Consider universal life insurance if you want
- Permanent insurance coverage
- A versatile insurance plan that can be customized to fit your situation
- A long-term plan that will increase in value
- Flexible investment options that include guaranteed investments and mutual funds
- The ability to deposit into, or take money out of, the account
- To save for retirement, using a bank account sheltered from taxation
- To offset the cost of your insurance policy (if well planned, the money you save through tax-sheltered savings can help pay for, or even cover, your insurance policy)
Use universal life insurance to
- Save money for retirement, especially along with registered retirement savings plans (RRSP's).
- Develop wealth for the next generation (estate creation) through life insurance coverage that is normally greater than the accumulative amount of your premiums.
- Pay the taxes that are automatically due at the time of death, saving your estate from government tax erosion (estate preservation).
- Arrange a buy-sell agreement [link to How does universal life insurance work?] for your business, in which each partner takes out insurance on the other to provide money to purchase a deceased partner's portion of the business. Simultaneously provide a retirement plan.
- Create a legacy for your chosen charity by donating some or all of the insurance proceeds.
How does universal life insurance work?
The most versatile insurance, universal life insurance resembles a construction set full of features. You can build a personalized insurance program tailored to your needs.
The two major components are:
Savings – As the only plans in Canada, other than RRSP's, that are legally protected from taxation, universal life plans are ideal to add to retirement savings plans.
As the optional savings component, a customized investment portfolio is developed to fit your risk profile. Funded effectively, the program's tax-free savings should equal or surpass the cost of insurance after 10 to 20 years. As a result, universal life insurance can pay for itself.
Life insurance – This component provides your insurance coverage. When you and your spouse die, taxes are automatically due on your investment properties, businesses, RRSP's and RRIF's. In the absence of family cash to pay these taxes, your executor might have to liquidate assets to pay them. The money from a universal life plan can preserve your entire estate for your family.
You can also avoid final taxes by donating some or all of the insurance proceeds to a favoured charity. Completely tax-deductible, charitable gifts can eliminate all taxes in a final return, preserving the estate. None of your money goes to the government; you retain complete control over where it will go and how it will be used.
Buy-sell agreements
Universal life insurance is also used in corporate environments. As well as funding a buy-sell agreement, it also provides a retirement plan for the employee insured. In a buy-sell agreement, company partners take out insurance policies on each other to fund purchase of a deceased partner's share of the business or for continuance of the business if a significant partner dies (e.g., the brains behind a software company).
At the same time, a universal life insurance plan provides a retirement plan through its tax-free savings component. By the time the employee retires, a considerable sum (tens to hundreds of thousands of dollars) can exist in the tax-sheltered savings account. This can be withdrawn and used during retirement. Offer this to your key employees as a great bonus. It will help you attract high-quality personnel.
Pension maximization
Pension maximization is the smart way to enjoy a greater income while creating a pension plan for your spouse.
When you retire and select a joint survivor option, you will essentially buy an ultra-expensive insurance policy to maintain income for your spouse after your death.
But perhaps your spouse will die before you do. In this case, you can't cancel the policy and you'll continue paying premiums for something that won't be used. You can't name another beneficiary. And, in the event that both you and your spouse die (in a common disaster), the money will be gone.
Instead consider buying an actual life insurance policy to provide an income for you and your spouse. Choose the maximum pension income and purchase a whole life insurance policy with the difference.
When your spouse collects the policy, he or she can buy annuities with the proceeds, for a guaranteed lifelong income. And, in the event of a common disaster, your pension will go to your family. Selecting the maximum pension also maximizes any cost of living increases. So you'll have a larger income, a pension plan for your spouse and a pension that doesn't die with you.
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