There are a number of life insurance policies for people from every walk of life in Canada. However, there are tons of things every Canadian should know about before applying for insurance. Life insurance has several types, and each has particular benefits and drawbacks.
One such type is Universal Life (UL) Insurance.
This blog includes everything you need to know before buying UL insurance, what it is, how it works, and its advantages and disadvantages, so read on!
What is Universal Life Insurance?
Universal life is a type of insurance that is permanent or is for life. A person is insured for the rest of their life with Universal Life Insurance. All they have to do is pay their premiums/payments and achieve other policy requirements in order to maintain their policy coverage. Just like other permanent life insurance, universal life insurance has a savings component that comes with lifelong protection. It is known as cash value. When the insured person passes away, their insurance benefits will go to their beneficiaries. UL insurance will cover your loved ones in your absence.
This type of insurance is a bit cheaper than whole-life insurance, and you can also increase or decrease premiums to a certain level. However, make sure to pay your premiums, or else it will have a direct effect on your death benefit and could cause a policy lapse.
How Does Universal Life Insurance Work?
UL insurance is more flexible than whole life insurance. In the case of the former, the policyholders are allowed to make adjustments in their payments and death benefits. UL insurance encompasses two basic components; the cost of insurance (COI) and the cash value. The costing component and the saving component, respectively.
As the name suggests, The COI is the least premium payment necessary to keep the policy in effect. It is composed of various separate payments combined into one. For instance, mortality charges, policy administration, and additional costs to keep the life insurance policy active. COI will change from policy to policy based on the policyholder’s:
- Age
- Insurability
- Insured Risk Amount
The collected premiums above UL insurance’s cost add to the policy’s cash value aspect. As the insured person ages, the insurance cost will increase as well. However, if it is enough, the gathered cash value will pay for the increase in the cost of insurance.
Advantages and Disadvantages of Universal Life Insurance
Some of its pros and cons are as follows:
Advantages of Universal Life Insurance
- Flexible Payments
Generally, UL Insurance premiums are flexible and within limits, unlike whole life insurance policies. The latter has fixed and comparatively more expensive premiums. The UL insurance policyholders are allowed to make payments that exceed the COI. The surplus premium is included in the cash value and adds interest. Or else, the policyholders can cut or skip payments without risking a policy lapse if the cash value is sufficient.
- Possible Increase in Cash Value
Just like other permanent life insurance, a UL insurance policy can add cash value in a manner similar to a savings account. The cash value adds interest according to the lowest interest rate of the policy or the current market’s interest rate, whichever one is better. Policyholders have the option to borrow against or partially remove some of the cash value as it grows.
- Potential Adjustable Death Benefit
Your policy can let you boost the amount of your death benefit, but doing so might require a physical exam. In order to reduce your premiums, you might be able to reduce your death benefit.
- Permits Policy Loans
The UL insurance policyholders can borrow money against the collected cash value without incurring any tax penalties. These loans do not need a credit check and usually have lower interest rates than those offered for personal loans. However, loans that are not repaid will cause the death benefit to be reduced by the amount unpaid.
Disadvantages of Universal Life Insurance
- Risk of High Premium Requirements and Policy Lapse
Although lowering your premiums and making withdrawals when needed makes UL insurance flexible, you must keep an eye on your account. If your cash value reaches zero and your premiums do not allow you to pay the cost of insurance, then the chances of your policy lapsing are high.
- Returns are Never Assured
Your cash value will not do well if the interest rates are dropped. The cash value of Universal life insurance does not have a guaranteed rate, unlike whole life insurance. However, in most cases, UL insurance policies offer least rates so that the policyholders do not face huge losses.
- Taxable Withdrawals
Taxes are applicable when Universal life policyholders withdraw a certain amount of cash. Generally, life insurance governs by the first in, first out (FIFO) method. It means the policyholders receive their in-contract investment before getting any benefits from the policy. But, your withdrawals will be taxed if you take out more money than you contributed to the insurance.
- Loss of Cash Value at Policyholder’s Death
The insurance company keeps the cash value of the account when a UL insurance policyholder dies. The policyholder’s beneficiaries only get the death benefit, as the cash value could only be used by the policyholder when they were alive. Certain life insurance plans, however, let you increase the death benefit as your cash value increases.
Conclusion
Having life insurance is a smart choice when you want to leave something behind for your loved ones after your demise. There are several smart choices that you can make when it comes to choosing a life insurance policy. One such choice is universal life insurance (often confused but different than joint life insurance). This blog has provided you with a detailed guide to understanding universal life insurance in Canada. We hope that it will help you know everything that you need to know before buying UL insurance.