Universal Life Insurance Plan Vs. Indexed Universal Life: Which One Fits Your Financial Goals

Here’s what happens. Cash value inside a Universal Life Insurance Policy grows on a tax-deferred basis, so you’re not reporting it every year the way you would with investment income. Later on, if you want extra retirement income, you can access the policy through withdrawals or loans. That flexibility can mean less income tax than if you were to withdraw from RRSPs directly.

Consider Indexed Universal Life as a middle-of-the-road option. Your cash value growth is based on a market index, but you are not actually invested in it. You have downside protection, so you don’t lose money in a bad year. Variable Universal Life, also known as VUL or variable Life Insurance, puts you directly into the market with investments, including mutual funds, so the risk level will be higher.

Yes, and we see this a lot with entrepreneurs. Permanent Life Insurance Policy structures that they use to fund buy-sell agreements or pay estate taxes at death by transferring shares. Some even use its cash value to secure loans. It’s not just something to keep from getting sick; it could help form part of an overall financial strategy.

Participation rates determine what percentage of the market performance you actually get to keep in your policy’s cash value account. If the index goes up by 8 percent but the participation rate is 60 percent, only some of that gain is credited. Throw in caps, and your cash value’s growth is more a function of how the insurance company builds the Indexed Universal Life contract than the index itself.

They do. A Universal Life Policy offers a tax-free death benefit, which means your family can have liquidity when they need it the most. Rather than liquidate assets or liquidate an investment, the Life Insurance proceeds pay estate taxes and final expenses.” It is for this reason that many wealthy families include Permanent Life Insurance in their estate plans.

Universal Life has some of the best U.L. benefits, with one of the most popular being premium payments. You are not bound to that particular number till the end of time. You pay the minimum to keep the Permanent Coverage for some years. In years other than the first, you dump more to help the cash value grow faster. This flexibility allows you to adjust as your financial situation changes.

It depends. Indexed Universal Life provides downside protection, which makes individuals who feel nervous about losing money feel better. However, the growth is still tied to a stock market index, so your cash value accumulation may be less predictable than with traditional Universal Life. For younger children, whole Life Insurance or traditional Universal Life (not IUL) is the safer route for the most risk-averse.

Yes, and it’s a tactic we recommend on occasion. A policyholder may hold a permanent policy — say in Canada, a Universal Life Policy, for lifetime coverage — while also purchasing a term life policy, many with high death benefits, for temporary protection. Universal Life Policies create a cash value that accumulates tax-deferred. By contrast, Term can keep insurance costs lower when you’re young or when your debts are at their highest.

Whole life is steady. Premiums are fixed, cash value growth is guaranteed, and you don’t have to follow participation rates or market index returns. Indexed Universal Life, however, provides greater upside linked directly to the market, with a safety net. So the trade-off is straightforward: dependability of whole life or the greater growth potential of Indexed Universal Life.

Yes, and people forget this. The policy’s cash becomes available later in life. That could be a combination of systematic distributions or loans. The key is not to disturb the tax-free death benefit. That’s why a Universal Life Insurance Policy is typically part of an overall financial plan, along with pensions and registered accounts.