How life insurance works
For some policies, such as term or permanent life insurance, you only pay for the cost of insurance. In other words, you pay monthly or annual fees, called premiums. In exchange for these payments, upon your death, your insurance will pay your beneficiaries a tax-free death benefit. Your beneficiaries will be able to spend this money as they wish or use it to cover funeral expenses, childcare costs, home maintenance costs, or pay off the unpaid debt.
Money from life insurance is paid directly to your heirs when you die. It doesn’t add to your estate — that is, anything you own (house, car, and unregistered accounts, for example). When you die, your estate is not immediately given to your relatives or heirs. It must first be approved. The probate process is used to cover legal fees or unpaid debts. Once this step is completed, your heirs receive what is left. So money from life insurance doesn’t necessarily go to paying the taxes and probate fees that your estate generates.
How universal life insurance works
Universal life insurance works differently: it includes permanent insurance and savings investments. When you pay your premium, the money goes into a policy account. Part of it is used to pay your premiums, so your beneficiaries get a tax-free death benefit. The death benefit money will not form part of the estate and will be delivered to your heirs when you die.
The other part of your payment is invested. Most universal life insurance policies offer various investment options to suit your goals and risk tolerance. Tax on savings is deferred: you will only pay tax on your investment when you withdraw money from the contract account.
In summary, the death benefit provides financial assistance to your loved ones upon your death. But the investments made in your policy account can benefit you throughout your life. If you need money in retirement, for example, or if you have an unexpected expense that your emergency fund can’t cover. Knowing that you can take advantage of this source of income can be very reassuring.
What can be done with a contract account?
Depending on how your investments are performing, you can put the money in your policy account to good use in several ways. Here are a few :
Use it to pay your premiums. Over time, if your investments perform well, you can use the savings accumulated in your policy account to pay for your insurance. Say you pay your premiums for a few years. During this time, your investments begin to grow. In the long run, your savings may well cover the cost of your premiums. This way, you stay insured without having to shell out a dime for monthly or annual premiums. As you get older, you are likely to have more financial responsibilities. It’s nice to think that your life insurance could pay for itself.
Use it to increase your coverage. The amount of coverage you purchase determines your heirs’ death benefit. By increasing your range, you can increase the death benefit of your insurance. Let’s say you initially purchased enough insurance to cover your spouse. Five years later, you have a child. Your family now requires more excellent financial assistance. Universal life insurance allows you to buy additional protection so that your loved ones receive a more considerable death benefit.
Use it as a source of retirement income. Are you looking for a tax-efficient way to save for retirement other than in a Registered Retirement Savings Plan (RRSP) or pension plan? You may be thinking of retiring early. Or you want to be prepared if you have to take it unexpectedly. A tax-deferred investment built into your policy can help fund your retirement in all scenarios. This is especially the case if you have already maxed out your RRSP. Or if you need an additional source of income to fund your new lifestyle after leaving the workforce.
