Universal life insurance: A vital part of a comprehensive financial plan

Most people recognize the valuable role that life insurance plays in protecting their dependants from financial hardship. But what many people don’t know is that some types of life insurance, such as a universal life policy, can also play a key role in meeting estate planning objectives.

Universal life insurance is a type of permanent policy that combines a death benefit with tax-deferred investment growth. An inexpensive term policy can be used to provide the death benefit, and the portfolio of investments can be structured to match the risk tolerance and investment objectives of the purchaser.

The following case studies illustrate how universal life insurance can accomplish a number of goals.

Case Study 1: Leaving a secure legacy

Tom and Moira are a married couple, in their mid 60s. They want to preserve a portion of their investments and pass them to their children in a tax-efficient manner. Their estate planning goals can be summarized as follows:

To preserve their existing capital and enjoy modest growth.
To ensure that their children have access to 100% of the use of the assets, subject to certain restrictions to protect against misuse.
To have access to the funds for their own use in the event of an emergency.

A universal life insurance policy is an effective way to meet all these objectives. Tom and Moira could purchase a policy with an initial death benefit of, say, $100,000, growing at a modest rate of 5% a year until the end of their life expectancy.

In their will, they can stipulate that the insurance proceeds are to be placed in a trust for their children. The trust can dictate how capital and income is paid out to the beneficiaries. This can protect against the misuse of the inheritance and preserve it in the face of a beneficiary’s divorce, business failure, and so on.

There are a number of ways Tom and Moira can gain access to the policy’s capital in case of emergency, some of which do not attract tax. For example, they can borrow against the policy’s accumulated value, or cash in part of it. (They would want to explore the possible tax implications and the impact on the death benefit before accessing the capital.)

Case study 2: Preserving estate assets

Unlike Tom and Moira, Michael and Michelle have just one overriding objective: to reduce the tax bite on their estate and preserve their assets.

Michael and Michelle are shocked to discover that their death will trigger a significant tax liability. In fact, taxes will reduce their Retirement Savings Plans (RRSPs) by almost 40%. Their cottage, even though it won’t be sold, will attract a large capital gain tax. And their investment portfolio outside their RRSP will shrink by almost 20%.

In this instance, too, universal life can help. Michael and Michelle can reallocate 10% of their non-registered portfolio to a universal life policy. The investments they choose within the policy can have a similar growth and risk profile as the ones they currently hold. The difference, however, is that upon their death, the policy’s tax-free death benefit can be used to cover the taxes due on their other estate assets.

By reallocating assets in this manner, they can keep their estate intact for their beneficiaries at little or no cost to themselves.
If you’d like to know more about how universal life insurance can help you accomplish your estate planning objectives, please give me a call.