Universal Life Insurance
Universal Life insurance stands as a multifaceted financial instrument designed primarily to offer protection to your loved ones, business, or chosen charitable organizations upon your passing.
- Lifelong Coverage: Once secured, your Universal Life insurance remains intact for your entire lifetime, ensuring that your beneficiaries receive the intended payout upon your demise, provided you fulfill the required premium payments to cover policy deductions.
- Wealth Accumulation: Beyond its primary function as insurance, this policy offers investment avenues that can potentially grow cash value over time. These accumulated funds are at your disposal, offering financial flexibility throughout your lifetime.
- Tax Benefits: Universal Life insurance brings tax advantages, with the cash value accumulating tax-free within the policy, subject to governmental regulations. Upon your passing, the beneficiaries receive the payout tax-exempt. However, it’s crucial to note that taxes may apply to any withdrawn or borrowed funds from the policy.
- Customized Investment Strategy: Collaborating with your advisor, you have the liberty to choose the investment options that align with your financial goals and risk tolerance. This empowers you to tailor your investment approach according to your preferences.
- Payment Flexibility: The policy grants you the flexibility to adjust your premium payments as per your financial circumstances. Whether you wish to increase, decrease, or temporarily halt payments, you retain control, provided there are adequate funds within the policy to cover monthly deductions and maintain coverage.
Highlights of Premium Paid on Your Universal Life Policy:
- Premium Payment Process: Your premium payments serve as the financial foundation for your policy. Upon deduction of any applicable premium tax, the net premium is then directed by the insurance company into the designated investment accounts within your policy.
- Allocation Flexibility: You retain autonomy in determining the distribution of these funds among the investment accounts you’ve selected, aligning with your preferred investment strategy and objectives.
- Monthly Deductions: Regularly, the insurance company deducts funds from the investment accounts to cover the monthly insurance costs associated with your coverage.
- Tax-Exempt Management: To maintain the tax-exempt status of the policy, the insurance company may engage in strategic maneuvers such as transferring funds between the investment accounts and a separate side account, or directing a portion of your premium payment into this side account.
- Payout Process: Upon the insured individual’s passing, the policy disburses the designated payout, according to the predetermined payout option chosen by the policy owner, to the specified beneficiary.
Premiums for Universal Life insurance are determined based on various factors including the desired coverage amount, the insured’s age, gender, and smoking status.
The initial premium payment is required on or before the policy date to activate the policy. This payment, after deduction of any applicable provincial premium tax, is allocated directly into the chosen investment accounts according to the predetermined percentages.
Any premium payments exceeding the maximum allowable amount may be directed towards a separate side account, utilized to offset outstanding loans, or refunded partially or fully by the insurance company. Premium tax is not deducted from these amounts in such cases.
Initially, policyholders are advised to select a planned premium equal to or greater than the target premium outlined in the illustration report. Subsequently, based on factors such as available net cash value, interest earned, and individual objectives, policyholders have the flexibility to:
- Maintain a regular premium payment schedule
- Adjust the premium amount, increasing or decreasing it as needed
- Temporarily suspend premium payments for a period and then resume them
- Make lump-sum deposits to augment the value of the investment accounts within the policy
However, it is essential to ensure that sufficient premium payments are made to maintain adequate funds within the investment accounts to cover the monthly deductions, thereby ensuring the continuous validity of the policy.
Premium payments can be made either on a yearly or monthly basis, providing policyholders with flexibility in managing their financial commitments.
Premium Tax
Premium taxes, subject to regulations set by provincial and territorial governments, are susceptible to changes without prior notice. While the policy does not assure the premium tax, it is deducted from every premium payment, including transfers from the side account to the policy. The insurance company then allocates the net premium amount to the investment accounts associated with the policy.
The annual minimum premium is calculated based on a per-thousand rate of the insurance amount for the insured individuals, augmented by any additional benefits, substandard extras, and the premium tax. This minimum premium is essential to ensure adequate funding for covering the monthly deductions.
For policies with an annually increasing cost structure, ensuring proper funding is crucial. This often requires a higher initial premium payment to activate the policy. If paying annually, the full year’s premium is due at the time of issuance. Alternatively, for monthly payments, an amount equivalent to the first year’s minimum premium is required.
Once the initial premium is paid and the policy becomes effective, you retain the flexibility to adjust subsequent premium payments. However, it is imperative to maintain sufficient premium payments to ensure that the investment accounts contain enough funds to cover the monthly deductions. This is vital for the continuous validity of the policy.
Each year on the policy anniversary, the insurance company calculates the maximum allowable premium that can be paid into the policy within the policy year without jeopardizing its tax-exempt status. This maximum premium is an estimation based on factors such as the insurance amount, cost of additional benefits, substandard ratings, number of premium payments, assumed interest rate, and the current value of the policy’s account.
Adjustments in the insurance amount directly impact the estimated maximum premium; reductions decrease it, while increases raise it. Although premiums exceeding the maximum are permissible at any time, any amount surpassing this limit is directed to the side account, provided it does not surpass the maximum allocation for the side account.
You have the option to make a lump-sum premium deposit according to the investment account allocation you’ve selected for regular premium deposits. Alternatively, you can opt for a different investment account allocation for the lump-sum premium.
The insurance company may assess the impact of a lump-sum payment to ensure that the value of the investment accounts does not exceed the allowable limit for the policy. Any amount exceeding the maximum premium is placed in the side account.
You have the option to make a lump-sum premium deposit according to the investment account allocation you’ve selected for regular premium deposits. Alternatively, you can opt for a different investment account allocation for the lump-sum premium.
The insurance company may assess the impact of a lump-sum payment to ensure that the value of the investment accounts does not exceed the allowable limit for the policy. Any amount exceeding the maximum premium is placed in the side account.
Should you choose to pay additional premiums, whether periodic or lump sum, you can maximize tax-free growth in the investment accounts and the payout under Coverage Plus. However, it’s important to note that premium tax will be deducted from all periodic or lump-sum additional premium payments.
With Universal Life insurance, you have the flexibility to adjust your coverage to accommodate your evolving needs. This includes options such as:
- Modifying the cost type.
- Increasing the coverage amount.
- Switching from a Level payout option to the Increasing payout option.
- Adding supplementary benefits.
It’s important to note that certain changes may have restrictions or necessitate evidence of insurability.
The chosen cost type dictates how the insurance costs may fluctuate over time. Policyholders have the option to select the cost type that aligns most closely with their requirements and financial considerations.
There are normally two cost type options:
Level Cost: Under this option, the insurance costs remain fixed throughout the policy’s duration, providing predictable premiums over time.
Increasing Cost: With this choice, the insurance costs gradually rise over the policy’s lifespan.
The chosen cost type dictates how the insurance costs may fluctuate over time. Policyholders have the option to select the cost type that aligns most closely with their requirements and financial considerations.
There are normally two cost type options:
Level Cost: Under this option, the insurance costs remain fixed throughout the policy’s duration, providing predictable premiums over time.
Increasing Cost: With this choice, the insurance costs gradually rise over the policy’s lifespan.
It is noteworthy to consider which insurance company you would end up with, as there may be different terminology associated with above explained, though the essence of it is pretty much the same.
You have the choice to select the payout option for both the total base coverage and investment accounts within your Universal Life insurance policy. This selection dictates how the insurance company calculates the payout when the insured person(s) passes away. There are typically two payout options available:
In essence, Universal Life insurance offers a comprehensive financial solution that not only safeguards your loved ones’ future but also serves as a tool for wealth accumulation and tax-efficient planning, all while affording you flexibility and control over your financial strategy.
Under the Increasing Payout option, the payout upon the insured person’s death comprises two components: the total base coverage amount as of the date of death and the value of the investment accounts on that date. The monthly deductions are determined by a constant amount at risk, which assumes no alterations to the policy. The deductions only increase if an annually increasing cost type is chosen.
Under the Level Payout option, the payout upon the insured person’s death remains consistent throughout the policy’s duration. It typically equals the total base coverage amount as of the date of death, regardless of any changes in the value of the investment accounts. The monthly deductions are based on a stable amount at risk, which remains constant over time unless adjustments are made to the policy.
You have the option to make withdrawals from the net cash value of your Universal Life insurance policy. However, it’s important to note that a partial withdrawal is considered a disposition for income tax purposes, which may result in taxable income that you need to report.
When you request a partial withdrawal, the insurance company withdraws the specified amount from your investment accounts according to your instructions. In each policy year, the insurance company processes one partial withdrawal request from the investment accounts without charging a transaction fee. However, for subsequent partial withdrawals within the same policy year, the insurance company may apply a transaction fee as part of the amount withdrawn for the partial surrender, based on their prevailing rules.
The payout upon death and the value of your investment accounts are immediately reduced by the amount of the partial withdrawal. If the Level Payout option is in effect for the base coverage at the time of the partial surrender, the base coverage amount will be immediately reduced by the withdrawn amount, ensuring that the reduced base coverage meets the minimum requirement.
It’s important to consider that withdrawals could lead to market value adjustments for certain investment accounts. The minimum amount for a partial withdrawal is typically $500, and the available withdrawal amount is determined by factors such as the policy’s net cash value, the types and values of the investment accounts, outstanding policy loans and loan interest, and the remaining monthly deductions before the next policy anniversary, with a minimum of 3 monthly deductions.
Each policy year, the insurance company typically processes one withdrawal request from the investment accounts without imposing a transaction fee. However, for any subsequent partial
withdrawal requests within the same policy year, the insurance company may levy a transaction fee as part of the withdrawn amount for the partial surrender, in accordance with their current policies.
As of January 2024, the transaction fee stands at $25 (please note that this amount may vary depending on the insurance company). However, it’s essential to recognize that this fee is subject to change in the future. The transaction fee is automatically deducted from the policy’s investment accounts.
The effective date of the withdrawal is determined as the date the request is received at the insurance company’s head office.
You have the option to surrender your policy at any time to receive its net cash value. The insurance company determines the policy’s net cash value as of the date they receive your surrender request. For index accounts and managed accounts, the valuation is typically done on the next valuation date following the receipt of the surrender request.
Upon surrendering the policy, policyowners receive an amount equivalent to the policy’s cash value, which is calculated as follows:
Minus any outstanding amounts owed on the policy, such as unpaid monthly deductions, loans, and accrued interest.
Minus any applicable surrender charges, fees, and market value adjustments.
It’s important to note that some or all of the surrender proceeds may be subject to taxation, depending on the individual’s circumstances and applicable tax laws.
Upon surrendering your policy, the insurance company deducts any applicable surrender charges before disbursing the net cash value. These surrender charges comprise any charges associated with the base coverage. Importantly, the total surrender charges will never exceed the policy’s cash value at the time of surrender.
It’s noteworthy that certain events do not affect the policy’s surrender charges, including:
- Changing the cost type of coverage (e.g., from annually increasing to level).
- Decreasing the base coverage amount.
- Changing the rate class of coverage.
Additionally, it’s important to note that there are no surrender charges associated with policies having a level cost type.
It is always good to remember each insurance company may have their slightly different version and approach when it comes to tools and features associated with Universal Life insurance. Even though the gest of the Universal Life product may be the same, it is highly recommended to seek professional advice from an insurance broker.