Universal life: Universal life (UL) insurance is permanent life insurance that was born out of Whole Life from consumers demanding transparency and more flexibility. With UL you have the ability to invest in a tax-sheltered cash or fund value, the premium payments above insurance costs are deposited to the tax-sheltered investment account, which can then be invested in cash, GIC’s, or bond, balanced or equity mutual funds, which can be determined based on your risk tolerance. This requires active management of the investment portfolio and there is risk if your life insurance agent doesn’t do that job well. The key to UL is:
UL is good for people who want life insurance to help their children pay estate taxes, for charitable gifts, in an estate freeze situation, or for corporately owned situations like funding buy-sell agreements, or taking advantage of some additional tax savings available to business owners of private companies for investment purposes. If you are considering a permanent plan and you are a business owner, it warrants a conversation with a seasoned professional and we can help you with that. Please let us know if you need to discuss your particular situation and get the appropriate advice. If it’s not right for you, we will let you know!
Whole Life: Whole life (WL) insurance is more of a black box, you don’t really get a clear look under the hood. But it comes with some perks that UL doesn’t have.
It contains a savings component that is already included in what is referred to as the cost or premium. But you can make additional deposits if you want to put more of your savings in this tax-shelter. And you don’t have to manage the funds, the portfolio is actively managed by the insurance company and doesn’t require any investment decisions by you. It’s very much like a pension plan. But even pension plans don’t have access to three things Whole Life does:
The tax sheltered growth is written into Section 148 of the income tax act, the same way you’re able to invest in RRSPs and TFSAs, these are gifts from the Canadian federal government that have been in place for decades. The smoothed returns feature allows insurance companies to choose a dividend rate that is an average of 4-7 years of market performance, which has resulted in conservative positive returns for more than 100 years. The CDA credit is a gift in the income tax act that allows business owners to use low tax corporate income or savings to invest in permanent insurance and unlock that investment to personal beneficiaries without any tax. This is a very high level summary of truly complex sections of the act, so please get advice from an experienced insurance and tax professional when contemplating this.
