Feb 24, 2022reading time icon7 min

What is universal life insurance?

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What is universal life insurance?
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Are you looking for the life insurance policy best suited to your needs? When navigating the insurance products offered by companies, finding one to suit your needs can be challenging.

In addition to term and permanent life insurance, there is also something called universal life insurance. This type of coverage is generally less well known, but also more complex, as it involves a financial investment component. Its use is not unanimously supported.

Here's everything you need to know about universal life insurance.

Universal life insurance: what is it?

Universal life insurance contract

Contrary to what its name suggests, universal life insurance is far from being for everyone. It is actually the most complex insurance product in Quebec as it requires some investment knowledge. It is often misunderstood or misused.

It is sometimes described as an all-in-one financial product, since it includes both a life insurance policy and a built-in savings account. The former is similar to permanent life insurance and protects your loved ones in the event of death with the payment a lump sum. The latter offers a wide range of investment options to take advantage of numerous tax benefits.

When used well and recommended to the right individuals, universal life insurance can be very beneficial. However, it should be noted that this form of coverage is first and foremost a form of protection in the event of death, and not an investment tool.

How does universal life insurance work?

As mentioned earlier, universal life insurance is first and foremost an insurance contract, despite offering the potential for possible investments. You choose the amount of the guaranteed death benefit for your beneficiaries based on your needs. The price of the insurance and your premiums will be calculated according to the risk you represent.

The main difference between universal life insurance and other types of life insurance is that the amounts you pay can be invested and generate economic growth with tax benefits. Additional amounts can be used to increase your death benefit. You can also choose the investment options that suit you.

Questions about universal life insurance

The price of universal life insurance: how much does it cost?

The price you will have to pay for your universal life insurance contains two elements: the amount of the premium and the cost of the insurance.

Your insurance premium will depend on your situation and your needs. Several factors can influence its cost. For example:

  • Your age;
  • Your health status;
  • Your work (a hazardous occupation could increase the amount you are required to pay).

Because this information varies from person to person, as well as the fact that many other factors are taken into consideration in its calculation, it can be very difficult to pinpoint an indicative universal life insurance premium amount.

The cost of the insurance is that which the insurer deducts to cover the running costs of your contract (administration costs, tax, etc.).

For this type of life insurance, it is recommended to pay premiums that are higher than the cost of your insurance. The money will then be invested in your accumulation fund. In some cases, your contract may stipulate a limit that can be invested each year.

Calculating the cost of the universal life insurance

The universal life insurance accumulation fund

The amounts you pay are deposited in an accumulation fund. In other words, they are invested into an investment account which allows you to accumulate interest. It is for this reason that universal life insurance is sometimes considered an investment product.

If you are a skilled investor or have an experienced advisor, an accumulation fund can be a good tool for generating financial growth. Be aware, however, that investments are not guaranteed. It is important to inform yourself about the various possible scenarios (projections, rate of return, etc.) to have an overall view.

Is universal life insurance taxable?

As far as tax is concerned, you do not have to pay tax on the money invested, as long as it remains in your savings account. However, you will have to pay tax if you decide to withdraw part of the amount.

Why choose universal life insurance?

Wondering if universal life insurance could be a good way to protect your family and guarantee an inheritance for your successors? Here are some ideas to help you decide.

The advantages of this type of insurance contract

  • It is flexible and adaptable;
  • It offers you tax-efficient investment options;
  • You do not have to pay tax until you withdraw the funds from your account;
  • In certain circumstances, it is possible to pay the cost of insurance with the earnings from your investments.

Universal life insurance : who is it for?

Who is this type of insurance for?

Far from being for everyone, universal life insurance is particularly suited to older and wealthier individuals, as well as savvy investors. It can be an interesting option in any of the following situations:

  • You have reached the maximum contribution limit for your RRSP and TFSA and are looking for another way to grow your savings;
  • You want a way to increase the inheritance you leave to your estate;
  • You want to reduce your inheritance tax bill.

How should I go about taking out universal life insurance?

The procedures for taking out universal life insurance are similar to those for other insurance policies. You will have to provide the necessary information for your application (sex, age, state of health, etc.), specify the amount to be paid in the event of death and the options to be added to your contract. You will also need to choose your desired investment options.

Before taking out universal life insurance, it is important to find out about all the aspects related to this type of contract, including the terms and conditions for canceling your policy. Get advice from a professional who can guide you through the various insurance products that might be right for you and help you to determine whether universal life insurance is really the best option.

Want to know more about life insurance? Learn more about life insurance by reading the articles on our blog!

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