The Truth About Universal Life Insurance – Comparing Investments

**Read part one of the this crucial series on Universal Life insurance by visiting the universal life scams and complications page.**

Important Questions to Ask About Universal Life ‘Insurance’

If you still INSIST on looking at UL here are crucial questions you must ask:

I understand that there is flexible and accelerated funding but if I make only the minimum payments over a period of time what happens?

Can I get money from my investment account at anytime?

How useful are the illustrated values in the early years if I can’t access them?



Is it a contradiction to fund a need for income security with variable investments and a variable rate of return?

Would the company lower the cost of insurance in the future?

What happens to the parts my policy if there is a bear market?

Whose property are the dividends from the linked investment?

Is there anytime I would have to pay tax on my rate of return?

Why would I give capital gains & dividend credits for a non registered investment inside universal life which may in future be taxed as income?

Why should I pay a higher management fees for the same investment I could get for less outside a universal life policy

Can you show me how the higher management fees would affect my investment return over 2-4 decades?
Are all expenses guaranteed and where is that stated in the policy?

Can you tell me the difference in commissions you would receive between term and UL?

Let’s take a look at an actual UL proposal for insurance:

This offer is for $200,000 on a single life age 36. The proposed insured has elected to pay $87/ month premium the minimum premium is $79.25/month. The proposed insured is an unemployed parent.
The illustration shows that there will be no cash value until the 10th year at which time there will be $837 in the side account. This is the amount after the surrender charges but DOES NOT include market value adjustments which would also apply at that time unless it was a death claim. The death benefit would be $210,440.

Following the calculations through the decades up to the 30th year the annual premium paid barely out-paces the expenses. This can only mean that the side account will have very little increase, and sure enough after 20 years the most the owner could have in her account would be $1663 and after 30 years (age 66) the maximum rate of return would net an investment of $2302. The death benefit would be $231,320.

At this point we can ask: If this person had bought term insurance and invested the difference in premium from universal life insurance in a TFSA what would have happened in 2 or 3 decades?

The standard rate for term insurance would be $38.05/month. If an inflation rider were added to the policy for the first five years the owner could add 10% or $20,000 each year for less than $3 per month. Therefore, after 5 years she would have a $300,000 death benefit. Investing the $49 over 10 years at even 4% rate of return would give her $7,312 9 times more than the investment in the universal life policy. After 20 years and 4% interest the TFSA would produce $18,140 more than 10 times the universal life investment and after 30 years she would have $34,122. Remember the longer money is invested the better chance a rate of return will be higher than 4% but at even conservative interest rates separating insurance and investments is a far more efficient use of one’s money.

Remember too that the management fees are not even mentioned in this illustration and they will have an effect on the investment part as well. Also, in term insurance the point isn’t to hold life insurance your whole life, only until your primary debt obligations are taken care of. So you will stop paying earlier (assuming you can pay off your house).

The media has recently reported the wrongdoings of various schemers who claimed to be investment advisors but in reality were not who they said they were. Their victims knew nothing for many years until it was too late to do anything. A universal life policy’s financial damage is the same; only apparent after decades of investing. But in a way it is more reprehensible because it is a sanctioned legal entity. This is one case where caveat emptor is of the utmost importance. Probably every financial misstep can be attributed to trying a complicated solution when a simple one would have been better.

Do you homework and protect your future and assets. Although $34, 000 isn’t much to live on, it highlights the difference between TFSA and UL when treated the same. You will hopefully be investing more in RRSP and TFSA instruments throughout the years to secure your financial freedom.

13 thoughts on “The Truth About Universal Life Insurance – Comparing Investments

  1. vhoang

    Do you homework and protect your future and assets. Although $34, 000 isn’t much to live on, it highlights the difference between TFSA and UL when treated the same. You will hopefully be investing more in RRSP and TFSA instruments throughout the years to secure your financial freedom.

  2. Barry Barry Barry...

    You make too many assumptions, and hence I don’t like your example… so let me counter with one from my favourite provider, Transamerica:

    36 yr old female non-smoker.

    The only difference… like you, I do not believe the client needs $200,000 of permanent insurance, so I’d recommend $50,000 of perm, and $150,000 of term as a rider.

    Minimum cost to float the policy: $61.34/mon, or $736.08 annually.

    Per your example, the client elects to pay a monthly premium of $87/mo, or $1044 annually.

    In 10 years, our client has $7928 available to her.
    In 20 years, $20,873.
    At 30 years, $41,035.
    All at 4%, though as the client has a 30 year window, I’d recommend something a little more fiesty, and aim for the 8 to double digit return range. But you used 4%, so I will too.

    Now, just with that little tweak, using a combination of permanent and term, the investment component inside the UL policy now has $41,035, as compared to your solution of $34,122. Just short of 7K more!!!

    AND the client still has a security blanket of $50,000 in insurance, just in case.

    Any questions?

    See, vhoang, when you make assumptions, you can make any product look better or worse than another. But let me come up with an example, and we’ll see.

  3. Paul

    Under zero circumstances should someone EVER purchase UL. The only people who sell UL are high school drop outs. The only people coming out on top from UL are the insurance managers cashing in on suckers who think 41 000 k is enough to live off of. What a horrific return.

  4. Paul, Paul, Paul...

    … did you even read Barry’s example? HE suggested that the client would only put away $87 per month, and HE suggested using a 4% rate of return. You can read, right? By the way, it’s either “41 000” or “41K”, but never “41 000k”. You did finish highschool, right?

    As for your claim that only the managers come out on top, I just demonstrated that UL produced a better result than buying term and investing the difference in a TFSA. You did note the improvement, didn’t you? or are you too busy hurling insults to do the math?

    I will agree that EVERY client should put away more than $87/month, and I’ll also submit to you that with the investment options available inside our UL product, the rate of return should well exceed 4%. However, if you didn’t like the idea of retiring on $41,035, you must have been quite irate over Barry’s suggestion that this client retire with $34,122. I think you should reply back and blast him. Your comment could even look something like:
    “The only people coming out on top from buying term and investing the difference in a TFSA are the insurance/TFSA managers cashing in on suckers who think $34,122 is enough to live off of. What a horrific return.”

    IF you decide to reply, please use an example to illustrate your point. Calling names just diminishes your credibility.

  5. barry econ

    Are you suggesting that Universal Life insurance is a good idea? (YOu’ve also ‘hurled’ insults with your high school comment. )

    UL under zero circumstances is a good idea, as noted above (using exceptionally low interest rate examples). Your return has a ceiling and your interest rate is tiny. TFSA investment into, say, equities you’re not looking at a pittance of 4% but hopefully something between 10-30% (and significantly more at withdrawal due to compounding).

    The 41K you’ve suggested (and in the examples) is good for what? Two years expenses when you retire? Hardly anything to live off of. UL is a poor investment tool that gives a false sense of security to anybody using it.

    AVOID AT ALL COSTS!

  6. Math doesn't lie, Barry

    I asked if he’d finished high-school. It was a question. Unlike your blatantly wrong assertion that only high school drop-outs sell UL.

    And I’m not suggesting UL is a good idea… I’m suggesting it’s a GREAT idea. If you read my example using YOUR numbers, the result in the UL policy is better than your “buy term and invest the difference in a tfsa”. That’s the math, baby! I understand that you don’t like it… if I was a term salesman, I wouldn’t either. So instead you have to make crap up.

    For example… a ceiling on the return? Whatever. If that happens with other companies, sure, you have a point, but I’ve never heard of it. If the funds in Transamerica’s UL policy produce a 10-30% return, the client gets it.

    The interest rate is tiny? Dude, which is it… a return, or an interest rate? Let me help you… in a UL policy, the savings component is invested. It earns a return. There is no interest rate. Stop making stuff up already. Geez.

    And I agree… $41,000 is nothing, but it’s still $7,000 and change MORE than your client got with YOUR strategy. Booyah!

    Just cause you call UL a poor investment tool doesn’t make it so, bro. And you really should stop making crap up. It so detracts from your credibility.

  7. barry econ

    Let’s talk about credibility. You SELL insurance and have resorted to disparaging remarks here and in the other post http://www.discusseconomics.com/insurance/universal-life-insurance-scams-and-complications/. All that aside, regardless of what you may think, you’re not NEUTRAL because you’re a supposed broker. At the end of the day you will collect a FAT cheque for every UL you sell.

    I on the other hand am merely facilitating dialogue (and FYI I did not write the article).

    The only time I can think of that UL would be a ‘great’ idea would be if you were a millionaire. For the regular Joe Schmoe it’s suicide.

    The example above merely pointed out that taking the same money and investing in a conservative TFSA would yield a better outcome. It wasn’t a recommendation to start putting away for your retirement when you’re 36 and to put away 20/bucks a month at that.

    Now back to the numbers. Please explain how you wound up :

    In 10 years, our client has $7928 available to her.
    In 20 years, $20,873.
    At 30 years, $41,035.

    The 34122 made sense b/c it was the difference (49) between UL and TFSA compounded yearly over 30 years at 4%.

  8. C the CFP

    I am avoiding the temptation to respond with like sarcasm. I do not feel the need to be on the defensive as the respondant was, because I am a professional who will always act in the client’s best interest even if it doesn’t serve me well. It sometimes isn’t easy but I will always take the high road.

    Facts speak for themselves. As the most recent market crash has shown us(have we learned it’s lesson yet?) making financial products complicated does very few any good.

    Why do insurance companies and salesmen promote UL to those who would most obviously NOT benefit from it? ( Sure a few could but not the majority of people).

    Insurance companies count on many policyholders lapsing on their premiums so they don’t have to be on the hook for the death benefit or whatever benefits the side accounts might accrue. It is in their interest to sell to people who will not be able to pay their premiums after a decade or whatever. The agent doesn’t care because it’s a fantastic commission and no after policy service. Human nature being what it is that is the end of the story.

  9. Mike, the CFP

    C, you may decide not to use sarcasm, but you also tend to make assumptions and use broad generalities. Let me give you some examples:

    “making financial products complicated does very few any good”. There is nothing complicated about UL, once you understand it. Your comment would suggest that you don’t have that understanding. Case in point, the ability to put insurance (both term and permanent) and savings into a single product, with a single premium, actually simplifies things for many clients.

    “Why do insurance companies and salesmen promote UL to those who would most obviously NOT benefit from it?” A most excellent question, but as I keep pointing out, that’s an agent issue, not a product issue. If an agent knows that a client is better served by term and an RRSP/TFSA, but puts them into a UL product, shame on them. Conversely, if the client is well served with the features of UL, that same agent would do well to recommend UL.

    “Insurance companies count on many policyholders lapsing on their premiums”. I hope you’re including term companies in that generalization, cause though you didn’t say so, I know you were thinking it. It would be easy for me to say: “term companies count on policyholders not renewing their policies when their premium just tripled or quadrupled cause they’re 20 or 30 years older, so they don’t have to be on the hook for the death benefit. The agent doesn’t care… they got paid.” See? Not very self-serving, is it, since anyone who doesn’t market UL most likely markets term insurance.

    and my favourite: “Human nature being what it is that is the end of the story.” I so badly want to call you all sorts of names for this lunacy, but holy hannah, I’ll hold off. This may be YOUR nature, but don’t be so bold as to paint everyone with your brush. Too many quality agents exist that decry such labelling.

    And Barry, in answer to your question, I took the numbers you provided, and ran a hypothetical using Transamerica’s Prosperity UL product. Using your monthly premium of $87, and a rate of return of 4%, the investment account in the Prosperity product grew to:
    In 10 years, $7,928.
    In 20 years, $20,873.
    At 30 years, $41,035.

    I don’t know which part you don’t get, but if this woman was my client, she would have $50,000 of permanent insurance (cause your term would have expired when she was 66), AND she would have roughly $7,000 more in her investment account. I gotta say, I have a hard time seeing how my client got screwed. I’ll let you guys who always take the high road and only do what’s best for your clients figure that out.

  10. Peter Lee

    Just answer this question for me: ” no matter how big your TFSA gets, can you ever use it as a collateral ?”

    And that’s why my UL is worth it in the long run.

    THE END

  11. barry econ

    You would prefer 60K in collateral over a couple million? That’s bad math.

  12. Mike

    Pffft! So’s your comparison, Barry. You really should stop making crap up… it’s so beneath you.

  13. […] protect the same thing. Life insurance has ‘term insurance’ or the much maligned ‘universal life‘, but there thousands of […]

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