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Universal Life Insurance – Part 2

Continuing from yesterday's Universal Life Insurance article (Part 1), Ed Rempel now explains the various disadvantages of Universal Life Insurance.

So, do we NEED universal life insurance? The main life insurance need most people have is income replacement. If you have anyone that is financially dependent on you (your family) and you want to know they will be okay if you die, you probably need to have some life insurance to replace that part of your income that they would need to be okay.

The need for income replacement goes away with time, though. When you retire (we call it being “financially independent”), you can live fine without working. By then, your kids are usually adults and are no longer dependent on you. Your spouse will get your investments and much of your pension, so most people have little or no income replacement need once they retire.

What life insurance do you need after that? Here is where an insurance salesperson often needs to “create” a need. The main needs usually used are taxes on your estate and avoiding probate fees.

If your estate is mostly illiquid assets that your kids will want to keep, such as a cottage, then taxes on your estate are a problem. You give your kids the cottage, but your estate first needs to pay the capital gains tax, which can be a lot. If you have no investments, then they can only pay it by selling the cottage.

For most people, however, your main assets are your RRSP’s and your house (which your kids won’t keep). So your estate has lots of cash. If your estate is $1 million and there will be $200,000 tax when you die, all that means is your kids get $800,000 instead of $1 million. Is this worth paying life insurance premiums all your life for?

Paying probate fees take some effort to be made to seem important. They can be $10,000 (on a $1 million estate)! Wow! But when you look at the numbers, you can see through it. Probate fees are between .5% and 1.5% of the assets passed by the will. Since the insurance policy names a beneficiary, the death benefit passes outside the will, so you avoid the probate fees.

However, life insurance premiums for minimum universal life are usually at least 1% of the death benefit each year. Getting 10 or 20-year term is only about 1/3 the cost. So, if you live for 2 years, you have probably already wasted more in excess premiums than your estate will one day save in probate fees.

In short, most of our clients are in their 30’s, 40’s and 50’s. Do they need insurance for life? Who knows? They usually need income replacement insurance now and to build wealth for retirement. But there is nothing that tells us they will need life insurance after they are “financially independent”. This is probably true for at least 95% of the population.

If you don’t have a need for insurance for life, then universal life insurance is a waste of money. And if you do, only buy it if it is cheaper than term 100.

The other question relates to the investments. Universal life allows you to pay extra into the policy to invest. Is investing in a universal life insurance policy a good idea?

The “need” created is usually tax deferred growth, avoiding income tax on your estate (again) and avoiding probate fees (again). However, you can get the same tax deferred growth by buying corporate class mutual funds. And the other 2 are rarely worth paying the premiums all your life.

There are some major disadvantages of investing in a UL policy:

1. You are restricted to the investments within that policy, usually all from that one insurance company.

2. Most of the investments are “segregated funds”, which are insurance mutual funds that charge .5-1% higher MER’s each year.

3. There is a 2% premium tax on the extra premium you pay in to buy the investments.

In short, you can virtually always invest much better outside of your insurance policy.

So, if hardly anyone has a need for insurance for life and if investing outside of your insurance policy is almost always better, why are so many universal life policies sold? For most insurance salespeople, every problem looks like a nail.

Of course, universal life and whole life insurance products pay many times higher commissions than regular term. It is not easy to make good money selling life insurance if all you do is term (which is all most people need). This is why they need presentations on how to “create a need”.

In short, “Buy term and invest the difference” is wise advice for almost everyone. Get renewal and convertible term, so you can convert it to a term for life IF you one day actually need it.

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About the author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.

Ed has written numerous articles to educate the public and his clients on his unique insights into strategies that actually work, instead of the “conventional wisdom” common in the financial industry.

Ed has trained more than 200 financial advisors and is considered the Smith Manoeuvre expert in the Toronto area. He has received accolades from Frasier Smith in his book “The Smith Manoeuvre” for customizing this strategy for hundreds of clients. His extensive experience in tax and finance has placed him in high demand. Ed’s team collaborates on each of their clients to help them create financial security and freedom.

{ 73 comments… add one }

  • Ed Rempel August 25, 2010, 3:40 am

    Hi Brian,

    The problem with whole life insurance is that it is not your money – it is the insurance company’s money.

    You can borrow it, but at rates that are more expensive than borrowing from your bank.

    The dividends add to the insurance company’s money – not to your money.

    People don’t realize that you don’t get both the account value and the death benefit – you get one or the other. The dividends generally add to the death benefit.

    The only part that is your money is the cash value, which generally grows by about 2%/year.

    If you cash it in, it is taxable. It is only tax-free if you never touch it during your life.

    We think that whole life is hugely oversold. If you are a GIC person that wants no market exposure and you are saving only for your kids (or beneficiaries), then whole life may be useful. But whole life is not an option compared to investments, since it is designed to be passed on only after you die.

    8%/year is a conservative market return. The TSX has averaged 10%/year since 1950. You can get that type of return with an index fund. Top fund managers beat the index long term. We use 8% for retirement planning purposes, since it is a conservative assumption for an equity investor with a good investment strategy.


  • Brian Poncelet,CFP August 26, 2010, 1:27 am

    Hi Ed,

    I really don’t want to put you in a spot so here goes…

    You made some interesting points… I will address a few here. The 8% you are talking about for equities I think is high. Even if I assume you are geting 8% with the “top fund mangers” I don’t think you have any you can name any who has been around even twenty plus years if you can, please tell me.

    From my data the TSX composite index (no fees) is 5.97% after 20 years (as of June 30th 2010)…GlobeHysales

    The returns go up and down like a ….seat. So someone who is near retirement is still be 100% in equities? Will they get 8% or better? I don’t think so.

    Assuming you have to pay capital gains, 2% gets lost to taxes. So the real return is a generous 6%.

    Using life insurance you have the opportunity to pay less taxes have more money in retirement with less risk. In retirement many people worry about running out of money and can not recover from a market correction so the equities is not going to work.

    For one example please review my new calculator on my web site http://www.rightinsurance.ca
    Under free financial tools go to person A vs. person B.

    Person B has less money than person A…yet has more money and pays less taxes in retirement. If needed, cash can be taken out of the insurance policy at the end of 20 years (age 85) every year even if he lives beyond 100! He spends more money and leaves money to his family instead of the government.



  • Brian Poncelet,CFP August 31, 2010, 10:06 am

    Hi Ed,

    Since I have not heard back on the question of who the mangagers who are beating the index I will address some other points you made in error.

    The long term returns for whole life is about 5% (after 20 years) and remains at that level. This is with over 100 years of experience in Canada… far longer than any mutual fund sold here. This return grows tax free. Loans can be made tax free for the first 15 years at that point the ACB will have been reached. Currently, loans charged by some insurance companies and banks is 4%. Loans can be made up to 90% of the cash value.

    Since money can be used tax free the insurance company credits the dividends as if no money was taken out.

    An example would be $30,000 borrowed from a policy for a 35 year old male at year by year 11, the cash value would be worth $65,347 by year 16. The cash values never go down… unlike stocks which can fall in value.

    So buying real estate, stocks etc. would be tax deductable. Using a loan with a life insurance policy.

    The idea of the insurance policy is not to replace stocks or real estate, the best idea is to have this as a swiss army knife. If one gets sick the policy will continue to be funded by the insurance company to age 65, if a wavier of premium is bought.

    If you need or see an opportunity the life insurance policy can be used. In retirement you can pay less taxes and have more money to spend than with out it.

    With investments if they are doing well why not borrow and buy more? The insurance allows you to do this and covers the debt against death or disability, you could even skip payments.

    Ps. the ten year return for the TSX (as of July 2010) is 1.19% (no fees). This does not factor taxes payable during this time as well! This would be paid out of pocket or out of the investment.

  • georgi jarvis September 1, 2010, 5:28 pm

    what brian says is mumbo jumbo .listen to Ed ! I have owned one of these products for 17 years .you will be FAR better owning term deposits or bonds in a taxable account .They do not grow tax free .tax is only deferred .Your original costs in fact depreciate over the life of the policy .this results in your paying tax twice on much of your final return.in most cases probably at a greater rate .COMMISSIONS are huge on this product.this along with layers of fees and othercharges create great leakage to total returns .This product is all spin .Stay away !!

  • Brian Poncelet,CFP September 2, 2010, 10:11 am

    Hello Georgi,

    It sounds like you may own a UL policy with the excess invested in the market.
    As you already know the markets have not gone anywhere for years. In general the mers are higher. Perhaps you can tell me details on what you own. If you read my comments regarding whole life the money is invested in government and corporat bonds, real estate, some stocks, mortgages etc. The fees are around .20.

    The UL topic I have use in the past is using gics please read Using UL with corporations.

    As far as commissions go I make more money selling term than most permanent life insurance policies based on the same yearly dollar amount paid.

  • georgi jarvis September 2, 2010, 4:47 pm

    Hi Brian , I truly appreciate you prompt response .The investments held in this product have been from the inception 5 year Government of Canada bonds .This is still the case and has never varied .It was and still is meant to satisfy a portion of my fixed income asset allocation .So it is very easy to compare with the returns that I would have received in a taxable account .After tax return in this product turns out to be 50% less .50% more would have been achieved investing in the identical bonds in a taxable account .See comment #41 on this stream .This will provide further info .looking forward to your response .Would love to have Ed weigh in as well !

  • Brian Poncelet,CFP September 2, 2010, 6:52 pm

    Hi Georgi Jarvis,

    The best I can say on this would be to sent me a copy of the illustration and the last statement showing the cash value of the policy.

    What maybe happening here is the majority of the money has gone to pay the insurance premiums. Having said that I have a few ideas, to turn this policy around for you without leaving your insurance company. If need be I maybe able (or give you) questions for the insurance company to ask. Again, without understanding facts all I can really do is guess what you may have.

    Feel free to drop me a line first, if you wish.

  • Brian Poncelet, CFP September 8, 2010, 9:04 pm

    Hi Georgi Jarvis,

    I am still waiting to hear from you.


  • georgi jarvis September 10, 2010, 2:14 am

    would love to hear what you have to offer .A fair bit of info provided in my previous comments .thanks brian .

  • Brian Poncelet,CFP September 10, 2010, 9:02 am

    Hi georgi jarvis,

    The information is very limited. For example are you buying more insurance with the premiums, is it max funded. Without details, I nor anyone else can’t help you. This is for a second opinion, not to change what you have. If you re read my story about annuities, you may be able to increase your income and pay less taxes. It is hard to say what choices you have with the insurance company.

    What you are asking is like phoning a doctor with limited information, who can not run some tests or see the patient. The other idea is to contact your insurance company and try to get them to help you, or have some one guess at what is going on with out details. Best of luck.


  • Big E September 27, 2010, 8:10 pm

    “People don’t realize that you don’t get both the account value and the death benefit – you get one or the other. The dividends generally add to the death benefit.”

    Can someone (Ed or Brian perhaps) explain this comment further? Can you not take out a loan that is guaranteed by the cash value, which is repaid upon your death, AND have the death benefit paid out?

  • Brian Poncelet, CFP September 28, 2010, 11:56 am

    Big E,

    It depends on what the extra cash value is invested in. Lets assume it is GIC’s you could borrow up to say 80-90% of the cash value. If you die, the insurance would cover the loan and you would have a small death benefit…assuming you do not repay the loan.

    If you pay back the loan, the cash value keeps growing as if you never took the money out in the first place.

    The question to ask is how will this help me in retirement or much later in life? If you like annuities, or have a cottage you want to keep in the family, children who need extra help, a pension you wish to pass on to a spouse…and many more ideas, a UL policy may make sense but it is not for everybody.

  • Big E September 30, 2010, 8:22 pm

    Thanks for the response Brian. While I’ll admit the returns on the cash portion of the insurance isn’t great, it at least paid dividends when my entire investment portfolio tanked. I also see this as a way to make sure my kids get something since I don’t plan on renewing my term insurance after my 20-year is done.

  • Stephanie October 17, 2010, 12:34 am

    Hello, I must say you have me hooked to reading each comment….very interesting, thank you. I found your column while trying to figure out what my husband and I should buy as far as life, or and health crisis insurance. I have spoken with two different insurance people whom I know. One is my FP and one who has been in the Ins. business for approx 20 years. We are each lets say 44 years of age; I am expecting and due to have our first child in two weeks. We each do well but at the moment a little land poor :-), we have realestate assets,ie home, and land worth a fair bit. We have life insurance through my husbands work and I have a critical illness policy that costs me approx $70.00mth for $100,000. We just bought a piece of land and are wondering what type of insurances we should have to pay off approx $400,000 for mortgage and land if something were to happen to us over the next 20 years; with a young child to think about now. We would prefer not to sell anything if something happened to one of us. If something happened to both of us we would want our child to have a comfortable life. If we buy term 20 that takes care of the $400,000. but no more. We have the insurance through my husbands work but what happens when he retires; I know his work has flex dollars….sorry cannot remember all the details. Can someone tell us what would be the best product or products we should buy? thank you

  • Brian Poncelet,CFP October 17, 2010, 1:09 pm


    Insurance is a wants product. Do you want coverage and for how long. Over the years we change what we want as life changes. For example having a family means you think differently than someone who has no kids. In my case I have two twin boys. In Ed Remple’s case (my understanding) is he has no childern, which means he has no kids which gives him a different perspective on insurance in general. Again insurance is wants product.

    If you read my article on annuities you could use the insurance as a way to guarantee a high after tax return in retirement. You don’t have to worry about returns. You have to look at cash flow. If money is tight maybe term is the only way.

    I sell a lot of insurance and a lot of investments. When I started out 16 years ago with Investors Group (I am independent now) I was taught you could expect 12% returns every year …later 10% ….later 8%. Now advisors are talking about 5 to 6% in retirement! So the idea of buying term and investing the difference seems good on paper but does not always work. There is much more I can add but I will leave it here for now.

  • Brian Poncelet October 26, 2010, 12:40 am


    Here is some new information your readers might want to review. From the Toronto Star
    By James Daw | Mon Oct 25 2010

    The cost today of insuring a life, no matter how long it may last, has remained roughly the same for many years.
    Statistics Canada and similar agencies in other countries do not track the cost of life insurance in their national consumer price index. But insurers can point to certain permanent life insurance policies that are cheaper now than 16 years ago.

    So coverage became more affordable for middle- and upper-income earners as wages rose. But, now, Canada’s leading seller of certain permanent policies is saying today’s prices cannot last.

    Manulife Financial Corp. says it expects interest rates will remain low, and there are not enough savings to squeeze from gains in efficiency, from policyholders living longer or from policyholders letting their coverage lapse early.

    My understanding is to also expect term rates to increase shortly as well.



  • uptoolate January 1, 2012, 3:10 am

    Hi Ed – at the end of the article, your quote goes,

    ‘In short, “Buy term and invest the difference” is wise advice for almost everyone.’

    Could you elaborate on who the very few individuals are who can benefit from having a UL policy?

    Happy New Year. Thanks. John.

  • Brian Poncelet,CFP January 2, 2012, 2:59 pm


    Life insurance does two things provides a guaranteed amount for a family (at death) and in retirement, it allows one to have several options such as getting an annuity for some of the retirement funds (currently paying 8% or better in some cases, for life also guaranteed).

    Where else can $100,000 produce $7,000 to $8,000 or better in retirement every year guaranteed as one example?

    see http://www.milliondollarjourney.com/how-annuities-work.htm

    Life insurance rates have gone up because of the low interest rates, also as one gets older as well.

    The goal is to spend and enjoy you money in retirement, without having to worry about rates of return and pay less taxes.



  • uptoolate January 6, 2012, 12:52 am


    Thanks for trying Brian but not really the kind of answer I was looking for. Was hoping Ed might have something to say on the topic as it’s pretty clear that permanent life is only an appropriate product for a very small portion of the population if really for anyone at all. If there is a group that would benefit in his mind, I would like to know who they might be and how the numbers break down so as to make the product beneficial too them.

  • George Jarvis January 15, 2012, 12:18 pm

    Brian ,does policy holder receive the additional advantage of having premiums and other costs being paid within the policy with pre tax dollars generated within the policy during the years the policy remains active ? Thanks George

  • eric September 10, 2013, 1:15 am

    just want to share my experience. i bought manulife perform max in 1995. I was 28 years old. I paid about $60k over 6 years. when manulife went public (ipo), i got shares and sold it for more than $60k. my policy is really free. Now, the cash value is about $145k and growing by more than $10k a year. death benefit is like $750k. Not a bad investment. In my opinion, if you can afford it. Buy a little as early as possible. Yes, the cash value is not the greatest. However, it is an investment that you don’t have to be involved much. over long run, it returns is reasonable and tax free. Unlike term insurance, the death benefit goes up as time goes. If you live a long life, you can leave a large sum of money to your children or borrow money against it at late life.

  • Brian Poncelet, CFP September 10, 2013, 10:21 am

    Good for you Eric!

    I think the main objection to Universal life is how the money is handled.
    Higher management fees etc. The Whole life policies (a different animal) grows more steadily and never goes down.

    The cash value always looks poor for the first 10 years. At year 15 plus it grow much better.

    I had a father-in law who had an old Maritime Life policy which was bought out by Manulife (he was paid over $50,000) and kept the policy. If you have the right type of policy you are in fact a owner (like a share holder).

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