Term Insurance Quotes Toronto

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The Income Tax Act stipulates that the growth of an “exempt” life insurance policy reserve is

tax-deferred until cashed-in by the policyowner. If the life insured dies before the policy is

cancelled, the death benefits are paid tax-free to the beneficiary. That is, the deferred tax is

never paid.

Universal life was designed to permit policyowners to take full advantage of the deferred

taxation provisions of the Income Tax Act.

A universal life insurance policy consists of three basic elements:

    an investment account
    the cost of administration
    life insurance

Universal life has unbundled these elements. In other words, each of the elements is priced

separately and can be changed without directly impacting the other factors. For example, it

is possible for the policyowner to increase the amount of insurance coverage (thereby

increasing the mortality costs within the policy) without causing a corresponding increase in

premium deposits. Similarly, the policyowner could withdraw some of the cash from the

policy without having to cancel the policy or pay interest on a loan.

When a premium is paid, the money goes into an investment account where it earns income.

The cost of life insurance (mortality costs) and administration are taken from the investment

account. This mechanism is important because it allows untaxed (tax-deferred) investment

income to be used to pay for the cost of insurance and administration.

Consequently, the cost of insurance in a universal life policy can be as little as half of the cost

of permanent insurance, which is paid for with after-tax dollars. The premium paid for

universal life can be flexible, provided that enough money remains in the investment

account to fund the mortality costs and administration.

Unlike traditional plans, where the policy account value is invested in a portfolio by the

insurance company investment managers, universal life offers the policyowner the option to

choose the weighting of investments within the account from a wide range of options,


    savings accounts
    guaranteed term deposits
    funds that track specific market indices (linked accounts)
    segregated funds and mutual funds

What are the Advantages and Disadvantages of Universal Life?


    UL takes maximum advantage of preferential tax treatment of life insurance policies.
    The insured can build a significant investment portfolio that includes tax-deferred income.
    Tax-deferred investments can be totally or partially withdrawn at any time.
    At death the total value of the investment account will be paid tax free to the beneficiary,

in addition to the life insurance benefit.
    The mortality charges and administration costs will be paid from untaxed investment

income. The insured accepts the risks that future investment returns may be inadequate to

fund the cost of insurance.


    The insured accepts the risks that future investment returns may be inadequate to fund

the cost of insurance.
    Policies that are funded with the minimum required premium are expensive relative to

term-100 policies because of the extra administration costs.


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