Universal Life Insurance: Pros and Cons

Posted on February 16, 2017 and updated December 4, 2018 in Insurance Types, Life Insurance Canada News 7 min read

What is Universal Life Insurance

Universal Life Insurance gives you flexible, cost-effective coverage that lasts a lifetime. It can be personalized to suit your changing needs and has a combined tax-advantage investment component that you can manage according to your risk tolerance and financial goals.

Universal Life Insurance allows you to adjust your premium payments (reasonable limits apply) as your needs or situation change.

Thus, three key features of this life insurance are:

1.Life-long coverage (unlike term life insurance)
2.Combination of life insurance and investment component

Ability to change your regular premiums (unlike whole life insurance)

Who needs to consider Universal Life Insurance?

 

It is the ideal choice for people interested in flexible coverage. Unlike term insurance, which covers for a set number of years, universal coverage protects your family for life, as long as you keep up with the premium payments giving you permanent coverage.

The policy has an investment component that gives you the opportunity to grow your wealth, so you have the option of using your life insurance while you are still alive. This means you can fund financial goals or leave more to your beneficiaries.

More on investments with Universal Life Insurance

All the premium payments you make go into a policy fund. This fund pays for the cost of your coverage plus investments. The balance remaining after coverage costs are invested on a tax-advantaged basis. There are a variety of investment options for you to choose from, based on your risk tolerance and financial objectives.

How much your investment will grow depends on the performance of your investments and the amount of your premiums. The money in the investment portion of your account is yours. You can use it to make premium payments or a source of savings. You can use it as collateral for a loan, withdraw it outright or just let it grow for financial security for your loved ones. Don’t forget that borrowing or withdrawing funds from your policy reduces its cash value.

Analyzing various Universal Life Insurance aspects

An overview below summarizes both positive and negative aspects of Universal Life Insurance

Pros of Universal Life Insurance

Cons of Universal Life Insurance

  • Lifetime protection
  • Flexible premium – you can increase or decrease your premiums depending on your budget.
  • Premium Holidays – you can use any cash value within the policy to take a premium holiday if you are short of funds, out of work etc.
  • You can get plans with a Level cost of insurance – so you are locking in at a set rate.
  • You can accumulate tax sheltered savings – although the amount of tax sheltered room decreased after Jan 1, 2017.
  • Higher initial premium than Term Insurance
  • The policies themselves can be very confusing even for certain brokers.  So if you are investigating a Universal Life policy make sure you are working with a broker who understands how the policies work.
  • Higher Management Expense Ratios (MERs) on many of the investment options within these policies.
  • Plan with Yearly Renewable Term cost of Insurance option can become unaffordable in the later policy years.
  • Many plans have high surrender penalties in the first 7 to 10 years.
  • “Cost of ‘universal life’ insurance stings – premiums could rise, although they are designed to remain steady, if the measuring index performs consistently below the anticipated rate

 

Sample Universal Life Insurance quotes

Here are a few examples of universal life insurance quotes generated as of September 2018. Please note that numbers can strongly vary based on personal profile of each applicant.

 Male, 35 years old,
non-smoker
Female, 35 years old,
non-smoker

Coverage:
$100,000

Starting at
$69.33/month
Starting at
$60.83/month
Coverage:
$200,000
Starting at
$129.07/month
Starting at
$113.15/month
Coverage:
$500,000
Starting at
$293.54/month
Starting at
$250.92/month

 

Interested in this insurance? Our brokers can help you with Universal Life Insurance quotes

 

Universal Life Insurance Sales changes

A Universal Insurance policy can be very complicated. There are so many options and variables that the average person prefers a straight-forward term policy – or so is the common belief.

Sales of universal life insurance (annualized premiums) dropped by 24% in Q2 2017, compared to Q1 of 2017. Yet in the first half of 2017, they were up 6%. Universal Life Sales sales totalled ~$62,000,000 in Q2, 2017.

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LSM Insurance
LSM Insurance

Thanks Michael. Agreed understanding what your buying is key. Many consumers got a great deal on Universal Life Policies, especially those Canadian consumers that locked in to Level Cost of Insurance plan before the recent rate hikes among Canadian carriers. But the key is to know what your buying and if you unsure get your answer in writing.

Michael Quinn
Michael Quinn

“The policies themselves can be very confusing even for certain brokers. So if you are investigating a Universal Life policy make sure you are working with a broker who understands how the policies work.”

I couldn’t agree more, Chantal. Even when explained properly, many consumers are completely unaware of what they’re getting into. I frequently speak to new clients who tell me horror stories of their policies about to lapse or lapsing – they were completely blindsided.