Universal life insurance policy is one of the more recent life insurance policy types and it was introduced to solve some of the limitations of both term life and whole life insurance policies. The universal life policy is a permanent policy but it gives the policyholder flexibility in terms of when and how much to pay his or her premiums. The policy is also set in such a way as to enable the policyholder determine how much funds to put into his or her cash value account every month. The policyholder is encouraged to put as much as possible into the investment account through paying higher premiums as this increases ones tax deferred investment.
Aspects of Universal Life Insurance
A universal life insurance Canada policy is usually divided into various components of costs to better understand the policy model. This is different from a whole life insurance policy that lumps all costs into a single premium and the policyholder does not get to know the various aspects of the costs of the premium. The various components of the universal life policy premium are described below.
Cost of Insurance
The cost of insurance is the cost incurred by the insurance company for the risk of death. Based on various underwriting factors, the company calculates the costs of covering your life for the face value of the policy. Depending on the type of policy, the cost of the insurance can either be level throughout the lifetime of the policyholder, level for a given period of time or renewed annually. It is best to seek for longer period or a lifetime level cost of insurance for your universal life insurance policy as this protects you from higher costs of insurance in later years of your life.
Administration Costs
The administrative cost is a small element of the premiums of the universal life insurance Canada policy and it covers all administrative costs of managing your investment account and running of your policy. Most companies will not provide any guarantees for the cost of administration as it is apportioned annually depending on actual costs. However, since this is a small costs, it does not significantly affect the premium levels or the universal life insurance quote.
Cash Value
The cash value is the excess of the cost of insurance and the administrative costs. This excess funds go into a tax deferred investment account and the insurance company invests the funds as per the contract. There are a wide range of investment options that a policyholder can choose to have his or her funds invested in. You can opt for a fix returns investment options such as investments in bonds, a variable returns investment option such as investment in stocks or a blend of various fixed and variable returns investment. The type of investment portfolio to put in your cash value is determined at the time of signing the contracts. The insurance company will provide information about the past performance of various investment options to help the policyholder make a decision on where to have his or her funds invested in. Some insurance companies will have hundreds of investment options for the universal life insurance policyholder.