Those looking for life insurance have a few options. If you’re looking for a permanent policy that will cover you until you pass away, universal life insurance has plenty of benefits. But what is universal life insurance and how does it differ from other insurance types?

That’s what we’re going to cover here. By the end, you’ll have full clarity on what this policy is and whether or not it’s right for you. Let’s start by covering what it is exactly.

What is Universal Life Insurance?

When choosing a life insurance policy, you can have term life insurance which covers you for a specific period. The alternative is choosing permanent life insurance, and universal life insurance falls into this category.

As long as the premiums are paid, it will provide coverage for the lifetime of the policyholder. The crucial difference with this policy is its investment component. Attached to the policy is a cash value which grows over time based on interest rates and the performance of underlying investments.

How Does Universal Life Insurance Work?

Now that we have a brief overview of what universal life insurance is, let’s dig a little deeper into the different aspects of this policy.

Components of Universal Life Insurance

Death Benefit – This is the amount paid to your beneficiaries upon your death. There is some flexibility in this as it can be a fixed amount. It can also increase with the cash value amount depending on your preference.

Cash Value – A portion of your premium will go into an investment account, which will then accumulate the cash value. This grows over time based on the investments you select. While there is some risk here, these are often low-risk investments such as GICs or mutual funds.

Flexibility in Premiums and Death Benefits

The reason many choose universal life insurance is its flexibility. Policyholders can adjust both the premiums and death benefits as their situation changes. After the initial cost to cover the insurance, you can choose to pay more or less into your policy. This can be beneficial during times of financial uncertainty. And as we mentioned, the death benefit can also be amended, depending on the conditions of the policy.

The Investment Component

The investment component can sound complicated but it is quite simple. As a policyholder, you will be able to choose between a few different options. There are usually three types available:

Guaranteed Accounts – These accounts offer a fixed interest rate similar to savings accounts.

Index Accounts – These are tied to the performance of market indices, like the S&P/TSX.

Equity Accounts – For higher potential returns (but also higher risk) you can choose to invest in stocks or mutual funds.

Tax Advantages

The final aspect to know of universal life insurance is the tax advantages. The cash value grows on a tax-deferred basis, meaning you don’t pay any tax on investment gains if they stay within the policy. It makes it an attractive way to build wealth over time.

Pros and Cons of Universal Life Insurance

There are both ups and downsides to this policy, so let’s check them out.

Pros of Universal Life Insurance

Flexibility – Other policies are inflexible leading some policyholders to feel stuck. If your financial situation changes, this policy can change with it.

Investment Options – The investment options allow you to have more control over your cash value. You can align your policy with your own risk tolerance and financial goals.

Tax-Deferred Growth – Universal life insurance is a tax-efficient way to grow your wealth.

Potential for Additional Income – The cash value can be accessed through policy loans or withdrawals. This may reduce the death benefit but can be a crucial source of income for a wide range of reasons.

Lifetime Coverage – With regular payment of premiums, you can have peace of mind that you have lifetime coverage.

Estate Planning Benefits – The death benefit is usually paid tax-free to the beneficiaries. This can make estate planning for after your passing much easier.

Cons of Universal Life Insurance

Complexity – Many people are put off by the added complexity of this policy, especially when compared to other types of life insurance. However, even though there is a learning curve, you’ll quickly understand how this policy works.

Investment Risk – With whole life insurance, the cash benefit is placed into savings, which is less risky. Universal coverage offers more growth potential, but also risk. This doesn’t affect the death benefit but can lower the cash value.

Higher Costs – As with other types of permanent life insurance, it is more expensive than term life insurance.

Potential for Policy Lapse – Without a significant cash value, your policy may lapse if you are unable to make premium payments.

Reduced Death Benefit with Withdrawals – Making withdrawals can reduce the death benefit, undermining the original purpose of the insurance.

Is Universal Life Insurance Right for You?

Hopefully by now, you have a much clearer idea of what this policy entails. However, it’s a great idea to speak to an expert to guide you through the decisions you’ll need to make. This is why using a broker can be a great idea. They’ll not only be able to answer your questions but also search multiple providers to find you the best quote.

Final Thoughts

Before you choose universal life insurance, it’s important to be comfortable with the choices you need to make. While there are huge advantages, permanent life insurance is a significant decision that shouldn’t be taken lightly.

If you’re interested in universal life insurance, then contact Marathon Insurance today. We’ll be happy to talk to you in detail about your life insurance options and how they can fit in with your family circumstances and budget.