Universal Life Insurance – What it Is and How It Works

What is a universal life insurance policy?

Universal life insurance is a form of permanent insurance. Where term insurance policies end and require renewals, a permanent policy is in force for the lifetime of the applicant (unless otherwise stated in the contract) as long as the premiums do not lapse. Universal life insurance is further unique in that it has a tax advantaged savings component. This savings account can be used to support the policy, help build wealth, help fund retirement – its up to you! People use universal life insurance in Canada to combine long-term savings with lifelong insurance protection. So, if you’ve ever wondered, “how does universal life insurance work?” read on. This article will explain universal life insurance in Canada and inform you on where to find quotes.

Components of universal life insurance

There are two main components of universal life insurance. The first part is the life insurance policy. This provides a sum, also known as the benefit, to the life insured’s beneficiaries upon death. Note how we say, “life insured.” This is because the policy holder and the life insured do not have to be the same person. A parent can take out a policy for their children, spouses can take out a policy for each other, and sometimes businesses take out a life insurance on their key employees (however, business life insurance is a whole different topic). When setting up universal life insurance in Canada, the applicant, life insured, and beneficiary can be different people or entities. 

The second part of universal life insurance is the cash savings account. The premium is split between the cost of insurance and cash that goes into this account. The cash is invested and grows over time. That is, it is supposed to grow over time. Unlike whole life insurance, where the cash values are guaranteed, universal life insurance’s investment portion is not guaranteed. This helps reduce the cost of the policy, but introduces an element of risk for the policy holder. That being said, most – if not all – universal insurance companies are very well-established businesses with long histories and sound investments.

The cash savings grow tax sheltered as long as the MTAR rule is not crossed. MTAR stands for Maximum Tax Actuarial Reserve. It limits how much cash can be in this account before it triggers taxation. The goal is to prevent tax fraud or tax evasion. This is just one of many reasons why you need to work with a universal insurance company to set up this type of policy. The MTAR rules and limits for your particular policy must be clearly explained and understood.

A final component of your universal life insurance policy is a rider. There could be one or more depending on what your insurer offers. Riders customize the policy so it better suits your needs. For example, adding a critical illness rider can give you a lot of extra protection.  Critical illness riders are living benefits, meaning they pay out to you while you are still alive. They are trigged by your diagnosis of a serious or life altering disease or event, but it doesn’t have to be fatal. A tax free lump sum is the benefit, and you can do what you wish with it. Some people pay off debts, others enjoy their bucket list, and some use the funds to take much needed time off work. 

Why work with a universal insurance company?

There are many ways to get life insurance. Online or over the phone are popular options. However, when it comes to universal life insurance, work with an agent or broker from an established company. These policies have a lot of moving parts and can be tricky to set up. If not set up properly you can run afoul of the MTAR rule or miss your target goal for long-term savings. Remember, these policies are designed to last a lifetime and a long time horizon is needed for the cash savings to grow – not only do you need a long-range vision to get the most of the plan, you need to work with an agent or broker annually to ensure you are remaining compliant with CRA, and that the policy continues to meet your needs. 

Is universal life insurance expensive? 

The cost of universal life insurance is higher than term, but depending on how it is set up, can be lower than whole life insurance. Getting and comparing universal life insurance quotes is a great way to find an ideal rate that fits your budget. That being said, the younger you are, the cheaper the policy. In fact, consider taking out a policy in your early 20s – or younger – to reap very long-term low premiums for life. Remember, term is cheap initially, but it gets very expensive as you age. Paying just a little more while you are younger saves you quite a bit on your premiums later on. Besides, the earlier you buy a policy, the longer your cash has time to grow.

Where to get universal life insurance quotes?

While it is advisable to work with a professional, you can start the process of finding a policy by getting universal life insurance quotes online. This gives you a starting point for a discussion with an agent or broker.

However, there is an easier, more exact way to get universal life insurance quotes and that is to go directly to a broker.

There is a difference between a life insurance broker and an agent, even though the terms are sometimes used interchangeably. An agent works for one company. For example, if you called Manulife or Sun Life Financial, you would talk to one of their agents. Brokers, on the other hand, do not work for any one company. They are licensed just like agents, but have access to the polices of a vast array of Canadian insurers. Sometimes they work with 20 or more insurers – including the companies that have their own agents. Some brokers work alone, others join brokerage firms. 

The advantage of working with a broker for universal life insurance quotes is ease of access to a large variety of quotes. Instead of comparing just one or two quotes on your own, the broker shops the market, relies on their network and broker support professionals at each company, then pours over the results to match you with the best policy. Price is a determining factor but so are your long-range financial goals, the types of riders you may need, etc.

Does it cost money to use a broker for universal life insurance?

No. Broker services are free to you. They are compensated by the life insurance company for whom they sell a policy. This empowers brokers to focus exclusively on you and not on meeting a quota or promoting one product over another. With how long-term and multifaceted universal life insurance policies are, one can see how having a broker procuring quotes and explaining the applications, contracts, and fine print is important.

Where can I find a broker that specializes in universal life insurance?

LSM Insurance is a Canadian life insurance brokerage firm that brings together some of the best insurance professionals in the country. Brokers work coast to coast to ensure you get the policy you need. Contact LSM insurance today for a quote or to learn more about universal life insurance.

Author: Oliver Curtis

Hi there. I’m Oliver. I’m just a young boy from the outskirts of… Okay, that’s a lie, I’m not a young boy anymore, although I certainly feel that way at heart.