Gain Tax-Free Income Through Universal Life

Universal Life insurance is a little-known plan that can have a big impact on your retirement income. It combines life insurance and an investment account in one package. When a deposit is made into a Universal Life policy, that amount, less a small premium tax, is put into the investment portion of the plan. Administrative expenses and the cost of insurance charges are withdrawn monthly. Meanwhile, the remainder of the deposit, up to an amount subject to Income Tax Act limits, accumulates in the investment account, sheltered from taxation. At even the most conservative rates of return, deposits that are large enough to fund both the insurance and the investment program can potentially grow into substantial, tax-free wealth. Later in life, the Universal Life contract may be assigned as collateral for a loan† which provides an income stream upon retirement that is tax-free. Interest on the loan is capitalized and is repayable upon death. At death, the basic death benefit, in addition to the tax-deferred accumulation, is paid out on a tax-free basis. Part of the total death benefit is used to satisfy the outstanding balance on the loan while the remaining amount is paid out to one’s estate or named beneficiaries on a tax-free basis.

Funding Your Retirement with Universal Life

Here’s an example: A couple, both aged 40 and non-smokers, purchase a Universal Life policy with an initial death benefit of $850,000. They make annual deposits of $20,000 for 15 years. Let’s look at how their Universal Life plan might develop over the next 50 years, assuming a 6 per cent rate of return††. Let’s assume further that the couple chooses to enhance their income by taking out a series of tax-free loans beginning at age 65 against the value of the insurance policy. The loan will pay them $26,666 per year of tax-free capital for 25 years. The outstanding loan balance of $2,273,830 is repaid at their death, using proceeds from the policy’s $5,588,632 death benefit. The remaining $3,314,802 death benefit that is left once the loan has been paid, will be paid out to the couple’s beneficiaries. As you see from the chart, the couple has succeeded in enhancing their retirement income tax-free while at the same time protecting their family with a life insurance policy that accumulates tax-free and pays a tax-free death benefit.

The key to getting the most out of any Universal Life plan is to have your life insurance licensed.
The Butler / Laing Group is here to guide you through the variety of products available to you, and then to help you direct the investment options within the plan you choose in accordance with your overall financial strategy.

Contact us at (604) 535-4749, or use our contact page.

† Based on current tax rules. You must satisfy credit criteria to qualify for the loan. The loan is designed so that the maximum loan plus its interest never exceeds 50-75% of the accumulated policy cash value.
†† For illustration purposes only. Rates are not guaranteed.
††† Based upon current loan rates. Rates may vary and are not guaranteed.