The Advantages and Disadvantages of Universal Life Insurance

2008-11-01T05:50:00.000-07:00

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As we mentioned in previous articles, UL plans are unbundled, the various components of the plan such as insurance charges and earned interest can each be isolated and quantified. Consequently, they are much easier to understand and explain than traditional bundled permanent life insurance products. In this article, we will discuss the tax advantage of the universal life policy.
There are many factors that universal life policyholders must consider when deciding which investment options to choose within a UL plan. Guaranteed interest accounts, for example, are less risky than indexed accounts which have a larger potential rate of return.

1. Advantage
a) Most UL plans allow the policyholder to allocate deposits in a way that matches their risk philosophy. Such a plan may change its investment allocation as the policyholder gets older, negating the need for the policyholder to monitor the UL investment mix to ensure that it is consistent with the policyholder's investment philosophy as that changes.

b) Tax-advantaged status
Investments that invest in the insurance company's general funds, have advantage of preferred tax status, no matter which outside index is linked to mutual fund accounts, if the actual funds is invested in the general fund of the insurance company, they will not be subjected to annual taxation. If the client would like to invest outside of the company's general fund, many insurers have segregated funds attached to their UL contracts and of course, any investment return of these funds is taxable annually.

c) Depending on the type of fund, the income may benefit from tax preferred status if the growth in the fund can be attributed to capital gains or dividends.

d) Used as a carrier fund or shuttle account to automatically receive proceeds from the sheltered accounts should the plan become non-exempt and the funds must be refunded.

e) Non-sheltered investment accounts allow a policy to become paid-up early, often as quickly as with one deposit.

f) If the UL plan can be registered, a non-sheltered account becomes a sheltered account as, once registered, it forms part of the policyholder's 401k or RRSP plans.

g) Investment returns accumulated in the universal life policy is tax free because they form part of life insurance, if payable to beneficiary upon the death of life insured.

2. Disadvantage
a) Funds invest outside of the company's general fund, many insurers have segregated funds attached to their UL contracts and invest outside of the company's general fund. Any investment return of these funds is taxable annually.

b) Limited choice of investments.

c) Investment return of funds withdrawn from universal life insurance policy are taxable.

I hope this information will help. If you need more information, you can read the complete series of the above subject at my home page:

http://lifeanddisabitityinsuranceunderwriter.blogspot.com/
http://life-insurance12.blogspot.com
http://lifeinsurancexiii.blogspot.com

Life Insurance 13

The Advantages and Disadvantages of Universal Life Insurance