Back in the first half of the last decade, it was easy to understand why universal life insurance was so popular. A client could choose term or whole life insurance for a monthly or a single annual payment. After paying the premium, clients could choose to invest the remaining balance. The investment’s return would then be tax free. Aside from this, the investments and insurance would pass to the beneficiaries, tax free, by the time of the holder’s death. Life insurance premiums were also remarkably low for term life policies, so a lot of individuals, especially the younger ones, chose those.
The popularity of universal life insurance declined in 2008, during the economic recession when markets crashed and at best only showed low growth at single digits. Life insurance premiums were also higher, a problem many faced when they had to renew their life insurance policies. In fact, there were policies that experienced a 100-150% increase. Unfortunately, the premium for universal life insurance increased even more, if the life insurance policy holder had developed an illness by the time of renewal.
Yet it continues to get worse when universal life insurance policy holders will have to sell their investments to pay the higher premium with the same annual contribution rate. According to insurance advisors, it will be taxed as part of the individual’s income, adding more expense on the holder’s part.
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The problem with universal life insurance is the expense that holders have to pay insurance companies so that they will be able to manage their portfolios. With corporate tax, the cost is usually higher than mutual funds.
Some insurance agents believe that clients should instead use the money in investments to increase financial security, such as paying a mortgage or putting the money in a tax-free savings account. Another wise option is to use the money to contribute to one’s Registered Retirement Savings Plan (RRSP).
In the end, universal life insurance has become a product that serves a niche market that would better serve older, mortgage-free individuals with a fully paid RRSP. Insurance agents also say that universal life insurance is also good for real-estate planning, something this niche market is free to do with their stable financial situations. Thus, it is widely believed among insurance agents that instead of universal life insurance, it’s best for younger individuals to invest somewhere else. Perhaps, in RRSP’s or other investments that would better serve their situations such as dividend paying whole life policies.
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The Hughes Trustco Group Ltd, life insurance brokers in business since 1972.
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Back in the first half of the last decade, it was easy to understand why universal life insurance was so popular. A client could choose term or whole life insurance for a monthly or a single annual payment. After paying the premium, clients could choose to invest the remaining balance. The investment’s return would then be tax free. Aside from this, the investments and insurance would pass to the beneficiaries, tax free, by the time of the holder’s death. Life insurance premiums were also remarkably low for term life policies, so a lot of individuals, especially the younger ones, chose those.
