Hey, if you are looking for a life insurance policy,
maybe you were introduced to either
term insurance or whole life insurance.
However, maybe you want something on the
permanent side but you are on a budget.
you might wonder,
is there anything in the middle?
Something that gives you the protection of
permanent insurance but is more cost-effective
and flexible compare to whole life insurance?
And the answer is Yes, there is!
There is another option called
universal life insurance.
In today’s video,
I want to talk about what is universal life insurance,
who is it for.
And more importantly what is
the proper way to set up the plan.
So you’ll have a better idea
if universal life insurance is right for you.
And as always,
if this is your first time here!
Thanks for dropping by!
My name is Thomas,
This channel is to help Canadians to make better choices
On Retirement Wealth and Insurance
My goal is to make sure you take 1 or 2 ideas home
So you can make better financial decisions onward!
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Let’s get started!
In Canada,
when you are getting life insurance
there are essentially two options.
You can get a term that expires at a certain age,
or you can get a permanent option.
The downside to any term life insurance
is that they expire,
usually at age 80 to 85 depends on
the insurance provider.
That means you might get a nice lump sum
of money if you do pass away before 85 –
but what happens when you die?
There are a lot of fees, expenses,
and more importantly taxes after death
And if your life insurance expires before
you die then you have no guarantee
that your costs are covered.
So in a sense,
term life insurance is a temporary solution
to a permanent problem.
That’s why I want to tell you more
about permanent life insurance.
When it comes to permanent life insurance,
there are, once again,
two options –
whole life insurance and universal life insurance.
Universal life insurance is
a form of permanent insurance
that is ideal for people who want flexibility.
It’s also ideal for young people who are
a bit tight on budget but still want insurance.
In a nutshell,
whole life insurance is like a piece
of a property in the insurance world.
It has more guarantees and
you can predict the growth.
However,
it requires more capital and commitment.
And the rate of return is relatively low as it
depends on the company’s dividend scale.
Whereas universal life insurance is like
investments in the insurance world.
That’s because you don’t just have the insurance,
you also have a savings component.
Therefore,
it’s like a middle ground between
insurance and investments.
You can control how much
you want to put into the plan,
and you have the options to not put it at all
which I will explain it later.
Now,
let’s briefly look at the background of
universal life insurance to understand better
why it exists and what it is for.
Universal life insurance was introduced
about 40 years ago.
Back then only whole life insurance existed.
Back in the 80s,
the stock market started to get more and more
attractive for people because they could get
a much higher return there.
So a lot of investors or business owners were like,
Hey the stock market can give me 30 50 or 80%
returns where if I just put it in a saving account
or the whole life insurance I just get 10%.
Also I have to put away that money
and I have no idea what the insurance company
has to do about it.
So therefore more and more people are
steering away from whole life insurance.
To the point where the insurance companies
had to come up with a product where instead of
mix all the saving and insurance together.
Why don’t we unbundle the plan and
let the client choose where you invest.
So you get to have life insurance and also
the flexibility of investment with a tax advantage.
It makes everyone satisfy.
Hence the name Universal life.
It became popular because high transparency,
you know exactly the cost of insurance and
how much you put into the investment
whereas whole life insurance
is kinda like a black box.
You don’t know what happens to your money.
And especially before 2009,
before TFSA was introduced.
A lot of investors love it.
Because the money in the insurance plan
can grow tax-sheltered.
And if done right,
it can be tax-free too
when they withdraw the saving from it.
So who is it for?
Universal life insurance is ideal for
anyone who likes to invest,
who is relatively young,
tight on budget but wants permanent insurance.
say you want to a $500,000 life insurance –
you are a 30-year-old male non-smoker,
whole life insurance would probably
cost you $400 to $500 a month.
But universal life insurance
can start at $150 per month.
Therefore it’s great for people on a budget.
And you might wonder
why such a big difference,
and that has a lot to do with
how you structure the plan.
First,
we need to understand Universal Life Insurance
has two components.
The insurance and the investments part.
They are separate and you know exactly
how much money you put into the investments
and how much into the insurance part.
So, for the cost of the life insurance portion?
There are two options.
You can choose between level
or yearly renewable term.
Level means the cost of the insurance is fixed
from now until the day you pass away.
YRT means that every year they will increase
the cost of insurance as we are getting older.
The beauty of YRT is when you are young,
the cost of the insurance is much
cheaper compare to a level plan
Let me give you an example
John is 30 years old, married.
He wants Universal life insurance
because he has the flexibility.
the cost for $500,000 is around
$300 per month.
Where if John chooses YRT,
the cost starts at $60 per month
for his current age.
And the year after is around $62 per month,
the year after maybe it’s 65 per month.
Yes, the cost of insurance keeps increasing
but it takes John to reach age 65 to
start paying $300 for the cost of insurance.
So which one should you choose?
Level or YRT?
Using John’s case,
if his budget is $400 per month and
decides to do level cost Universal Life,
at age of 65 he will have
around $140,000 in cash value,
and $252,000 at the age of 75
based on a 5% return on his investments.
but if John choose YRT,
the cost of insurance is $60 and he can
use the remaining $340 for investments.
and therefore he will have around
$400,000 at age 65
and $700,000 at age 75.
so It really depends on your age and
how much money you’d like to invest.
If you want to invest more
and you are young,
YRT will be a better option.
That’s because we can leverage the youth
to get the lowest cost possible and invest
the difference to invest into the markets.
whereas,
if you are hitting your 50s or 60s and want to
lock down the cost instead of increasing over years.
Then Level will be a better option.
Now For the investment portion,
you have a variety of things you can do.
You can use it for savings, term deposits,
bonds, and equity-based funds.
Your range of yearly returns per year can be 1-20%,
depending on your risk and market performance.
With the current low-interest environment,
I suggest investing in the equity fund
like an index fund.
It’s relatively safe and give you a good return overall.
Plus you are doing this for the long term anyway.
What’s more,
I always recommend making sure the
universal life insurance that you have
is death benefit plus fund.
Meaning if you pass away,
you get both the death benefits plus
whatever you saved inside the plan tax-free.
Now, let’s dive deeper
The beauty of universal life insurance
is that you can control
how much you want to put into the plan.
In John’s case,
he can choose to put in $200 this year
and he can choose to put in $2000 next year.
Now you might wonder why
you should pay more than the minimum?
There is a good reason to it.
Think of this insurance like a coffee cup,
anything in this cup is tax-sheltered
So the CRA won’t tax you
on the portion of your investments.
And depends on the size of the mug.
Whether it’s tall, grande, or venti,
it depends on the amount of the
life insurance coverage you buy.
Yes there is a cost to this cup.
But If everything is plan accordingly,
the interest that you earn from the
investment can cover the cost already.
That means you have a self-sustainable
system and comes with free insurance.
Remember,
TFSA increases the room by $6,000 every year.
If you are a high-income earner,
you should max out the room pretty quickly.
So lot of business owners or professionals
like to buy a Universal Life to create more
tax buckets beside from the TFSA or the RRSP.
That’s why universal life insurance is also
called the “rich man’s tax-free savings account.”
Another great feature of universal life insurance
is something called premium holiday.
Let’s assume you paid into your
universal life insurance for a few years but
suddenly unexpected expenses come up.
Maybe you have to buy a place or lost your job,
in that case,
you can use the cash value to pay for the insurance.
Whole life insurance have a similar feature
but it won't kick in unless you have the plan
for more than 15 years.
That’s why like I said,
whole life insurance is like buying a place.
No matter if you are sick or laid off,
you are obligated to pay the mortgage.
Now, like anything,
it has downsides as well.
Compare to a whole life insurance,
there is a lot of moving part in
the universal life insurance.
Especially if you are choosing YRT.
The downside of YRT is that if you don’t
invest enough into your insurance
one day the cost over of the insurance side
could be higher than the investment side.
And I do see a lot of cases like that.
The agent just sold the client a YRT UL but
put all the investment into a savings account.
As a result when the client is getting old,
the return from the investment
cannot cover the cost.
And speaking of investment,
because it’s market-dependent,
think back in 2008 or 2011.
The stock market drop 30%,
and therefore most of the
Universal Life insurance follow as well.
where whole life insurance is still able
to pay 6 – 8% on those challenging years.
Meanwhile just like a mortgage,
most of the whole life insurance now
can be paid off in 20 years where
Universal Life insurance you pretty much
want to keep paying until the day you die.
Yes you can access the premium holiday option.
But there is the risk of policy lapse
If you are thinking about universal life insurance,
there are a couple of things to consider in advance.
Do you want to choose YRT or level?
What kind of investment would you like to choose?
And more importantly,
will your insurance advisor going to review the
investment performance with you from time to time?
Or you have those agents that
never come back to review
I personally have both the whole life and the
universal life because I can have both of the world.
But I do find universal life insurance is
especially beneficial if you are young and
looking for asset accumulation.
It’s transparent and you are more in control.
Alright as usual,
hope you learn something from this video!
Please Share this video with your friends
or family who are looking for insurance!
And comment below if you have any questions!
I need your feedback to make the video better!
Thanks so much for watching!
This is Thomas! See you In the next Video!