The market has seen more than its share of trouble lately. This isn't news—nor is the fact that the instability has affected clients' investment portfolios in their personal and corporate non-registered accounts, as well as their RRSPs, RRIFs and TFSAs. However, it might surprise some that the market issues have also affected the investments in their universal life plans. Have you had a look lately?

You may have a number of over-funded universal life policies in your book—policies with account value you've invested in the market. The ability to tax-shelter funds within those policies—and to manage those funds on behalf of your client—are great reasons to continue to make use of the universal life product.

Out of sight, out of mind?
For those managing a book of investments, the assets in a universal life plan's exempt account may not be top of mind because they don't give you regular onscreen reminders the way so many other investments do. This out-of-sight-out-of-mind situation can create issues for policyholders who rely on you for direction.

When you are actively managing the investments within universal life plans, ask for the most frequent statement updates you can possibly get. Some insurance companies only provide annual statements, but others provide quarterly statements. These are necessary reminders to look at the plans you manage.

Use your time-management system to provide you with additional regular reminders to log on to the insurance company's Web site and review these holdings on a regular basis. (While lower frequency reminders aren't good for advisors, they're probably good for clients, for whom stock-watching is counterproductive.)

Consider the cost
You may have encouraged your clients to over-fund their universal life policies and advised them that they could discontinue any further deposits to their plan, as the capital and assumed rate of return would feed the cost of insurance. Advisors who didn't take the possibility of a market correction into consideration may have to go back to clients, with hat in hand, asking for another cheque to fund the policy's cost of insurance. What kind of response do you think they're getting?

It's important to remember that—like all good things—universal life policies have a cost. Read your illustrations, review contract pages and ask for in-force illustrations. Find out what the annual cost of insurance will be for the next three years. Now, treat the cost of insurance the same way that you treat retirement funds: set it aside.

The plan
Plan three to five years in advance for that cost of insurance. You can choose to withdraw the cost of insurance from any of a number of interest-bearing investments available in the plan. Most plans have a "Daily Interest Account (DIA)" or "Savings Account (SVG)." This will be a highly liquid account, but it will also pay the least amount of interest. In some cases, depending on current short-term interest rates, this account may pay nothing at all. However, it can provide a cash wedge to fund an immediate expense.

Alternatively, the vast majority of plans have guaranteed interest accounts (GIAs or GIOs, depending on the company), with fixed terms from one to 20 years. As can be expected, the guaranteed rates of return on these accounts usually increase with the length of term. In most cases, if you move funds out of a guaranteed interest account before the term is up, your client may be charged a "market valuation adjustment" or MVA. However, when the move out of this account is to pay for the cost of insurance, generally the MVA does not apply. Be sure to double-check this with the insurance company in question, and the contract for that specific product.

Now that you've set aside these funds in the highest guaranteed interest account available, ask the insurance company exactly how they deduct the cost of insurance from the plan. Some insurance companies will automatically deduct the cost of insurance from guaranteed interest accounts before touching any other investments. Other companies insist that the client specify that a certain investment become the "designated deduction account (DDA)" for that policy, and a form may need to be completed.

Once all these ducks are in a row, you have the room to allocate the balance of the funds in the policy, without having to go back to your client to ask for additional funds over and above what was originally planned. Review these plans regularly—request in-force illustrations and reallocate funds to the fixed-income or savings account that the cost of insurance will be withdrawn from each year to keep your clients' policies onside and chugging along as designed.

  • Cindy D. David, CFP, CLU is president, estate planning advisor, Cindy David Financial Group Ltd.