What Universal Life Insurance Means and its Pros and Cons
Universal life insurance is a lot like whole life insurance but the two are not to be confused. Universal life policies have a few different types to choose from and offer investment potential that goes beyond the basic cash value feature of a whole life policy.
What is Universal Life Insurance?
The “universal” part of universal life insurance is, like whole life, so long as you pay your premiums, you are insured, no matter how old you get — so there is no end date and no need to requalify. The premium you pay doesn’t just cover your insurance needs either, part of it is redirected to an investment account, also referred to as the “cash value” aspect of the policy. This cash value can be invested and used to grow your wealth.
Pros
One of the great things about universal life insurance is the fact that you are insured no matter what, as long as you pay your premiums. On top of that is the income potential from the cash value aspect of the plan. Potentially you could get some good gains from this investment, and even reap some tax benefits with the dividends you receive.
There are also different types of universal life policies, which offers you a lot of flexibility to decide how much risk you’re willing to take on with your cash value on investments. Choices are good. Depending on when you set up your policy and how you structure your premiums, there is the potential to build a good sized cash value.
Cons
Depending on which type of universal life policy you select, you may not get a guaranteed premium. It could change regularly to accommodate stock market conditions, and that can be strenuous for someone on a fixed income or strict budget. And while you may not be on a fixed income now, it’s important to look into the future and consider that one day you might be, so having affordable premiums is important.
The universal life policies that involve stock investments are higher risk, and bad market conditions could be little or no growth in your cash value (the reverse is true too, though) and the policies that aren’t involved in the markets don’t build up a lot of cash value.
Another negative point to think of is the amount of fees you may have to pay for investment transactions, and what percentage of the gains the insurer will want to claim.
A Great Option for Youth
Universal life insurance in Canada is a great opportunity for young people to build up cash savings while also paying for life insurance. When you are young and healthy your insurance premiums are low, so for example, if you pay $100/month for universal life insurance in your 20’s, $20 of that payment could go to cover your insurance needs, and $80 could go toward your cash value. As you age those numbers adjust to account for your insurance expenses increasing as you age. So, by the time you are 50, $60/month could be going toward your insurance and only $40 toward your cash value. This is why it is better to start these policies at a younger age, allowing you to bank much more cash value in the early years.
Although the above example is purely to illustrate the concept, and is in no way meant to represent actual costs, it does give you an idea of how the system works. It is important to note however, that this example does not account for shifting stock markets or interest rates, which would affect both your cash value and your monthly premium amount — so keep that in mind.
Learn More
Choosing life insurance is an important decision, and one you should not make alone. Consult with a professional insurance broker to help you understand all your options and find a policy that is tailored to your needs. Finding affordable universal life insurance in Canada is possible, you just have to know where to look!
