance a good investment? Well, maybe if you have specific life circumstances, but overall, for the average Canadian, probably not. There are a lot of risks, it requires a lot of attention, and while the savings and investment portion are intriguing, chances are you can earn more just by investing that money into your TFSA or RRSP. 

Since your universal life insurance policy is only valid so long as your cash value is above zero, you are taking on a lot of risk. According to a study by PolicyMe, 88% of universal life policies never pay out because the policyholders are unable to afford the premiums. 

How to get universal life insurance

Now that you know what is universal life insurance, and life insurance in general, you might be thinking it’s time to get a policy.

Whether you’re looking for universal or term life insurance products, you’ll want to shop around for quotes to ensure you get the best policy for your personal circumstances. You can do this yourself by checking in with individual life insurance companies, or you can work with an insurance broker or advisor who will get quotes for you. This can be done in person or online.

Once you are ready to apply, make sure you have the following on hand:

  • Some form of identification (SIN, driver’s licence, passport, etc.)
  • Proof of income (paystub or a letter of employment)
  • Proof of address (from a bill or letter from your landlord)

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About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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