Saturday, May 11, 2013

Universal Life Insurance In Canada

I often get the question from my clients that isn't investing a better strategy than obtaining life insurance? The answer is really depended on when will the insured pass away and make the claim. To compare life insurance with investments, let's explore the following case study.  Below is an illustration of getting universal life insurance in Canada versus investing:

Assume a non-smoker male, thirty years old, purchases a $300,000 universal life insurance policy, with the guaranteed paid up option of 20 years, his monthly standard rated premium will be $216.08. (Figures obtained from Canada Life on May 8th, 2013, and it is subjected to change.) It is a permanent coverage, therefore, the $300,000 will be paid out no matter when he dies, and the good thing is he just has to pay premiums for twenty years.

On the other side, if he doesn't purchase this life insurance policy, he could use the $216.08/month to invest. Assume the investment he picks can give him a 5% annualized rate of return.  At the 20th year, the investment balance will grow to $88,043.If he terminates making any additional contribution, and just lets the findings to grow for another 25 years, the investment amount will be approximately $298,145 which is close to the death benefits. In this case, it takes 45 years for the investments to break even with the death benefits.

In addition, there are investment risks involved, while the premium and death benefits are guaranteed and written in the insurance contract. Insurance death benefits are paid out tax-free, on the other hand, tax may be applied to the investments.  If the insured dies, his beneficiary will receive no death benefits, but only the accumulated investments. This is a self-insured method. (A person takes all the risk himself/herself instead of the insurer)

Then why would people not to have life insurance coverage? One good reason of having investments over life insurance is that it is more flexible to access the money. There are permanent life insurance that have built-in cash value, but the huge portion of the funding in the policy are still only accessible when a death claim is made. Simply speaking, most of the findings are paid out to the beneficiary rather than the insured. For people who are not accounted for any financial responsibility, directing the money towards investments rather than paying the premium may be a better alternative.

This article is not trying to state which method is absolutely better than the other, but to discuss some of the different aspects of these two approaches. It is important to understand the different choices available and your needs before making any financial decisions.

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