**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.