Universal Life Insurance

Understanding universal life insurance and the key factors needed to make an informed decision before making any life insurance purchase.

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If you’re looking to buy insurance, it’s easy to get caught in a dilemma of asking yourself which insurance is best. If you’re seeking coverage for the rest of your life and tax-free accumulation of cash value within a policy, then permanent life insurance may be an ideal option for you. But choosing the right permanent life insurance can be challenging, depending on your individual protection needs like tax-free benefits to cover final expenses, debt and legacy inheritances. One popular type of permanent life insurance is universal life insurance.

Universal Life Insurance vs. Term Life Insurance

There are two types of life insurance: term and permanent. How you choose between them depends on your goals, how long you'll need the insurance and how much you want to spend.

Universal life insurance is a type of permanent insurance (whole life insurance is another type). Permanent life insurance covers your entire lifetime and can be used for several goals, offering greater flexibility, but it is often initially more expensive than term insurance. You may be able to use permanent insurance to ensure you leave a specific amount of money to heirs or a charity, regardless of how long you live. Many permanent insurance policies also allow you to build cash value within the policy.

Term life insurance is generally used to cover a specific time frame versus a lifetime need. It also typically has the lowest initial cost, making it a great choice if you still have responsibilities of children at home and paying a mortgage. When the initial term period is up, you may be able to continue the policy, but premiums will be higher.

Here's a table to help you identify key differences between universal life insurance (a type of permanent insurance) and term life insurance.

 

Universal Life Insurance vs. Term Life Insurance
Universal Life InsuranceTerm Life Insurance
PremiumsAre initially higher in most cases than term insurance but has greater flexibility. This insurance typically lets you select your preferred premium schedule, the amount you want to pay (within limits) and an investment mix that matches your unique risk profile.A lower-cost insurance product where clients have a choice of term lengths between 5 years and 50 years.
Death BenefitPays tax-free death benefits. For business owners, it allows for tax-efficient succession of the family business. Provides cash for equalizing distribution of assets for family members not in the business. Ability to accumulate cash values through dividends to purchase additional coverage.Pays tax-free death benefits. Affordable coverage for temporary needs in the event of an untimely death (i.e., mortgage on second property) For business owners, it allows for tax-efficient succession of the family business. Provides cash for equalizing distribution of assets for family members not in the business.
Cash valueThe cash value of permanent universal life insurance grows tax deferred.No cash value
BenefitsBuild wealth inside your policy, within limits, that you can access during your lifetime.Can be converted to any permanent plan available at the time of conversion without evidence of insurability/underwriting up to the existing term policy amount.

What is universal life insurance and why should you consider it?

Universal life insurance is a type of permanent life insurance policy that gives you  coverage for your entire life, as long as it's adequately funded, offering flexible premiums and death benefits. Universal life insurance policies can be issued either on a single-life basis or joint-life basis with the death benefit paid at the first death or last death.

Universal life insurance provides a lump-sum tax-free benefit to beneficiaries on the death of the life insured(s). It is best suited for individuals seeking permanent life insurance protection where they might want to also take advantage of the opportunity to accumulate tax-advantaged policy cash values to help beneficiaries cover costs associated with final expenses, taxes on registered assets and capital gains.

Some of the advantages of universal life insurance include:

  • Tax-deferred growth – The cash value of permanent universal life insurance grows tax deferred.
  • Premium choice – Guaranteed level premium or increasing premiums each year, limited term or premiums being paid each year for life.
  • Choice of investment option – You choose the investment mix that suits your needs based on guaranteed interest options, managed money and equity-linked investments.
  • Cost – Option of locking a guaranteed level premium into the plan.
  • Flexibility on death benefit.

What are the differences between universal and whole life insurance?

 

Universal life insurance differs from whole life insurance, which is another type of permanent life insurance that also offers guaranteed death benefits if your premiums are paid as scheduled. Whole life policy premiums tend to be higher compared to that of universal life. In addition, whole life insurance policies generally provide guaranteed and non-guaranteed cash values which grow every year. Growth is based on the performance of a large pool of assets managed by the insurance company’s team of asset managers. As a result of the product design, cash value in a whole life policy cannot go down as a result of investment performance.

 

Universal life insurance, on the other hand, offers flexibility to the policy owner in selecting interest and/or investment accounts. In that case, the cash value, death benefit, and amount of premiums required are affected by the performance of the selected accounts, and cash value can go up and down depending on how the investments selected perform.

 

What are the differences between universal and whole life insurance?
Whole Life InsuranceUniversal Life Insurance
Death BenefitProvides guaranteed death benefit if premiums are paid as per the schedule. Policies can be issued on a single-life basis or a joint-life basis with the death benefit paid at the first death or the last death.Offers a flexible death benefit, which might be the right option if you have less time for wealth accumulation and are focused on maximizing the policy’s death benefit for estate planning purposes. Policies can be issued on a single-life basis or a joint-life basis with the death benefit paid at the first death or the last death.
PremiumsPremium is specified when the policy is issued.Includes flexible premiums, so you can choose how much premium you want to contribute, as long as it is above the minimum required to keep your policy in force and below the maximum set by CRA to keep your policy tax exempt.
Cash ValueGenerally, this policy provides guaranteed and non-guaranteed cash values which grow every year. Growth is based on the performance of a large pool of assets managed by the insurance company’s team of asset managers.Offers the ability for the policy owner to select interest and/or investment accounts. The cash value, death benefit and amount of premiums required are affected by the performance of the selected accounts.

What is cash value?

Permanent life insurance policies (as opposed to term insurance policies) have a cash value. Premiums for permanent insurance policies go towards three things: cost of insurance, policy fees and charges, and cash value. The cash value of a permanent life insurance policy accumulates over time and can add to the total death benefit for the beneficiaries depending on the type of policy. While whole life policies always provide a guaranteed cash value, many also offer a non-guaranteed cash value as well. Non-guaranteed cash values are dependent on several factors the most significant being the actual performance of the pool of assets associated with these products often referred to as the Participating Fund (or Par Fund).

The growth of the cash value in a universal life insurance policy is tied to sub-accounts that contain investments chosen by the policy owner such as mutual funds and daily interest accounts.

Policy owners have several options if they want to access cash value within their policy, which can be done with a loan, withdrawal, or surrender (this applies to both whole and universal life insurance).

In case of withdrawal from a universal life insurance policy, the owner must have cash value available in the account. Part of every dollar withdrawn is taxable, unless the adjusted cost basis is higher than the cash value. The taxable portion depends on the proportionate amount of the adjusted cost basis.

We can help

At Edward Jones, we can find you the right financial advisor to help you move one step closer to your financial goals. We’ll help you navigate your life insurance policy options to make an informed decision possible. Reach out to an Edward Jones financial advisor to find the option that is right for you.

Important information:

Insurance and annuities are offered by Edward Jones Insurance Agency (except in Québec). In Québec, insurance and annuities are offered by Edward Jones Insurance Agency (Québec) Inc.