Consider universal life

Investors who have maximized their RRSP contributions realize their RRSP contributions already realize the benefits of tax-advantaged growth.

But if you want to make the most of your estate or are looking for other growth opportunities, you may want to consider a universal life or whole life insurance policy.

Universal life (UL) can seem somewhat complex, but it is very flexible and allows you to control any investment options.  UL has the potential to have a significant positive impact on retirement income and estate planning.

UL is both a financial product and life insurance bundled together with the benefits of tax-advantaged investing.  Individuals pay premiums for a UL policy similar to a term life or a whole life policy.  The main difference is that deposits over and above the premium amount may be deposited into an investment account.

There are a variety of investment options to choose from. The deposited amounts accumulate on a tax-deferred basis.  The Income Tax Act has constraints on the size of the investment component.  Proceeds from a UL policy include the insurance and investment component and are usually paid out to the named beneficiaries on a tax-free basis after death.

Retirement Income

A UL policy can also be used to enhance retirement income.  Withdrawals are possible through loans by pledging the UL policy as collateral. The loans are repaid from the insurance payout after death.  Another option may be to withdraw a portion of the value of the deposits in the investment account.  However, this type of withdrawal may be subject to taxation.

Maximizing Estate

A UL policy may provide for enhanced retirement income and/or a maximized estate value.  As noted, amounts can be withdrawn through loans or policy withdrawals.  After death the loans are repaid and any amount in excess of what is owed on the loans are paid out to the designated beneficiaries on a tax-free basis.  An estate can be maximized if no loans are taken and no values have been withdrawn.


UL is a flexible type of life insurance product and ensures that a customized approach is used to meet the individual’s needs.   As financial circumstances change so can the amount of the premium payment – subject to certain restrictions of the Income Tax Act and the need to maintain sufficient value within the policy. Other components that highlight the flexibility is the possibility to increase or decrease the amount of insurance, add additional lives insured, or substitute one life for another.

Whole Life

This is the insurance product that our parents loved to hate.  It is less flexible than UL, but offers some distinct differences that can be beneficial.  It is permanent in nature (in force for life) so it is ideal for use in estate planning.  Whole Life builds tax-sheltered cash values, but the investment component is managed by the insurance company.  This investment component pays (non taxable) dividends which are usually used to increase the death benefit.  The recent “de-mutualization” of life insurance companies resulted in their stocks being available to all of us.  More and more people understand the financial strength of these companies.  Many individuals are also realizing that whole life is a very suitable product for some situations.


Certainly it is necessary to be in sufficient health to be eligible for insurance. UL and Whole Life policies are generally most suitable for investors aged 40 or older.  The individual should have already maximized their RRSP and still have remaining funds to invest.  It is important that they be young enough to allow for growth.  Individuals in the higher tax brackets will benefit more than those in lower tax brackets.  Those considering a UL or Whole Life policy should have also paid off all of their non-deductible debt.


Mr. Sanders is a non-smoker and purchased a UL policy when he was 50 years old.  He sold one of his businesses at that time and obtained excellent financial advice.  One of his objectives was to ensure that he could leave a significant estate for his children.  Mr. Sanders decided that a UL policy with an initial death benefit of $500,000 provided the most flexibility.  He plans to make annual deposits of $15,000 for 15 years.

Often it is difficult to see the merits of a strategy unless one compares it to an alternative investment option, such as investing in guaranteed investment certificates (GICs) earning 5 per cent.  We will also see how both develop over the next 35 years, assuming a consistent 5 per cent rate of return and that Mr. Sanders lives to age 85.

In the first year Mr. Sanders could deposit $15,000 into a GIC, earn $750 interest income and pay tax of $328 on this income, ending with $15,422.  Alternatively, this $15,000 could be used to fund the first year’s premium for the UL policy.  If Mr. Sanders chose to fund the UL policy and were to pass away after the first year then the beneficiaries would receive approximately $509,801.  This represents an estimated difference of $494,379 over the GIC option.

What happens if Mr. Sanders lives to be 85 years old?  After 35 years of tax-free accumulation within the UL policy, his children will received a tax-free benefit of approximately $790,837 upon his death.  The GIC alternative would result in approximately $493,041, a difference of $297,795.  As noted above, the difference is even greater if Mr. Sanders passes away prior to age 85.

If you can recall from our previous articles, one benefit of insurance products is the ability to bypass the estate (avoid probate) and avoid public record.  These advantages are in addition to the differences noted above.

Mr. Sanders could have also chosen to enhance his retirement income through policy loans.  Mr. Sanders liked this flexibility but found other sources of income were sufficient to fund his retirement and did not require any policy loans.  The primary purpose of this UL policy was for Mr. Sanders to maximize the amount he could leave to his children.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors.