November 1999

Some Should Consider
Flexibility of Universal Life

© Talbot Stevens

Warning: It can be dangerous to follow "rule-of-thumb" advice. The risk comes from not knowing if your unique situation is the same as the majority of people for whom the rule-of-thumb advice does benefit.

As outlined in my book Financial Freedom Without Sacrifice, I believe that most Canadians should buy term life insurance.

Statistically, most Canadians struggle to pay their bills and need the most insurance for the least cost to responsibly protect their family, particularly when they are young.

Obviously, not everyone struggles financially. High income and high net worth individuals as well as business owners may not be best served by following the common "buy term and invest the difference" mantra.

As people's wealth and age increase, financial goals change. When the primary insurance goal shifts from temporary income protection to permanent issues like estate maximization and tax-deferred investing, longer-term products like universal life should be explored.

Universal life combines the death benefit of term insurance with a savings fund. As a product, universal life has improved by introducing more options for both the type of insurance inside the policy and how the excess savings are invested.

Originally, most of the savings options were conservative guaranteed investments. Now, your cash value account can be linked to a variety of equity markets around the world like the S&P 500 and others.

The savings portion of universal life policies grows tax-deferred much like an RRSP, and can be paid out to beneficiaries tax-free. This has obvious appeal for high-income individuals who have maximized their RRSPs and are looking for tax-deferred investment options.

The other significant financial planning benefit is the flexibility of universal life. Paying the minimum premiums makes the policy look like term insurance. Overfunding the cash account, up to limits, provides substantial tax deferral.

This flexibility allows universal life to be used to address multiple goals or goals that change, and produces some creative, advanced financial strategies beyond basic estate planning.

If you have maximized your RRSPs and have a permanent insurance need, consider the pros and cons of universal life insurance. Additional tax-deferred savings, tax- and probate-free death benefits, and creative retirement income strategies attracting little or no tax are possible.

Life is rarely as black and white as we wish. While most Canadians should buy term insurance, everyone's circumstances are different. The easiest way to get the best insurance solution for your unique situation is to work with a trusted financial advisor who is knowledgeable with all product types.

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