In this article, Dean Chambers discusses how a universal life insurance policy can be structured to offer your clients maximum flexibility, lifetime protection and tax-preferred growth.

The new year marks a time of resolutions and fresh starts. Maybe you’ve resolved to eat healthier, exercise regularly, or spend more time with friends and family. If you want to grow your business in 2018 and offer your affluent clients more flexibility, lifetime protection and tax-preferred growth, you could start by learning more about universal life insurance (UL).

UL isn’t ideal for every client, it’s true. But UL can offer clients a way to reduce their payment period, while continuing to build their savings in a tax-efficient manner.

Meet Jane

Let’s consider the case of Jane. A few facts about her:

  • She’s a 45-year-old non-smoker.
  • She’s built up significant savings and has maxed out her RRSP and her TFSA.
  • She’s a hands-on investor who likes to monitor and manage her investments.
  • She recently inherited some money, but needs a lot of flexibility with her budget.
  • She has a life insurance need. Jane’s term policy is expiring and she wants to make sure her daughter is protected, and will benefit from everything she’s worked so hard to build.

Jane has four primary concerns. She wants to:

  • benefit from lifetime insurance coverage, without a lifetime commitment to paying premiums,
  • invest her inheritance and make sure it’s not eroded by taxes,
  • diversify her assets in a tax-efficient way, and
  • leave a meaningful legacy for her daughter.

As Jane’s advisor, how would you recommend she invest her inheritance in a tax-efficient way and pay for her life insurance coverage effectively?

UL holds the answer

Using the yearly renewable term (YRT) structure in a UL policy helps Jane in a tax-efficient way. She can make additional payments in the early years of the policy, which will go toward paying her future cost of insurance (COI). Low COI in the early years gives her more tax-preferred growth potential in her policy fund. Any interest she might earn based on her investment account options is tax-preferred as long as it remains within the policy, giving her the ability to pay future COI with pre-tax dollars.

While this structure creates the life insurance coverage and tax efficiency Jane is looking for, she wonders what to do with her inheritance, and whether she can shorten her premium-payment period.

Again, UL holds the answer. Making 10 equal payments with a YRT structure will give Jane more tax-preferred funding and flexibility if she wants to take a break from making payments or take a withdrawal in the future. What’s more, the total payments over the life of the policy are significantly lower with 10 equal payments, when compared to estimated level payments (ELP) based on the duration of the COI period:

graph explaining 10 pay fund and ELP&S total fund payments over 55 years

Based on SunUniversalLife II, female non-smoker age 45, $1 million of coverage using YRT to 85 COI option and insurance amount plus policy fund death benefit. ELP to age 85 assumes 2% in years 1 and 2, and 3% thereafter.

Interest generated by her investment account options increases Jane’s fund value – a value she can access in her retirement.

If Jane took the additional money needed to make 10 equal payments and instead made estimated level payments, she could invest the difference. However, if she invested the difference in a taxable investment, she wouldn’t see the same total growth as she would within her policy by making 10 equal payments:

graph explaining 10 pay fund and ELP&S total fund value over 55 years

Based on SunUniversalLife II, female non-smoker age 45, $1 million of coverage using YRT to 85 COI option and insurance amount plus policy fund death benefit. 10 pay fund value assumes 4% in years 1 and 2, and 3% thereafter. The ELP to age 85 option assumes the SunUniversalLife II plan will earn 2% in years 1 and 2, and 3% thereafter, with the difference between the ELPs invested at an after-tax rate of 1.5%. The interest rates assumed within the SunUniversalLife II plan assume that Jane selects the Sun Life Diversified Account as soon as she is eligible, based on the minimum funding requirements for that account.

Additional lump sum payments up front help give Jane the security of permanent life insurance protection, a tax-efficient way to fund her policy and a tax-free death benefit for an effective transfer of assets to her daughter.

The bottom line

The flexibility of UL insurance gives clients more opportunities than you might think. It offers maximum choice, flexibility and the opportunity for clients to manage their policy and make changes to it as their needs evolve. Additional payments to a UL policy can help hands-on clients make the most of their investment account options, create additional value in their plans, and help them protect what they’ve worked hard to build.

Resources

This article is intended for information purposes only. Sun Life Assurance Company of Canada has not been engaged for the purpose of providing legal, accounting, taxation, or other professional advice. No one should act upon the examples/information without a thorough examination of the legal/tax situation with their own professional advisor, after the facts of the specific case are considered.


Dean Chambers, Vice-President, Individual Insurance, Sun Life Financial Canada, has over 23 years of experience in the insurance and wealth industry where he’s held various roles in financial management, group national accounts and individual life marketing. His experience includes senior-level positions in individual life pricing and individual wealth product development.

Dean joined Sun Life Financial in 2011 as Vice-President, Individual Insurance. He is responsible for product development and pricing for the individual life and health business. Most recently, he led the re-launch of Sun Life’s Term insurance portfolio and is in the process of updating Individual life products for 2017.

For more than 10 years, Dean has been a member of the Society of Actuary’s Education Committee, participating in and chairing several committees. He is a frequent speaker at forums across Canada, including meetings of the Canadian Life and Health Insurance Association (CLHIA), the Canadian Institute of Actuaries and the Canadian Institute of Underwriters.

A native of London, Ontario, Dean earned a Bachelor of Science in Actuarial Science from the University of Western Ontario in 1992. In 1998, he qualified as a Fellow in the Canadian Institute of Actuaries (F.C.I.A.) and Society of Actuaries (F.S.A.).