You may be aware that life insurance offers financial security for your family or beneficiaries after you die. This can be helpful if you have people who rely on you to cover various financial responsibilities. For example, if your partner relied on you to pay a share of the mortgage or rent. Or if your kids depended on your support with tuition.
There’s no doubt that life insurance can help protect the people you care about. But did you know that life insurance can also help you while you’re alive and well?
Some types of life insurance allow you to grow your savings and reach your financial goals. You may be familiar with permanent or whole life insurance, which offers lifelong protection. Permanent life insurance stays in effect throughout your life, no matter your age or health.
Universal life insurance is a permanent life insurance policy that includes investments that grow over time. This can help you save money for the future and provide you with cash when you need it most. Here’s how.
How does life insurance work?
For some life insurance policies, you’re only paying for the cost of insurance. This means you only pay monthly or annual fees (called premiums). In exchange for these payments, your insurance policy will pay a tax-free death benefit to your beneficiaries. This benefit is the amount of money given to your beneficiaries after you die. They can then spend this money as they please. For example, they can use it to cover expenses such as funeral costs, child care, home maintenance and outstanding debts.
With life insurance, the death benefit will go right to your beneficiaries after you die. This means it bypasses your estate – which is everything you own, such as your house, car and non-registered accounts. Is this a big deal? Yes and here’s why:
When you die, the assets in your estate may not immediately go to your family or heirs named in your will. First, your estate may have to go through probate, which is an approval process that legally approves your will. This process also covers several issues such as legal fees and unpaid debts. Your family gets whatever is leftover after this process is complete, which could take a long time.
So there’s no guarantee how much your loved ones will receive or when they’ll get it. Whereas with life insurance, your beneficiaries can get a set amount of money after your death. But keep in mind, if you name your estate as your beneficiary, then the death benefit funds could be subject to probate.
- Probate happens where death and taxes meet. Here’s what you need to know about it.
How does universal life insurance work?
With universal life insurance, you’re getting a permanent policy and the potential for investment-savings growth.
Here’s how it works: In a universal life policy, your payment goes into a policy fund. A portion of the money in this fund covers your premiums. Meanwhile, another portion of your policy fund is invested. Most universal life policies offer a variety of investment account choices to suit your goals and tolerance for risk. The investments in your policy fund grow tax-deferred. This means you typically won’t have to pay tax on any investment growth until you withdraw money from the policy.
What’s more, you can choose a specific death benefit option that’s tailored to your universal life policy. Here are some death benefit options you may come across if you’re thinking of getting universal life insurance for yourself:
- Level insurance amount. Your beneficiaries get the guaranteed death benefit amount you bought or the value of your policy fund – whichever is greater.
- Insurance amount plus policy fund. Your beneficiaries get the guaranteed death benefit you bought and the value of your policy fund.
But if you’re a business owner, there’s another death benefit option you may want to consider:
- Level insurance amount plus adjusted cost basis (ACB). This death benefit option may be ideal for corporations that want life insurance. Adjusted cost refers to the value of an asset after various taxes. With this option, the corporate beneficiary will get a death benefit that’s at least equal to the basic insurance amount, plus the policy’s cost basis. Corporations can add this death benefit to its Capital Dividend Account (CDA). This way, a corporate beneficiary can pay out the death benefit to its shareholders as a capital dividend. To learn more about this option, please consult a business tax professional.
Think of it this way: The death benefit helps provide security for your loved ones after you die. But the investments in your policy fund can help you throughout your life. For instance, if you need more money for retirement. Or, if you have an unexpected expense that your emergency fund can’t cover. Having this source of income to pull from can be a great help.
What can you do with your policy fund?
Depending on how well your investments perform, there are many ways you can use your policy fund to your advantage. Here’s a few you to keep in mind:
- Use it to pay off your premiums. If your investments perform well over time, they can pay off the cost of your insurance. So, let’s say you pay your premiums for a few years. During which time, the investments in your policy fund begin to grow. Eventually, they could grow to a point where they can cover the cost of your premiums. This way, you can remain insured and avoid paying monthly or annual premiums. You may already have several financial responsibilities on your plate like a mortgage, family or debt. Your life insurance could be one less thing you have to pay.
- Use it to buy more insurance coverage. The amount of coverage you buy determines the death benefit your beneficiaries will receive. By purchasing more coverage, you can increase your policy’s death benefit. Let’s say you originally bought enough life insurance to help your spouse in the event of your death. So if you weren’t around, your spouse could use the death benefit to cover various living expenses. But five years later, you find yourself with a spouse and a child. This means the amount of financial support your family needs from you has now risen. With universal life insurance, you can buy more insurance to increase the death benefit your family gets.
- Use it as a source of retirement income. Want a tax-effective way to save for retirement outside of a registered retirement savings plan (RRSP) or pension plan? You might be thinking of retiring early. Or, you may want to be prepared in case you have to retire unexpectedly. In any scenario, tax-deferred investments growing in your policy can help fund your retirement. This can be especially helpful if you’ve already maxed out your RRSP contributions. Or if you need an additional source of income to cover expenses for your post-employment lifestyle.
- Use it to boost your savings goals. Whether you’re saving up for long-term or short-term goals, a universal policy can be a solid savings tool. A portion of the money in your policy fund goes toward your investments. You can choose to leave them in the policy and let them grow for a few or several years. And, up to certain limits, you can make extra payments in the policy fund. This can help boost your tax-deferred savings. More money in your fund means there’s more potential for your investments to grow.
- Withdraw or borrow money from it. You can take money out of the policy fund for any reason, at any time. Remember: any money you withdraw or borrow can reduce the death benefit unless you repay the loan. So before taking money out, be sure there the remaining death benefit value will be enough to protect your beneficiaries.
Please know that some of these options come with tax implications. For example, you may have to pay taxes any time you withdraw or borrow money from your policy fund. You also may have to pay taxes on any interest you earn on the investments held in your fund. For help, speak with an advisor or accountant to learn how these taxes can affect your finances.
Talk with an advisor about your life insurance options
Universal life insurance can help you save money for the future and protect the people closest to you. Does it sound like the right fit for your financial situation?
Before purchasing life insurance, it helps to understand the different types of coverage available and the benefits they offer. Perhaps your needs are simple and you need just one type of insurance. Or your situation may be more complex, and you may need more than one type. But with so many options, it can be tough figuring out what’s right for you. This is where talking to an advisor can be a huge help.
An advisor can help you build life insurance into your overall plan. They can also explain how you can combine individually owned insurance with other coverage you may have at work.
An advisor’s knowledge about insurance can be especially helpful if you have a large estate to pass down or you’re in a higher tax bracket
- Looking for the right type of life insurance? Connect with an advisor for help. Most advisors now offer to meet people by phone or virtually through Zoom video chat.
*This article is meant to provide general information only. Sun Life Assurance Company of Canada (Sun Life) does not provide legal, accounting or taxation advice to advisors or Clients. Before acting on any of the information in this article, make sure you seek advice from a qualified professional. A professional like a lawyer or accountant can provide a thorough examination of your specific legal, accounting and tax situation.