Universal Life Insurance.Universal life insurance is the Swiss army knife of life insurance products. It has two parts:
The investment account is completely tax-sheltered and totally creditor proof. Universal life insurance has a premium range from a minimum (set by the Insurance company to keep the policy viable) and a maximum (set by CRA (Canada Revenue Agency)) to keep someone from tax sheltering every dime they have. Once the cash is inside the UL policy no one can touch it, except for a family court judge during a marital breakup. This creditor protection doesn’t mean you can buy a UL on Friday and then declare bankruptcy on Monday. That would be considered fraud, but if you were solvent at the time you bought the Universal life insurance policy. No creditor not even C.R.A. can take that cash away. The law behind this is the beneficiaries act. The assumption being, the value in the policy ultimately belongs to the beneficiaries not the owner. Using Universal Life InsuranceThe premium range allows the owner of a universal life insurance policy the opportunity to “over fund” the policy. Over funding is the portion of the policy that forms the investment account inside the U.L.This gives you the opportunity to create a tax-free income using the
Insured Retirement Strategy
Universal Life Insurance - 250% RULE - the “anti dump-in rule.”Starting in Year 10, a policy’s value can’t increase more than 250% of it’s value 3-years previous. This means you can’t minimum fund a U.L. then all of a sudden dump in a pile of cash. This is based on MTAR - Maximum Taxable Actuarial Reserve.The Insurance company has to perform “exempt tests” to make sure the Universal Life policy does not go offside according to C.R.A. tax rules. The greater the amount of Life Insurance the higher the MTAR allowance will be. Which means more room to put in the cash. The very best way to fund a U.L. policy is with consistent monthly or yearly payments well above minimum but below maximum. If you plan to minimum fund a U.L. in the early years, then increase your funding down the road. The Universal Life policy may not have the room you hope for. Your advisor needs to check the illustration from the Insurance companies’ software to make sure as little as possible is going into the “side account. The side account is basically a money market account that sits outside the policy - therefore has no appreciable gains and is NOT tax sheltered or creditor proof. So we don’t want that situation. The Insurance company is on the hook to make sure that if you do your part - fund the U.L. as planned - the plan cannot go offside and violate any exemption rules. Features of a Universal Life PolicyWhen we put together a Universal Life Insurance policy we need to make sure the proper level of Life Insurance is maintained to suit the individual, while at the same time ensuring there is the correct amount of room to tax shelter the account. It is a bit of a balancing act.Think of buying a new suit. A Term Policy is off the rack and a Universal Life Policy is made to measure. Suppose your need is for $800,000 Life Insurance coverage - based on a needs analysis conducted earlier in the process. To reduce the cost of Insurance we can reduce the amount of Universal Life to $250,000 to give you a good funding level for the U.L. and add on a $550,000 10 or 20 year term rider for a combined total of $800,000 life coverage. Thus we still meet the need. The disability rider. This rider causes the Insurance company to take over your premium payments of you were to become disabled. This means that - God forbid - if you became disabled. The Insurance company would pay for your policy until you were no longer disabled or to age 60. Becoming disabled is bad enough, but having to give up your Insurance coverage because you can no longer afford the premiums is worse. You can be disabled and still live past age 90. Remember even if you have the best disability coverage in the world, you can only fund an RRSP from earned income, disability income is not allowed nor is investment income. Benefits of a Universal Life PolicyIf you die, the UL policy will pay to your beneficiaries - the face value of the Life Insurance and the investment account as a tax free death benefit. All of the money in the U.L. and of course the Life Insurance goes to your family.Over funding a Universal Life policy gives you all kinds of options that an RRSP can’t give you. ExampleYou have $300,000 in your U.L. and a friend comes to you and tells you about a distressed sale of a Cottage worth $300,000, but the owners need a quick sale and no real estate fees. Any one who comes up with $200,000, the cottage is theirs. You think well, I have $300,000 in the U.L. but I’d have a huge tax bill if I withdrew that and you would, but you can borrow the funds from the U.L. to buy the cottage.Most Insurance companies have a version of the “8-10 system”. This means you borrow the cash from the Universal Life policy at 10% loan cost and at the same time the Insurance company guarantees 8% rate of return on the amount borrowed. The net cost is 2%, much better than 35% tax! The government demands that a Universal Life Insurance policy must have “a cost of Insurance” component, otherwise it’s simply an account and will be taxed accordingly. This is where the guaranteed bonus system comes in. Some Universal Life Insurance policies have certain guaranteed bonuses, which increase as the years go by. One bonus is 1.56% added each year to the overall return which means that in an “up” year for the market the positive return is enhanced by 1.56% and in a “down” year for the market a negative return is mitigated by 1.56%. This is a guaranteed bonus which means you get it regardless of other events. In the later years of the policy, the illustration can show you how your guaranteed bonus becomes greater than the cost of Insurance. "Hey the government said there must be a cost of Insurance. They didn’t say the Insurance company can’t give you a bonus to cover that cost!" After so many years the cost of Insurance is much less than the bonus.
Notes:In his book "Retirement for the Rest of Us" Richard Shillington exposes how having a “Futile RRSP” will cause you to lose precious government benefits. Like Old Age Security-OAS and Guaranteed Income Supplement-GIS through taxation and claw backs.Government Benefits are indexed to inflation and in the case of GIS tax-free. It is a shame to lose benefits like these simply because you didn’t know. Accountants, Advisors, Think Tanks are now recommending people do an RRSP Meltdown, to rid themselves of over-taxation during retirement. A UL Policy can provide you with the Life Insurance you need and a Tax-free income in retirement by using the
Insured retirement strategy
Requirements for getting a Universal life insurance policy? You and/or your life partner have to be Insurable. PS it cost you nothing to find out!
Terry Johnston CFPJ C Mitchell Financial Services Inc. Phone: 866-721-7781 ext. 232 Return from Universal Life Insurance to Home Page
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