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Pros and Cons of Universal Life Insurance

Life insurance is an important consideration for anyone looking to protect their loved ones in the event of their untimely death. It can provide financial security and peace of mind, knowing that your loved ones will be taken care of in the event of your passing. In Canada, there are two main types of life insurance: term life insurance and permanent life insurance.

Basics of life insurance

Term life insurance provides coverage for a set period of time, typically 10, 20, or 30 years. It is generally the most affordable option, as the premiums are based on the likelihood of death occurring during the term of the policy. If the policyholder dies during the term of the policy, the beneficiary will receive the death benefit. If the policyholder does not die during the term, the policy will expire without any value.

Permanent life insurance, on the other hand, provides lifelong coverage and typically has higher premiums. In addition to a death benefit, permanent life insurance also includes a savings component, known as the “cash value.” There are two types of permanent life insurance, including whole life, universal life. 

Basics of universal life insurance

Universal life insurance is a type of permanent life insurance that combines the protection of a traditional permanent life insurance policy with the ability to adjust the premiums and death benefit based on the policyholder’s needs. It includes a cash value component that accumulates over time and can be accessed by the policyholder through loans or withdrawals.

There are two main types of universal life insurance: YRT (yearly renewable term) and level cost insurance. 

YRT universal life insurance is a type of policy that renews annually and adjusts the premiums and death benefit based on the policyholder’s age. The premiums and death benefit increase each year as the policyholder gets older, which can make this type of policy more expensive over time.

Level cost insurance is a type of universal life insurance that has fixed premiums and a fixed death benefit for the life of the policy. The premiums do not increase over time, and the death benefit remains the same regardless of the policyholder’s age. This can make level cost insurance a more affordable option for individuals who are looking for lifelong coverage.

One of the key features of universal life insurance is the ability to use the cash value component to pay for the cost of insurance. The cash value accumulates over time and can be used to offset the premiums, effectively making the policy “self-funding.” This can be a good option for individuals who are looking to maximize the growth of their investment and pay for their insurance coverage over the long term.

However, it’s important to note that universal life insurance can be complex, with multiple components and features that may be difficult for some individuals to understand. It’s a good idea to work with a competent financial advisor or insurance broker to fully understand the details of a universal life policy and determine if it’s the right fit for your needs.

 

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Pros of universal life insurance

  1. Flexibility: One of the main benefits of universal life insurance is the flexibility it offers in terms of premiums and coverage. Policyholders can adjust their premiums and death benefit to suit their changing needs, as long as the policy remains in good standing.

  2. Cash value accumulation: Like other types of permanent life insurance, universal life insurance includes a cash value component that accumulates over time. This can be a good option for individuals who are looking for a stable investment with the potential for tax-deferred growth.

  3. Tax advantages: In Canada, the cash value component of a universal life insurance policy may grow on a tax-deferred basis, meaning that policyholders do not have to pay taxes on the growth until it is withdrawn. This can be a good option for individuals who are looking to maximize their investment growth.

  4. Potential for greater returns: Universal life insurance has the potential for higher returns than whole life insurance, as it allows policyholders to allocate a portion of their premiums to higher-performing investment options. This can be a good option for individuals who are looking to maximize their investment growth and are comfortable with taking on a higher level of risk.

Cons of universal life insurance

  1. Complexity: Universal life insurance can be complex, with multiple components and features that may be difficult for some individuals to understand. 

  2. Higher premiums: Universal life insurance typically has higher premiums than term life insurance, as it provides lifelong coverage and includes a cash value component. This can make it more expensive for individuals who are looking for more affordable coverage.

  3. Active management required: Universal life insurance requires active management to ensure that it remains in good standing and continues to meet the policyholder’s needs. This can include monitoring the performance of the cash value component and making adjustments to the premiums, death benefit and cost of insurance type as needed.

  4. Dependence on financial advisor: Working with a financial advisor is typically a key part of the process of purchasing and managing a universal life insurance policy. However, financial advisors may leave the industry or change firms, which can create disruptions in the management of the policy. It’s important to be proactive in maintaining a relationship with your financial advisor and to have a plan in place in case they are no longer able to assist you.

Who is universal life insurance right for

Universal life insurance is a good option for individuals who have a need for permanent life insurance coverage and are willing to take on additional risk for the potential of higher returns. It may be particularly suitable for individuals who are investment-savvy and comfortable with the idea of actively managing their policy to ensure that it meets their needs.

Universal life insurance is a good option for individuals who are looking for lifelong coverage and have a long-term financial planning horizon. It’s also a good option for individuals who are looking for a way to accumulate cash value on a tax-deferred basis and who are willing to take on some level of market risk in exchange for the potential for higher returns.

However, it’s important to keep in mind that universal life insurance may not be suitable for everyone. It can be complex, and it requires active management to ensure that it remains in good standing and continues to meet the policyholder’s needs.

Final Thoughts

In conclusion, universal life insurance is a type of permanent life insurance that offers flexibility in terms of premiums and coverage, as well as the potential for cash value accumulation and tax advantages. However, it also comes with some risks and complexities, and it requires active management to ensure that it remains in good standing and continues to meet the policyholder’s needs.

If you’re considering universal life insurance and want to learn more about how it works and whether it’s the right fit for your needs, don’t hesitate to book a call with us. 

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