Sometimes insurance companies confuse us with difficult, hard to pronounce or hard to understand terminology when it comes to life insurance. Today I would like to explain in easy way what is a Universal Life Insurance.
The short form of Universal life insurance is UL policy. It is a permanent coverage, meaning it will cover the insured person during their whole life. Universal life insurance has a death benefit (the amount your beneficiary will receive when the policy is paid out, it also has a cash value account attached to it. It is an investment saving element. So how does it work?
Let’s say you are planning to buy life insurance, and you really like the permanent option as your desire is to leave some money to your kids when the time comes. Under the Universal Life insurance, you will be asked to pay monthly fee for your insurance, but you will also have a choice to overfund your policy, meaning, each dollar you put extra into the policy will go into your cash value account. Your cash value account works like a savings account, you choose investments in it. The benefit of the cash value is that your money accumulates tax free, you are not asked to pay taxes from that account.
You may also borrow against the cash value account without tax implications. Interest will be calculated on the loan amount. Unpaid loans will reduce the death benefit by the outstanding amount, with unpaid interest on the loan deducted from the cash value. Your cash value can be added to your death benefit or you can use this money as an retirement income, vacation savings, emergency savings, or simply if you have enough money saved in your cash value account you can stop paying for your life insurance or skip a payment. Overall this is the most flexible plan available on the market for clients who are looking for permanent coverage.
The investments in your cash value are not guaranteed as they work the same way as your mutual funds that you might have with your bank. It is important and I do recommend highly to review your UL plan once a year with your advisor. You want to make sure your policy is doing well with your investments. Sometimes you can make changes to the structure of payments, depending what your plans and goals with the policy are.
This type of a plan should not be left in a drawer for years to come. Before making the final decision, I advise you to do your research. I always recommend to work with large, well known, high quality Canadian Insurance companies as your life insurance will be with you for a long time.