Universal Life Insurance is a combination product that includes both permanent life insurance coverage and investment options. This is a unique product that offers tax advantages to preserve your estate and transfer the assets to your beneficiaries.
It benefits people who:
Want to increase savings in combination with RRSP and TFSA.
Would like to leave more money to their children and grandchildren.
Are trying to protect the value of a self-owned business in a tax-friendly manner
The primary purpose of Universal Life is an insurance policy. You determine the payout amount based on your determination of what you need to help your family, protect your business, or conserve assets. The premium is based on the insured’s health, age, and other determining factors.
Universal Life has an added advantage to have the premium payments invested. When done correctly, this can produce growth that will also afford a tax advantage.
From each payment you make, the insurance company first deducts the amount of the premium. The insurer also deducts for any administrative fees and charges for any Riders you may have chosen. The balance of your payment is placed into the investment accounts you have selected. You make the selections at the time the policy is issued. This investment portion is called the Account Value. This portion earns dividends or interest based on the performance of the investments you have specified.
Maximum Exempt Premium (MEP)
The upside is that when you pay more than the cost of the insurance and fees, it is automatically invested. There is a limit on the amount you can pay annually and still maintain the tax exemption. This is called the Maximum Exempt Premium (MEP). If you do contribute more than the MEP, it is placed in a separate account held outside the policy. This separate balance is called a Shuttle Account. The income on the shuttle account is taxable.
Remember that this is still an insurance policy and when you pass away, the death benefit paid is tax free.