Universal Life Insurance in Canada Good Investment Strategy or Bad News
The advantages of life insurance are obvious for many as it will give financial security to the beneficiaries after a policyholder passes away. What isn’t as obvious is exactly what life policy you should be choosing.
Universal life insurance has gained a lot of popularity in recent years as not only a means of life insurance but also as an investment vehicle. Here we’ll look at the pros and cons of universal life insurance to see whether or not it’s the right solution for you.
What Is Universal Life Insurance?
Life insurance can be divided into two main categories. They are term insurance which only covers you for a specified period, and permanent life insurance which will cover you until you die. Universal life insurance is a type of permanent life insurance.
What makes universal life insurance unique is that it combines the death benefit which is paid out to the beneficiaries with an investable cash value component. That cash value component is invested into various investment options offered by the insurance company.
This cash value grows tax-deferred, allowing policyholders to accumulate savings over time. Standard permanent life insurance also has this cash value component but not as an investment option and is more of a standard savings vehicle.
Key Features and Universal Life Insurance Benefits
If you’re interested in universal life insurance, then you’ll want to know its benefits along with its downsides. Let’s first look at why it may be a good idea.
Flexibility – One reason many are interested in universal life insurance is its flexibility. Policyholders can adjust their premiums and death benefits as their financial circumstances change. This makes it an attractive option if you want a plan that can adapt to your financial circumstances.
Investment Component – Unlike term life insurance, which provides coverage for a specific period, universal life insurance allows policyholders to grow a cash value over time through investments. While there is risk involved, this has the potential to generate higher returns.
Tax Benefits – The investment gains within the cash value component grow on a tax-deferred basis, meaning that policyholders do not pay taxes on the earnings until they withdraw the funds. This is perfect if you wanted to build wealth while minimizing tax liabilities.
Estate Planning – Universal life insurance can also be used as an effective estate planning tool. The death benefit can provide a tax-free lump sum payment to beneficiaries, helping them cover various expenses, such as funeral costs, estate taxes, and outstanding debts.
Potential Drawbacks and Universal Life Insurance Risks
Now we’ve looked at the benefits of universal life insurance, what are the risks? Here we’ll look at what they are so you can make a balanced judgment.
Cost – Universal life insurance tends to be more expensive than term life insurance. The added investment component and administrative fees contribute to the higher premiums. As such, it may not be the most cost-effective option for those on a budget.
Investment Risks – While the investment component can potentially yield significant returns, it also exposes policyholders to market risks. The cash value may fluctuate based on the performance of the underlying investments, and there is no guarantee of positive returns.
Complexity – Universal life insurance policies can be complex and challenging to understand fully. Term life insurance is much simpler and you may want to choose a policy that has less variable and more certainty.
Surrender Charges – If policyholders decide to surrender or cancel the policy prematurely, they may face surrender charges and tax implications. This could result in a lack of life insurance protection including financial losses, especially if significant funds have been invested in the policy.
Considerations for Maximizing Investment Potential
Many people find universal life insurance appealing due to its investment element but it’s important to know how to give yourself the best chance of growing your cash value. Here are some tips to get the most out of your policy.
Consult with Financial Professionals – Before purchasing a universal life insurance policy, it’s crucial to consult with a qualified financial advisor or insurance agent. Here at Ron Johnston Insurance we can assess your financial goals, financial circumstances and risk tolerance.
Diversification – If you decide to invest through a universal life insurance policy, it’s a great idea to diversify your investments with your universal life insurance investment strategy. In simple terms, this means investing in several different assets to spread your potential risk.
Regular Policy Review – Universal life insurance allows for flexibility and with this, it’s a great idea to review our investment periodically. This will allow your life insurance to grow and change with your circumstances.
Consider Alternatives – Depending on your circumstances, there may be other investment options that better suit your needs. Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs) are just two investment alternatives to universal life insurance that you may not have explored.
Is Universal Life Insurance Right for You?
Is universal life insurance worth it? The answer to that question will depend on whether you think the positives outweigh the benefits. Many prefer other types of life insurance as they are simpler and don’t have the investment element.
However others, especially with pre-existing investments, see universal life insurance as an extra investment tool where they can take advantage of the tax benefits. You may also like the idea of having more flexibility in your payments.
Without knowing individual circumstances, we’d neither recommend nor discourage you from getting universal life insurance. Instead, it’s a great idea to get universal life insurance quotes and speak to insurance experts who can give you more guidance dependent on your needs.
Final Thoughts
Universal life insurance in Canada can serve as both a life coverage and investment strategy, providing flexibility and tax benefits to policyholders. However, it is essential to weigh the potential benefits against the drawbacks and risks associated with this type of policy.
If you are considering universal life insurance as an investment, it’s best to seek advice from financial professionals. Here at Ron Johnston Insurance, we’re here to help. Contact us today and we’ll happily guide you through your life insurance options and advise on what is perfect for your needs.