Using Universal Life Insurance for Estate Planning

Using universal life insurance for estate planning allows an individual to add to wealth while avoiding the costly and time-consuming probate process. Universal life insurance also provides a unique cash value and opportunities for investment to increase the policy during the life of the insured.

Continue reading to learn how universal life insurance policies operate and their benefits for estate planning in Canada.


Universal Life Insurance Explained

Universal life insurance is a type of permanent life insurance that provides a lump-sum payment to beneficiaries upon the death of the insured. From the moment a universal life insurance policy is purchased it guarantees lifelong protection, as long as the policy owner is able to keep on premium payments.

Universal life insurance is known to provide more control for the policyholder over payments and investments, and it tends to be preferred by those who want more control and less rigidity in such a long-term commitment.


Universal Life Insurance vs. Other Estate Planning Devices

Universal life insurance policies are an effective estate planning tool that you can use alongside a will. The will explains how you want your assets divided, and can even account for other wishes regarding:

  • Funeral and burial/cremation requests
  • Guardianship for minor children
  • Caretakers for pets

A life insurance policy only accounts for the creation of tax-free sums that beneficiaries can access and utilize soon after the death of the insured. This can provide the funds necessary to offset fees on the estate, such as:

  • Probate fees
  • Income tax
  • Capital gains taxes

Life insurance can also be used throughout your life to create a money pot to dip into as needed, growing your estate throughout your life for your own benefit, and increasing what you can pass on to beneficiaries.


Benefits of Using Universal Life Insurance for Estate Planning

While a universal life insurance policy is closely related to other permanent life insurance policies, it has a few distinguishing factors. Most who seek or benefit from a universal life insurance policy do so because of the:

  • Untaxed contributions and payout
  • Access to the cash value
  • Flexibility of payments
  • Control and Growth of Investments

Universal life insurance policies are split into an insurance portion and an investment portion. The first is the immediate creation of a death benefit that is contractually due to beneficiaries upon the death of the insured. The latter is where the differences occur, mainly due to the irregular contribution schedule and the difference in control.


Untaxed Contributions and Payouts

When you pay premiums on a universal life insurance policy the value is not taxed. There are a few ways that you can trigger a taxable event, but in most cases, you can minimize or completely defer taxes.

While you cannot deduct premium payments, this creates a scenario in which your beneficiaries can access the full value of the death benefit when the policy is claimed. Compared to an account that goes through probate and loses up to 50 percent of its value in taxes, a universal life insurance policy is a preferred method for passing on wealth.


Access to Cash Value

During the life of a universal insurance policy, you can access the cash value as needed with minimal penalty. You do run the risk of triggering a taxable event, but in most cases, the taxes due are preferred to higher interest rates or taking out loans from other avenues.

You can partially withdraw from the cash value of the policy, but this decreases both the cash value and the beneficiary’s payment. The amount withdrawable depends on the insurer, and you are likely to pay income tax on withdrawals.

Loans taken directly from the cash value can be borrowed, with interest, as long as there is enough left over to cover any cancellation of the policy. When you do this your cash value will continue to grow as if the cash was not removed. This can be considered a taxable event, but you generally have more repayment flexibility.

If you need to cancel the policy you can receive the cash surrender value and completely lose the death benefit. This might be preferred in times when you can no longer keep up with the premium or no longer need the policy, but you will owe income tax on the year that you cancel the policy.


Flexibility of Payments

Universal life insurance policies are preferred by some because of the flexibility in payments. You can choose to only pay to cover the annual premium of the policy, contributing only to the cash value and leaving the investment portion alone.

To do this, you only pay the amount of the premium. After the insurance costs are covered the funds leftover can go to the investment portion, and you can choose whatever investment you want.


Control and Growth of Investments

In a universal life insurance plan, the policyholder is the one that chooses where the additional funds are invested. The insurance company will provide a list of investment opportunities in different areas, including:

  • Equities
  • Fixed income
  • Mutual funds
  • Bonds GICs

The policyholder then chooses how their funds are invested, assuming both the risk and the management. Because of this, there are no guarantees on returns for universal life insurance policies.

These qualities make this type of policy more attractive to those seeking control and those with investing experience.


Owning More than One Type of Life Insurance for Estate Planning

You can leverage multiple life insurance policies to maximize the value of your estate and your income.

For example, a universal life insurance policy can take care of long-term estate plans while a term policy can cover a specific cost, such as a mortgage, for its lifetime at a lower premium.


Decisions with Universal Life Insurance for Estate Planning

Speaking with a trained life insurance advisor like Sim Gakhar is essential to creating an effective plan for your estate. Not only will you have a better idea of what will work for you, but you will also have a professional mind bringing up situations you did not think to address.

Estate planning is a large task to take on your own, and creating the right plan is essential for the maximization of your assets.


FAQs & Helpful Resources Regarding Life Insurance for Estate Planning


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