Universal Life Insurance
(If you’re looking for a primer on available types of life insurance, please see our article on Types of Life Insurance)
Universal life insurance is from the family of permanent life insurance products. It’s intended for use if you want insurance for the rest of your life.
Universal life consists of two basic parts to the policy; the insurance and cost portion of the policy, and the investment portion. These two sections of the policy are mostly discrete.
The insurance portion of your policy is generally available in two basic formats; level for life, or increasing every year..
The investment portion of a universal life insurance policy look similiar to many mutual funds. They’re not actually mutual funds, but conceptually they are similiar. For example, you will find a wide array of investment options from different companies and many of these options are actually tied to specific and well known mutual funds. Other common investment options are similiar to GIC’s, equity and stock type options, and various indexes.
The investment portion of most universal life insurance policies does behave like a mutual fund in another very important aspect. The investment options are typically not guaranteed, just like a traditional mutual fund. And that means, like a traditional mutual fund, investments inside your universal life insurance policy can crash and burn. Many universal life insurance policy’s investment options crashed by 30-40% in 2008-2009 right alongside the rest of the markets.
You can have a universal life insurance policy and not take advantage of the investment options. Doing so reduces your insurance policy to something that is similar to a term or term to 100 policy. i.e. level or increasing insurance costs, no cash or investment options.
It’s important to note that your annual premiums are not necessarily the same as your insurance costs – money going into and out of the investment options can have an affect. You should be very very clear on how your premiums are actually being divided inside the policy – what portion covers insurance and what portions covers investments.
Two other cautions when considering universal life insurance. First, even using a conservative interest rate may not be reflective of the actual policy. Let’s say you use 0% interest – can’t get much lower than that, can you? Well, as noted above, many universal life investments performed at -20%–40% in recent years, quite a bit below ‘0%’. Secondly in terms of investments options, most consumers will be better served by RRSP’s and TFSA’s than starting to invest inside a universal life insurance policy.
- Fully guaranteed costs of insurance.
- Level costs of insurance (we do not recommend products with level premiums but increasing insurance costs inside the policy).
- Minimal to no investments. Treat your insurance policy as insurance, no at investment.
When purchasing life insurance it is very wise to seek out independent, unbiased advice from a life insurance broker who represents all of the life insurance companies in Canada. Feel free to reach out to us by email or phone at 1-877-344-4011 to speak with one of our licensed brokers and determine what product is best for you and your family.
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