Understanding Universal Life Insurance

Universal Life (UL) insurance, introduced in the 80s, was crafted as a tax-free investment tool for affluent individuals. Over two decades, it gained popularity for growing wealth and facilitating tax-free wealth transfer.

Key Components:

1. Cost of Insurance (COI): There are two options to choose from.
   • Level Cost until death (LCOI): In this arrangement, the cost is Fixed until death
   • Yearly Renewable Term (YRT): In YRT the cost of insurance may increase every year. This means every year if you are paying the same premiums, a lesser portion of those premiums would be going toward the Investment portion. The cost may be very significant during the later years of the policy.  
2. Fund Account (Investment Account):
   • This could be a Tax-free or tax-sheltered investment account.
   • It allows customizable contributions for diverse investments. The investments could be made into different types of funds, GICs. etc. 

Flexibility :

This involves depositing a premium to cover the costs of insurance and also contributing to the investment account, to get tax-free growth. The growth in the policy could eventually offset the cost of insurance. The policyholders can adjust the investment portion of the amounts within specified limits.

Pros and Cons:

1. UL is cost-effective and flexible, in contrast with Whole Life insurance.
2. If you are an active investor and understand at least the basics of how the stocks/funds markets behave then UL could be a good choice.
3. If you like to take higher risk and want higher growth from your investments within a life insurance policy then Universal Life insurance could make more sense. 
4. UL requires proper management due to its intricate structure. You must have an active advisor who can manage your policy well. In case you want to switch the cost of insurance from YRT to Level, your advisor must be on top of this. 
5. UL lacks guarantees, putting the entire risk on the policyholder and the performance of the funds within the policy. 
6. Universal life insurance could be a great fit where there is only a specific requirement for a death benefit for the estate to take care of tax liabilities. In some cases, it could also be a great fit when corporate dollars need to be tax-sheltered. 

Cautionary Note : 

1. Industry trend shows advisors exiting within five years after they join the Insurance industry. This leaves the Insurance policyholders with poorly managed UL policies, especially, YRT cost (Yearly renewable term) products. 
2. Clients might have to pay premiums for decades, facing potential policy collapse at a later stage due to wrong choices of cost of insurance, badly handled investments, and many other variables.
3. Often, permanent insurance only makes sense when you have already maximized your contributions in RRSP, TFSA, and other registered accounts. 

Conclusion:

1. Understanding UL complexities is a little hard. You and your advisor must discuss and understand what kind of options you are choosing and how can they affect your policy in the long run.
2. This also emphasizes the need for competent advisors to secure financial well-being.