Managed Money Reporter Newsletter — Issue 137, June 1998

Editors: Carl Spiess & Allan McGlade

Universal Life - For A Variety Of Problems

By Allan McGlade

Universal Life insurance, a product that is now in it's second decade of existence, is a product that could be appropriate for your estate planning and financial planning needs. That's right! I said financial planning.

Before I elaborate on how this unique product can assist you with the accumulation of capital, let's review what the insurance component can do for you. If your need for life insurance is short term, a 1,5,10 or 20 year term policy will meet your needs. However, if your insurance needs are long term, a term insurance policy becomes an expensive proposition. This is due to the fact that the premiums for a term insurance policy will increase on it's renewal date and the new premium would be based on your attained age. The older you are the more expensive the new premium. Another potential problem is that most term insurance policies have an expiration date. If you are still alive at the expiration date you would be left with a worthless insurance contract. There is a term insurance policy however, that eliminates these potential concerns. A Term to 100 policy offers a level premium that is guaranteed never to change and the coverage will remain in effect until the insured dies or reaches the age of 100 at which time the face amount of coverage usually becomes paid up.

Some of the reasons you would want coverage for life would be:

  • The funding of the tax liability an estate faces on the de-registration of an RRSP or a RRIF
  • The funding of the tax liability for any capital gains triggered at death and recapture of depreciation for depreciable property.
  • Funding an estate equalization payment where one beneficiary will inherit a property or business that represents a significant portion of the estate and there is a desire for an equitable distribution to the other siblings.
  • Funding a testamentary charitable request.
  • Maximizing the overall value of one's estate.

These are only a few of the situations where insurance can be used in an effective manner.

A Universal Life insurance policy takes the Term to 100 policy to a new level. Instead of having a fixed annual premium for life, a universal life policy offers a premium range that allows you to deposit more than is necessary to cover the annual cost of insurance. The excess accumulates in a tax-deferred account that is attached to the insurance policy. Investment choices within the account range from interest income options such as daily interest or GIC's, to capital gains opportunities from a variety of equity linked indices. The tax deferral feature should appeal to anyone who is in a high tax bracket and would prefer to defer the taxation on their investment income until some time in the future or eliminate taxation altogether on a portion of their assets. It also appeals to people who do not like the idea of paying a premium for life. By over funding the policy you can accumulate New Hours sufficient capital to generate enough earnings to cover off the annual cost of insurance. Obviously, the more you put in, the sooner the policy can fund itself. The rate of return you can achieve will make a big difference in how much capital you would need. A word of caution, if you are shown a 'quick pay' illustration, make sure a reasonable rate of return has been used. Otherwise, you might be in for a bit of a shock when the insurance company asks for additional deposits down the road because the capital in the policy has been eroded. The other advantage of the quick pay concept is that you begin to use pre-tax dollars to fund the insurance costs versus the after-tax dollars it takes to fund other forms of insurance.

I'll finish off with a simple example of a Universal Policy being used to accomplish a couple of objectives. A couple (it could just as easily be one person) has accumulated a fair amount of assets over the years. They know they have more than they will ever need and are paying a high rate of tax on the interest income their investments are generating. So much so that it is causing them to be clawed back on their OAS payments. However they remember the tough times they had financially in the past so they are reluctant to give up control of any of their assets. After all, what if one or both of them require long term care at some point in time? They have heard that this can be an expensive proposition.

A solution is to purchase a joint and last to die universal life insurance policy. First and foremost they are guaranteeing that their estate will be left with an amount that will be available immediately for distribution to the named beneficiaries without any of the usual estate requirements. Two, by moving some of their assets from a taxable environment to a non taxable environment they are lessening their annual tax liability which may or may not allow them to receive more in OAS payments each month. Three, if at some point in time they need to get at the assets they can be withdrawn from the policy. It should be noted that a withdrawal may or may not trigger income taxation on a portion of the amount withdrawn. Four, upon death the insurance plus the accumulated value in the investment account are paid out totally free of tax. The end result, usually, is a larger estate than the client would have otherwise had if they did nothing, and it is not as if they had to take on anymore investment risk than they are comfortable with.

The flexibility and the tax advantages of a Universal Life insurance policy make it worthwhile for anyone to take a closer look to determine whether it would be an appropriate component of their estate and financial planning. Please contact us if you would like to know more about this product or any other matters that relate to your overall planning. We would be happy to complete an analysis for you.

Fund News

CI Mutual Funds has announced that Gerry Coleman (formerly of Ivy) will now be taking over the management of the Monarch Canadian and Sector Canadian. As Gerry Coleman presently manages Harbour Fund and Harbour Sector Funds, CI intends (pending shareholder agreement) to merge these two funds.


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