Universal Life Insurance: Demistifying Costs of Insurance Options

Posted on July 7, 2009 and updated August 9, 2010 in Life Insurance Canada News 4 min read

Universal Life insurance offers many advantages when compared against other permanent insurance policies.

In particular, when compared with Whole Life, Universal Life allows the applicant to unbundle the investment component of the policy. On Whole Life policies, the investment component is built into the policy and premium. With universal, the investment component is seperate – premiums can increase or decrease.The applicant can also choose between a level and increasing death benefit. Most Universal Life policies offer a myriad of investment options. BMO Assurance Company (Formerly AIG Insurance) offers over 400 investment solutions in its Universal Life plan, ranging from guaranteed investments, like GICs to, higher risk, specialty mutual funds.

When compared with Whole Life, Universal Life allows the applicant to unbundle the investment component of the policy. On Whole Life policies, the investment component is built into the policy and premium. With universal, the investment component is seperate – premiums can increase or decrease.

The crux of any insurance product is the risk charge associated with the plan. This is where Universal Life can get confusing. Most insurance products have one risk charge, i.e.your premiums are level for a specific term or for life. Universal Life insurance allows the applicant to choose between different risk charges. Some companies even allow the applicant to segment the policy into different risk charge components. There are generally four “cost of insurance” options on a Universal Life policy. The following is a snapshot of how each work:

1. Increasing Cost of Insurance: On this option, the charge starts very low, but increases on an annual basis until age 100. The advantage here is that the cost of insurance is very low in the intial policy years, which allows the applicant to maximize the cash value in the early policy years. The disadvantage is that the cost of insurance becomes extremely high in the later policy years and if the underlying investment under performs, it may be insufficent to carry on the coverage.

2. Level Cost of Insurance: With this option, the cost of insurance is based on Term 100 costs, i.e. the cost of insurance never goes up as the insured gets older. The advantage of this option is cost certainty for the insured (always knowing exactly how much it will cost). The disadvantage is the intial cost is much higher so the cash value isn’t as significant in early policy years.

3. A Hybrid Insurance: Many insurance companies offer this option, which includes an increasing cost of insurance with the option to switch to a level cost at a certain point and time. This hybrid scenario is designed for people who want to maximize their cash value in the early policy years, but prefer to have cost certainty in their policy in later years.

4. A Limited-pay Insurance: In recent years, insurance companies have introduced a Universal Life policy with a Limited-pay option. These policies are based primarily  on a non-participating Whole Life plan, i.e. the cost of insurance can be paid-up in 10, 15, or 20 years. Many huge national insurance companies are now offering this type of plan including, Manulife, Canada Life and Industrial Alliance.

Remember, you can get a free Universal Life Quote at our Universal Life Instant Quote Page, or contact us at 1.866.899.4849. 

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