Universal Life Insurance Vs Whole Life - Universal life insurance may be something you've heard about on TikTok or in the news, especially a type called indexed universal life insurance.
You may have heard that it is a good investment strategy and that it is basically a "cheat code for the rich".
Universal Life Insurance Vs Whole Life
There's another side to the story, too: that universal life insurance costs much more than the cash value it provides, and that it's full of hidden fees and fine print.
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In this post, our certified life insurance consultants provide the real facts about the ins and outs of universal life insurance in Canada, how cash value works, and whether indexed universal life insurance is really all it's cracked up to be.
Universal life insurance is a type of permanent life insurance coverage that covers you for your entire life as long as you continue to pay the premiums.
Part of what you pay goes toward the life insurance itself, while another part is divided between the savings and investment components.
Insurance companies introduced universal life insurance policies in the 1980s. Since then, they have been selling widely, though universal life's popularity has waned, as the Wall Street Journal reports.
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There are plenty of ways to customize them, but you should also monitor them closely to make sure the investments are working and adjust as needed.
If investments continue to underperform, your premiums may increase and you may not be able to pay your policy, which means it will lapse.
In fact, almost 88% of universal life policies never pay out. This is because people let their policies lapse, often because they can't pay the premiums.
The cash value portion of your policy may increase or suffer losses as the investment portion fluctuates.
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This portion of the cash value is often what draws people to universal life insurance because they may know enough about it to realize that you can get money out of the policy by withdrawing or borrowing funds.
Universal life insurance and whole life insurance are types of permanent insurance coverage, but they differ in cost and flexibility.
With this type of insurance, you pay your fixed premium and the money in your imaginary bucket stays constant. The money accumulates in your bucket, with part of the money in insurance premiums and part invested.
This can be seen as the safer of the two options, as your money usually goes into a low-risk fund that you don't need to worry about. In fact, your insurer guarantees a return.
Indexed Universal Life Archives
With universal life insurance, the amount in the bucket can fluctuate. Why? The cost of insurance could increase and erode what you invest.
Investments held in the vat may also underperform, so you have to pay much more in premiums. If you do not pay the required amount, your policy may lapse.
With Universal, you also have some flexibility in what your funds are invested in. You can also choose whether you want to pay your premiums monthly or annually.
Whole life insurance has a fixed monthly cost that stays the same over time. It may be more expensive upfront, but it is stable.
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Universal life insurance, on the other hand, may be more affordable at first, but it will get more expensive as you get older.
The idea is that you have more flexibility in choosing how high your premiums are within a specific range set by the insurer.
This range will always cover the cost of insurance, also known as a death benefit, and the cost of providing the service to you through administrative fees.
If you pay more than the minimum premium, the extra amount will be added to your cash value.
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This cash value can grow over time, but it's important to remember that any numbers you predict for growth are only predictions, not guarantees.
Universal life insurance can provide a lifetime of coverage, which can be comforting when you're trying to provide a financial cushion for your family after you're gone.
The death benefit, or the amount paid to your beneficiaries, is received by them without tax implications. Some policies accumulate cash value over time.
This type of coverage typically offers flexible premiums that allow you to control and adjust how much you pay and give you the opportunity to get the cash value of the policy.
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Universal life insurance is a type of permanent insurance, which means it is meant to last your entire life and does not lapse as long as you continue to pay your premiums.
These policies usually guarantee a rate up to a certain age. Even if that age is 100, you may have to pay a significant amount to keep the policy in force if you pass that age.
However, these policies can lapse if you stop paying premiums and there is not enough cash value to cover the payments.
It's a good reason to monitor your universal life insurance coverage carefully, since you need to not only keep your payments up to date, but also make sure you're paying the right amount.
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If your policy lapses due to non-payment, you'll have to start a new policy later in life, which can be expensive.
Universal life insurance tends to be expensive and complex to administer, making it not the best option for most people who need affordable payments and a simple policy they can understand.
That being said, most young people are not in those high tax brackets. Even life insurance policies now have less tax-free space due to new tax rules in Canada that will take effect in 2017.
This means less policy funding space and fewer tax-free death benefits, making universal life insurance policies less attractive.
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The truth is that most Canadians need life insurance, at least those who have dependents who are financially dependent on them.
Term life insurance covers you during the years you need it most, when your children are young and/or your debt payments are highest.
There is a lot to learn before seriously considering a universal life insurance plan. So what are the disadvantages of universal life insurance? What are the benefits?
As a type of permanent insurance, your universal life insurance policy remains active as long as you pay your premiums.
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You can generally make adjustments to the amount of coverage and premium payments over time, providing flexibility as your life or income changes.
As you pay your premiums, a portion of the money is deposited into an account that represents the cash value of your policy and may earn interest over time.
As with most life insurance policies, the death benefit for your beneficiaries is tax-free. However, the interest earned on the cash value portion of your policy is tax deductible, which could be an advantage in your situation.
There are different types of universal life insurance, and these options give you some flexibility in choosing how the investment portion of your policy is used.
Important Things You Should Know About Guaranteed Universal Life Insurance
Universal life insurance is not an affordable option for most people. It can be prohibitively expensive, making it difficult for insurers to keep up with the payments to keep the policy active.
Term life insurance rates are some of the most affordable in Canada; and couples save 10% in their first year if they apply together.
Your insurer may return your cash value or how much you can invest in tax bills, so ask about things like the "participation rate" or contribution limits before you sign up.
There is no transfer version of these policies. You should monitor your policy closely to ensure that you are paying the correct premiums and that your cash value is not depleted. If this happens, you may lose the policy.
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While the idea of an investment stock is appealing, it's wise to take a close look at the interest rates you can earn. If you're interested in investing for your financial future, you're better off with a traditional investment account like a TFSA or RRSP.
Cash value is one of the features most people are familiar with when it comes to universal life insurance, but it takes time to develop. It is wise to have a clear idea of how long it will be before you can withdraw money or borrow in an emergency.
These policies are often sold as flexible coverage that you can adjust as your needs change over time. This may sound like a good thing, but keep in mind that increasing your coverage may require a health exam, which could lead to higher premiums.
If you have a high income and have maxed out your other investment options, you may want to consider universal life as an option. But with limited returns, it's usually not a great investment.
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There are real concerns about how these policies were sold as investments. In most cases, customers simply did not understand how the policy worked and were not monitoring it as closely as necessary.
In the worst case, the returns are exaggerated when the policies are sold, giving people the impression that they have more security than they really do.
Then, as time goes on, premiums go up, policies are insufficiently funded, and suddenly people can't afford to keep the policy active.
There are several different types of universal life insurance policies.
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