Permanent Insurance - Universal Life
The purpose of permanent insurance is to provide a solution to a permanent problem. Insurance proceeds are intended to provide an enhanced estate for the family, pay the taxman, buy back shares from a partner’s estate, or supplemental retirement income. Permanent insurance can take the form of term to 100, whole life, or universal life.
Universal life is made up of two key components which are wrapped up in one contract. Namely, life insurance and investments. Either increasing or level Term cost can make up the Insurance Component.
Conceptually, Universal Life starts with an account into which the policy owner makes periodic deposits. Some expense loads for things like premium tax are deducted from the deposits and then the net amount is invested and earns interest.
Periodically, usually monthly, the insurance company takes charges from this account to pay for the insurance protection being provided and to cover its other expenses.
An important fact that makes life insurance of particular interest from an investment perspective, is that the investment earnings on this account are exempt from tax as long as they stay in the account, and provided there is sufficient life insurance protection, as defined in the Income Tax Act. Upon the policy holder’s death, the insurer pays the Proceeds as a tax-free death benefit to the named beneficiaries.