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Dos and Don'ts When Considering a Universal Life Insurance Policy

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Universal life insurance is a permanent insurance plan which first made its appearance in Canada in the early 1980's.  Like traditional whole life, it is designed as a long term financial planning vehicle, combining both cash accumulation and insurance protection.  Unlike traditional whole life, universal life policies are usually interest-sensitive.  Universal life policies are normally very transparent in design and flexible in their use.

Universal Life Insurance provides with you an extremely flexible form of life insurance. You can vary your monthly deposit, choose a level or increasing death benefit options, as well as tailor your investment choices within a tax sheltered account. When purchasing a universal life policy, there are many variables to examine.

Do #1

Know your options.

Determine whether you want a level cost of insurance (COI) or increasing cost of insurance. A level COI guarantees that your cost of insurance remains level for life and you will not be surprised by future increases. Whereas an increasing COI provides you with lower initial cost of insurance escalating on an annual basis. The advantage of increasing COI is that it can result in a higher cash accumulation in the early years of the policy. The disadvantage is that if the investment component does not perform as expected, the insured can be left with drastically escalating premiums or a policy which is about to lapsed.

Do #2

To increase or not to increase

Universally life policy allows you to choose between an increasing death benefit and a level death benefit.  It is important to understand the difference and make a decision as to whether you wish the policy to increase in value to keep pace with inflation or to remain at a constant level.

Do # 3

Seek professional advice

Work with a professional independent broker who is someone that you would trust to babysit your first born child. Universal life policies can vary dramatically from one company to another and it's crucial you work with someone who can give you unbiased advice.

Do # 4

Cover the risk first

Universal life insurance can be an attractive insurance product for those looking for permanent insurance. a policy that will ensure you sleep at night would include a fully guaranteed cost of insurance with a level cost with minimal to no investments.

Do # 5

To buy or not to buy

Universal life policies are suitable for individuals who need or want insurance and are willing to assume some risk of the policy, who want to build up equity inside an insurance plan, and who have maximized their RRSP contributions and wish to defer taxes on additional investment income.

Don't #1

Pride goes before the fall

One of the benefits of Universal Life insurance is that you have the ability to make the investment decisions but with that ability comes great risk.  It is essential to choose the investment option which best fits your risk profile and not to go chasing the riskiest option out there.

Don't #2

Understand the fine print

if you are using an universal life insurance policy as a means to save and tax shelter monies, do not ignore the fine print.  It is essential that you verify if you have accessibility to your cash value in the early or later policy years. Many universal life policies have high surrender costs should you terminate your coverage in the early years. It's essential that this is clearly understood.

Don't #3

It is all about you

Do not assume that the insurance company that offers the product will help you when you need it.  A well informed policyholder should understand that the flexibility of the Universal Life Insurance policy is tied irrevocably to risk to the policyholder. The more guarantees a policy has, the more expensive its cost. And with Universal Life, many of the guarantees are tied to an expected premium stream. If the premium is not paid on time, the guarantee may be lost and cannot be reinstated.

Don't #4

Markets go up and down

If a Universal Life insurance policy is linked to the stock markets even using a conservative interest rate may not be reflective of the actual policy. Many universal life investments performed at -20%–40% in recent years, which has the ability to eat into the policy cash value.  Do not assume a conservative return in your assumptions if your investment choice has even a remote ability of losing when markets go down.

Don't #5

Monitor your cash

Universal life insurance is not a type of policy you want to just stick in the drawer and simply pay the premiums as they come due. Do not ignore the policy as you need to keep track of how your cash value account is doing, and frequently request in force illustrations. If you’re a person not too savvy with knowing how investments work, this may not be the best policy choice for you.

Everyone wants to protect and give their family financial security in case of an unforeseen disaster. Life insurance is one of the most convenient methods to achieve this goal. But, which life insurance policy is the best product for you particular circumstances is the proverbial Million Dollar question which can only be answered by speaking with a professional while at the same time understanding your needs and your options.