Insurance protection plus investment growth potential
Most people think of life insurance as basic financial protection for loved ones. But some types of insurance can do more—including enhancing the value of your estate. Among the more flexible, and popular, types of permanent coverage is universal life.
"Universal life complements your financial picture by focusing on the opportunity to enhance the value of your estate," says Bruce Chegus, LL.B and Manager, Advanced Financial Planning Support at Investors Group.
Fundamentals
A universal life plan is a blend of life insurance protection and investment accounts. Part of the premiums you pay goes towards insurance; the rest comprises the investment component (also known as the cash or fund value). The growth within the investment component is tax-deferred, subject to certain limits. At death, all funds may be paid to the beneficiary on a tax-free basis.
You decide how the savings component is invested, choosing one or more of the options provided by your insurance company. A wide range of investments is available, including those whose returns are linked to equity or bond market indexes, money market accounts and guaranteed interest accounts.
Flexible features
Most insurers allow policyholders to tailor the frequency and level of the premium payments, subject to government mandated maximums. Yearly limits are based on your age, actuarial calculations and the face amount of the policy. The deposits must be large enough to cover the ongoing costs of the life insurance component under the contract.
This flexibility allows policyholders to adjust payments to suit their financial circumstances (as long as the minimum requirements of the policy are satisfied). It also means the focus of a policy purchased at one stage of life as a means of insurance protection can be shifted toward tax savings later in life, when increased cash flow allows it.
The payout
Upon your death, your beneficiaries will receive not only the face value of the policy's life insurance, but also the accumulated value of the investments if this death benefit option is selected. Both are usually passed along tax-free.
You can also tap into the cash value of the policy during your lifetime, although doing so has potentially negative side effects. Not only do you curtail the tax-sheltered growth of the investment portion, withdrawing cash can trigger taxes (and possibly early withdrawal penalties). Withdrawing any portion of the savings component will reduce the amount available to your beneficiaries at the time of your death.
Who should consider universal life?
Universal life is best suited to those who have additional capital above and beyond a basic investment plan.
"You should view it as an add-on after the financial basics are taken care of, such as an RRSP and paying down non tax-deductible debt," says Chegus. "It's ideal for those families who want estate values to increase and who are willing to pay a little more for flexibility in their insurance planning."
Universal life is also an excellent way for those who regularly make maximum Registered Retirement Savings Plan (RRSP) contributions to further the potential for tax-free investment growth (recognizing, of course, that deposits to a universal life contract are not deductible like RRSP contributions).
If you think universal life insurance might meet your needs for insurance protection plus tax-deferred investment growth, talk to your Investors Group Consultant.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
