Ron s. gilbert

Lifecycle Financial Strategies

Universal Life

Universal Life is rapidly growing in popularity for Canadians. In certain situations it is possible to use a universal life policy to minimize taxes and preserve & transfer wealth.

Universal Life insurance is a type of Life Insurance that has two components – the pure cost of permanent insurance or minimum premium and a tax sheltered investment account. The minimum premium must be invested every month / year but the policyholder has the flexibility to invest extra premiums in a tax sheltered account.

The accumulated funds in the investment account can be used in different ways….

  • A policy holder could stop paying in later years and let the investment account cover the pure cost of insurance.
  • The policy owner could use the side account as a wealth transfer mechanism to grow an inheritance that would be paid to a beneficiary tax free.
  • The accumulated funds can be used to supplement retirement income.

The most important part of all is the flexibility of the policy holder to choose how much to invest and when. You have a choice of investment options to invest in, including guaranteed investments, bond funds, balanced funds and equity funds. There is also the flexibility to not invest any extra money and simply pay the minimum life insurance premium.

Investments into a Universal Life policy are not a tax deduction but the investment account grows tax free – the other side of this coin is that an investment loss would not be deductible.

A Universal Life policy may be attractive to individuals who max out their RRSP and TFSA contribution room and could use another method of tax deferred growth for their investments.

A Universal Life policy is a very good wealth transfer tool. If the policy owner does not need the investment component during their lifetime, it can be allowed to accumulate and then paid out tax free to the beneficiaries. If the benefit is paid directly to the beneficiary, probate and executor fees can be avoided.

If the investment component is not needed during the policy holder’s lifetime, it can be allowed to accumulate and be paid out tax-free to the policy beneficiaries in the Will. If the beneficiary is named in the insurance policy itself, probate and executor fees can be avoided.