Universal life insurance is a type of insurance that combines a savings part and an insurance part. Here is a summary of how it works to help you determine if this type of insurance might be right for you.
Universal life insurance offers a lot of freedom. In particular, you can determine the amount of premiums and when you will pay them. These premiums may increase with age or remain fixed, depending on the contract chosen.
You can also choose the investments you will make with the amounts accumulated in your capitalisation funds. You must nevertheless respect the obligations appearing in the contract.
Differentiate the premium from the cost of insurance
The bounty
With universal life insurance, the premium is any amount you put into your accumulation fund. Part of the deposit goes towards paying the cost of insurance. The other part is used to invest to accumulate sums.
The cost of insurance
For its part, the cost of insurance represents the amount that the insurer withdraws from your capitalisation fund in order to pay the cost of insuring you.
The insurer will also charge fees, in particular to manage the contract. In addition, a tax of 3.48% is levied on the amount you pay into the contract, including the savings portion. The insurer can pay part or all of it. This tax could have an impact on the amounts that you will accumulate in your capitalisation fund. Ask your representative about the impact of this tax.
So, when you buy insurance, you pay more premiums than the cost of insurance. For example, the cost of insurance is $ 400 per year, but the insurer may pay you up to $ 1,200. In addition to the 3.48% tax, the surplus you pay accumulates in your capitalisation fund tax-sheltered as long as you do not withdraw the amounts.
The savings and investment part of insurance
You can choose to invest the amounts in several types of investments, for example in segregated funds.. You can also withdraw funds if you wish. Tax may then be payable. In addition, you are not required to pay a insurance premium. However, you need to make sure that there is enough money in the capitalisation fund to pay the cost of insurance.
The insurer pays tax
The insurer must pay 15% tax on the investment income generated in your capitalisation fund (nuances apply and limits on the sums “invested” in the capitalisation fund are imposed). Although you do not pay these taxes directly, these amounts may be included in the costs that the insurer charges. Also, when you withdraw the amounts, you may have to pay tax. If so, the 15% investment income tax paid by the insurer may be refunded.
Example of a universal life insurance contract
Anne purchases a universal life insurance policy that offers her an insurance amount of $ 200,000. Insurance costs $ 700 per year. However, Anne can pay up to $ 1,500 per year. Anne chooses to make an annual payment of $ 1,300 and let the difference between the $ 1,300 she pays and the $ 700 that goes to her insurer to accumulate in her account.
Here’s what will happen:
BEGINNING OF THE 1 ST YEAR:
Amount paid by Anne:
$ 1,300
Cost for insurance, including fees:
– $ 700
Amount accumulated in the capitalisation :
Anne chooses to invest the $ 600 in one of her insurer’s segregated final expense leads funds. She believes that her investments will earn her a net return of 4% per year.
BEGINNING OF THE 2 ND YEAR:
Account value last year:
$ 600
Return credited to account: (4% x $ 600)
$ 24
Amount paid by Anne:
$ 1,300
Cost for insurance, including fees:
– $ 700
Amount accumulated in the capitalisation fund at the end of the second year
$ 1,224
Anne decides to let the interest accumulate in her account the same way for 25 years.
