If you were to die tomorrow, would your family be taken care of? This might seem like a morbid question to ask, but it is valid. When you find yourself asking this question, you might wonder about how much life insurance you need.
Unfortunately, tomorrow isn’t promised. That’s why if you have a family, you need to ensure they are taken care of if you were to pass away suddenly. That’s where universal life insurance could help you. If it’s your first time purchasing it, you probably need to learn more about how life insurance works in Canada before making a decision.
Shopping around for life insurance can be a bit unnerving at first, but it doesn’t have to be. In fact, if you have a broker from BrokerLink by your side, it can be quite simple. Universal life insurance is the most common type to have. That’s why we have prepared a guide to help you understand what a universal life insurance policy is and how to get one. It’s time to learn more about universal life insurance.
Understanding universal life insurance
What is universal life insurance? How does universal life insurance work? Universal life insurance is a type of permanent life insurance. In other words, it covers you for your entire life instead of for a set term. People opt for this type of policy because it offers more flexibility than its counterpart, but it’s important to note that it will cost more. Another benefit of this type of policy is that it allows you to build cash value or donate specific amounts of money to a charity or beneficiary. Continue reading to learn more:
Cash value explained
Cash value is the amount of money that you accumulate as you pay your monthly life insurance premiums. At the end of the term, this is added as additional money on top of the initial death benefit. When it comes to accessing cash value for your permanent life insurance policy, you have a few options. To access it, you can take a loan, withdraw or surrender.
With a withdrawal, cash value must be immediately available. What does this mean when you take it out? Every dollar you can take out is taxable. This portion depends on the amount of the adjusted cost basis.
Types of universal life insurance policies
There are multiple types of life insurance available. There’s term life insurance, whole life insurance and universal life insurance. What you might not know is there are multiple types of universal life insurance policies. As mentioned earlier, universal life insurance is a type of permanent life insurance, but it’s quite multi-faceted. Here’s what you need to know about the various types of universal life insurance policies:
Guaranteed universal life insurance
The main benefit of guaranteed universal life insurance is that the death benefit and premium payments will not change over the years. When you choose this option, you will have to select an age for the policy to end. Remember, a higher age will cost more. However, it’s important to note that guaranteed universal life insurance doesn’t carry a lot of cash value because it is one of the more affordable policies you can purchase.
Indexed universal life insurance
Indexed universal life insurance offers lifelong coverage to its counterparts with extra flexibility when it comes to death benefits and premiums. The cash value is attached to a stock market index, so when you pay your premiums, a decent amount of money pays for policy fees and charges. What’s left contributes to cash value. However, the money you invest goes more into bonds. The main purpose of the index is to determine cash value increases and losses.
Variable universal life insurance
The name says it all — variable universal life insurance lets you vary your premium payments and death benefit amounts as long you don’t surpass policy limits. However, you need to actively pay attention to this policy as you need to manage your cash value investments and choose a fixed interest rate for such accounts. Good investment skills will allow you to get better returns on your cash value. However, you also risk losing some of the cash value if the investments don’t work out well.
Factors to consider when purchasing universal life insurance
Before you reach out to your insurance company about universal life insurance, there are a few aspects to consider. Purchasing a life insurance policy is a big deal and shouldn’t be taken lightly. After all, it’s there to keep your family afloat after you’re gone. Keep the following in mind before making your final decision. Factors to Consider When Purchasing Universal Life Insurance:
Cost-effectiveness
When you’re purchasing a universal life insurance policy, you should think about what you can comfortably afford. After all, you don’t want to have a policy that you can’t make payments for on time. Missing payments can cause a lapse in coverage.
You should also reach out to multiple insurance companies. If you aren’t comfortable doing this, ask your insurance broker to do this for you. By working with a broker, you can ensure you afford the payments for the entirety of your coverage period.
A timely payout
When choosing an insurance company, make sure you choose one that provides a payout immediately. In other words, the payout or death benefit should be paid out to your family members right away. It will allow them to support themselves in their time of grief.
Be skeptical of companies that don’t require a medical exam to qualify for coverage. When it’s too good to be true, it probably is. If you aren’t asked to undergo a medical exam, there may be a longer waiting period before the death benefit can be paid out to beneficiaries — sometimes, this can be a few years.
Your insurance provider’s reputation
When you choose a life insurance provider, you are trusting the company to protect your love when you’re no longer able to. Pay attention to what other customers are saying about the provider you’re considering. Feedback from actual customers speaks volumes.
Your insurance provider should have a solid history and plenty of positive customer reviews to back it up. When in doubt, family members and friends might be able to provide some recommendations.
Acceptance of your health history
Your health history plays a significant role in how much insurance coverage costs. Because of this, you should look for an insurance company that will treat your health history fairly. This makes finding a universal life insurance policy for a decent rate much more feasible.
For example, if you have a history of diabetes, you will pay more for your policy if a company is not as lenient. Shop around to find the best rate for your health history.
How much does universal life insurance cost?
The most common question we get is, “How much does life insurance cost?” The price of a universal life policy will vary depending on a number of factors, including your insurance provider and the amount of coverage you want to have. Generally, it costs between $100 and $200 per month to maintain a basic universal life insurance policy. Reach out to an insurance broker to ensure you find a company that offers you the coverage you need at an affordable rate.
Reasons to consider a universal life insurance policy
Universal life insurance offers several advantages over its counterparts. The most obvious one that we already mentioned is that it provides coverage for your entire life. This type of policy can be issued on a single-life or joint-life basis. That means the death benefit can be paid at the first death or last death.
Additionally, universal life insurance offers a lump-sum tax-free benefit to beneficiaries after the policyholder passes away. It is ideal for those looking for permanent life insurance protection. Over time, there is an opportunity to receive tax-advantaged policy cash values. It assists beneficiaries with covering expenses such as funeral arrangements and unpaid debts. Some of the reasons to choose universal life insurance include the following:
Premium payments are flexible
Universal life insurance policies don’t have fixed premiums like some of their counterparts. In other words, you can choose how high your rates are within your policy limits. Payments that are higher than those listed in the insurance contract are allowed. Any extra money you contribute can be added as cash value, which can accumulate interest over time. When there’s enough cash value, policyholders can sometimes lower or skip premium payments without their policies lapsing.
A death benefit with flexibility
Having a flexible death benefit can be helpful. Universal life insurance policies let you increase the amount of your death benefit. However, you may have to undergo a medical exam to do so. There’s also the option of lowering your death benefit amount to decrease your premiums.
Cash value can grow
Similar to permanent life insurance, a universal life policy allows you to accumulate cash value like you would with a savings account. Over time, the policy’s cash value can earn interest depending on the market and the policy’s minimum interest rate, depending on which amount is higher. Over time, policyholders can withdraw money or take the cash value out as a loan as the amount increases.
Ability to take out policy loans
The insured person also has the option of borrowing from the account’s cash value component without the threat of tax implications. The positive side of things is that the interest rate on taking on a loan is usually lower than that of a personal loan, and no credit check is required. Be careful because with this type of permanent life insurance, not paying back the loans can reduce the guaranteed death benefit.
Risks of choosing this type of permanent life insurance
Like whole life insurance and its counterparts, this type of permanent life insurance policy isn’t without its risks. When you choose this option, you are taking a couple of chances. Yes, you can alter your premium payment, which is an appealing personal finance option. However, even with that and guaranteed interest options, you can’t be too sure of yourself. You need to know when to avoid purchasing insurance to find the right policy. Here are some factors to take into consideration when you’re searching for affordable coverage:
Premium payments can increase, and your policy can lapse
Being able to lower your monthly insurance premiums can be helpful because it reduces the financial burden associated with lifetime coverage. After all, you are paying premiums until you pass away. However, when you adjust how much you pay, you have to keep an eye on your account. That’s because if you no longer have a positive cash value and you don’t pay enough to cover insurance costs, your policy can lapse.
No guaranteed returns
Interest rates can fluctuate. When they decrease, your cash value might not perform too well. With universal life policies, you do not have a guaranteed rate. In other words, you can only get a minimum rate to attempt to limit your losses. This is why you have to be careful when opting for a universal life insurance policy. There are often many stipulations.
Not everything is safe from taxation
If you have a universal life policy, you can withdraw part of the cash value component. However, it’s subject to taxation. Universal life policies are taxed on a first in, first out (FIFO) basis, which means the policy owner has to receive the investment listed in their contract prior to gaining money and being taxed on it. Remember that if you withdraw more than what you invest into your policy, you are subject to taxation. Speak to your broker to find out if your life insurance is taxable in Canada.
Cash value disappears upon death
After you pass away, your life insurance company will keep any potential cash value growth that you’ve accumulated over the years. Beneficiaries will receive your policy’s death benefit, but the cash value is only accessible when the policyholder is alive. It’s important to note that some life insurance policies let you increase the death benefit amount when you accumulate more cash value.
Riders you can add to your universal life insurance policy
Similar to other types of life insurance policies, you can add riders to your universal life insurance. Life insurance policies must contain certain types of coverage, and you can find out which ones you need by reaching out to your insurance broker. Think of these like endorsements you add to your car insurance policy. It’s a way to add coverage features or guarantees. However, you do not have to add these to your policy — they are completely optional. Let’s discuss what these riders are and how they can benefit you:
No lapse guarantee
You should always get your premium payments to your insurance company on time. This keeps your policy intact and makes a no-lapse guarantee worth it. With this rider, paying for it on time annually is worth it, even if it’s higher than the billed minimum premium. This is because your death benefit remains the same even if your cash value goes down.
Waiver of cost of insurance
If you suddenly become disabled, having this rider listed on your policy pauses premium payments. However, there’s one important thing to note: Your policy will remain in effect, but the cash value will not increase. Adding this rider to your policy is only necessary in certain situations.
Accelerated death benefit
Death is often unexpected, which is why you should consider opting for an accelerated death benefit. It will help you if you are diagnosed with a terminal, critical or chronic illness while you are still alive. This allows the death benefit to be paid out sooner. However, you should ask your insurance company about what illnesses are covered before adding this rider to your policy.
Family rider
The whole point of purchasing life insurance is to make sure your family is financially taken care of if you were to pass away suddenly. The two main classifications of a family rider are child term riders and spouse riders. Basically, this allows you to add coverage for family members who weren’t previously listed on your policy.
Accidental death
Let’s face it — life is unpredictable, and accidents happen. You could pass away as a result of an accident. Adding this rider to your policy will increase the amount that your policy pays out if you die in or because of an accident.
Guaranteed insurability
Obviously, we don’t wake up thinking our days are numbered. That’s why guaranteed insurability is an ideal rider to have on your policy. It lets you increase your death benefit at specific life stages or reach policy anniversaries. No health exam or questionnaire is required to do this. An example of increasing your death benefit is if you develop a medical condition shortly after having a child.
What is the difference between universal and whole life insurance?
Universal life insurance and whole life insurance have some similarities. Not to state the obvious, but both are intended to last for your whole life rather than a set period of time. The biggest difference between the two is how much you pay. You will pay more for a whole life insurance policy because guaranteed and non-guaranteed cash values are available. Because the cash value is based on the way the insurance company’s asset managers manage a pool asset, the cash value will not decrease.
In contrast, universal life insurance allows policyholders to choose interest and investment accounts. As a result, the cash value, death benefit, and premium are determined by how these accounts perform. This causes the cash value to go up and down depending on how the investments perform. Below, we will explore the differences between both types of life insurance in regard to the following aspects:
Death benefit
When it comes to death benefits, whole life insurance guarantees them as long as the premiums are paid on time. Single-life and joint-life options are available. From there, the death benefit is paid out to the beneficiaries following the first or last death. On the other hand, universal life insurance is more flexible. This means if you have less time to accumulate money, there is still the option of maximizing the death benefit for estate planning purposes.
Fitting life insurance within your estate planning is essential. These policies also offer single-life and joint-life options that allow the death benefit to be paid out after the first death or last death.
Premiums
Whole life insurance premiums are set in stone after the policy is issued. Universal life insurance offers flexible premiums. In other words, you can choose how much premium you want to contribute as long as it's above the minimum amount required to keep your policy in effect. It also has to be below the maximum amount set by the CRA to avoid taxation.
Cash value
Whole life insurance offers guaranteed and non-guaranteed cash values that can grow annually. The growth is dependent on the pool of assets taken care of by your insurance company’s asset managers. Universal life insurance policies allow you to choose interest or investment accounts. The cash value, death benefit and premium payments are altered by how such accounts perform.
Reach out to BrokerLink to find insurance policies that suit your needs
From your premium payment to the cash value portion available, there’s a lot to think about when choosing a life insurance policy. Luckily, a universal life policy can offer you flexible premiums as long you pay the minimum premium that’s outlined in your policy. Finding life insurance isn’t an easy task, though. You’ll need a broker to help you out. You can also learn more by reading our guide to life insurance in Canada.
Now you understand what to look for in a good life insurance policy. The next step is finding a provider who will keep you and your family. BrokerLink can help. Call, get an online quote or visit one of our Canada-wide community branches today.
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