Universal Life

Many Canadians consider their Registered Retirement Saving Plan (RRSP) to be their best tax shelter. However,
Universal Life (UL) insurance has become an increasingly popular long-term financial planning tool that also offers
tax-sheltering benefits. What makes UL insurance so popular is that it combines two essential financial planning
components into one package: life insurance and tax-sheltered investment savings.
This article will take an in-depth look at how UL insurance works, and why it is a great investment tool to meet any
Canadians financial planning needs.

What is Universal Life?

A UL policy combines permanent life insurance with an investment savings component. A portion of each deposit is
used to pay for the life insurance component, while the balance is invested in a tax-sheltered manner.
Upon death, proceeds from the investment portion of the policy as well as the death benefit, transfer to the
policyholders beneficiaries tax-free. However, there are also ways to access the investment portion of the policy while
living.

The Structure of a Universal Life Policy

A UL policy has both an accumulation and an insurance component. The insurance component consists of funds
paid towards the cost of the insurance. Any funds deposited over and above the base insurance costs are invested at
the owners discretion within the investment options offered by the insurance carrier. These options include money
market, fixed interest or GIC type funds, and equity based funds that are similar to mutual funds. All of these types
of investments accumulate on a tax-free basis. All premiums and accrued interest are paid into the accumulation
component, and the costs of insurance are paid from the accumulation component. Excess funds remain in the
accumulation component and grow tax-free. These excess funds can be accessed via policy or collateral loans, or
withdrawals.
If you stop paying the basic insurance costs, the funds in the accumulation component may be enough to cover the
premium payments and maintain the policy. If you surrender the policy, the insurance coverage ceases and the funds
in the accumulation component are paid out to you, less applicable charges and taxes.

A Flexible, Tax-Sheltered Investment Program

Similar to an RRSP, investment savings compound tax-free while residing in a UL policy. Investments within the
policy grow free of taxes on capital gains, dividends, and interest.
Unlike an RRSP, there is no salary-driven maximum that you can contribute to a UL policy. The only constraints
on how much you can deposit is the size of the death benefit of the policy. The larger the death benefit, the greater


Universal Life
the deposit maximum. This makes a UL policy particularly attractive to high-income earners who have already
maximized their RRSP contributions.
In addition, the investments are your choice! A wide range of eligible investments can be selected to provide flexibility
and control over the management of the savings portion.

Creating Tax-Free Retirement Income

The investment savings component of a UL policy can also be used to generate tax-free cash during retirement.
Structured properly, the policys investment savings can be used as collateral to secure a series of loans; typically
between 75-90% of the cash surrender value. Since the loans are not considered taxable income, you receive the cash
free of tax.
These loans and accrued interest are repaid upon death, while the balance of the policy, and its death benefit, passes to
your named beneficiary tax-free.

An Excellent Estate Planning Tool

UL policy provides you with lifetime insurance coverage. The policy remains in place until death, eliminating any
fear that you will have to requalify for insurance in the future, as is typically the case with term insurance.
Proceeds of a UL policy paid to anyone but the estate directly are shielded from creditors, free of probate fees,
confidential (unlike assets distributed by your estate through a will, which is a public document), cannot be contested,
and most importantly, are received free of tax.
As a result, UL is an excellent estate planning tool. The policy can be used to offset capital gains taxes on corporate
shares, second properties, or taxes on the full value of your RRSPs and RRIFs.
An increasing savings portion in a UL policy also means that you can build an increasing insurance benefit, often
larger than you might otherwise afford with other kinds of insurance. This can help to offset increasing tax liabilities
much more efficiently than term insurance.

UL insurance can provide the following advantages:

1) Protection Against Taxes on your RRSP or RRIF:
Upon the last death of either you or your spouse, the full value of your registered assets are subject to income tax on
your estate tax return.. A UL policy can be structured to pay the proceeds upon the death of the second spouse, thus

Universal Life
offsetting the taxes payable and preserving the full value of your assets for your heirs. Significant savings in premium
costs are achieved by structuring the UL policy to pay its death benefit upon the death of the last spouse.
2) Protection Against Capital Gains Taxes:
Over a lifetime of hard work, many individuals accumulate significant assets such as a business, investments or real
estate. Eventually, these assets can be subject to significant capital gains taxes. A UL policy can help those who wish to
pass on capital property (such as a ski chalet, family cottage or business interest) without having to liquidate the assets
in order to pay the capital gains tax.
3) Tax-Sheltered Investing Outside of a Registered Plan:
For individuals who have paid off their mortgages, maximized their RSP contributions and have excess cash flow
available for investment, a UL policy can help. It is a savings vehicle that allows you to invest non-registered money
on a tax-sheltered basis so as to maximize investment growth and create more income available for retirement. This
policy is best suited to high income earners at the top marginal tax rate.
4) Tax-Sheltered Estate Accumulation:
Many individuals desire to provide a special bequest at the time of death to benefit a charity, a loved one, to provide
education funds for a grandchild, or for any other purpose. A UL policy can alleviate concerns about taxes or probate
fees eroding the value of an estate. Such a policy would be suitable for investors concerned about the negative tax
consequences of most non-registered investments and for those who want to maintain the liquidity of their assets in
order to access the funds during their lifetime.

In short a UL policy can allow you to:

Set aside funds to cover estimated estate fees and taxes
Enjoy attractive returns and tax efficiency
Receive tax-free income over a lifetime
Protect a small or family-owned business
Accumulate a tax-free inheritance for family, heirs and charities
With all of its benefits, UL insurance deserves serious consideration by investors

Universal Life
Universal Life: How Does It Work?
UNIVERSAL LIFE: HOW DOES IT WORK?

UNIVERSAL LIFE: HOW DOES IT WORK?

Think of two buckets:
The death benefit flowsThink
to theofbeneficiary
from the insurance bucket.
two buckets
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Where do my premiums go?

Where do my premiums go?

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ridersriders
and policy
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accumulation grows tax free; could later be used as income.

Universal Life
If you live:
Money moves from accumulation to insurance to keep policy in force. Excess in accumulation grows tax free; could
later be used as income.
Upon death:
die
The death benefit is paid Iftoyou
beneficiary
from insurance; contents of accumulation go to party stipulated by policy
Death benefit is paid to beneficiary from insurance; contents of accumulation go to party
owner. Both amounts arestipulated
paid to the
recipients
on aamounts
tax-freearebasis.
by policy owner. Both
paid the recipients on a tax-free basis.

If you quit paying premiums

If you quit paying premiums:

Money in accumulation may be sufficient to maintain policy. If policy is surrendered,
insurance
is eliminated,
contentspolicy.
of accumulation
owner, less applicable
charges.
Money in accumulation may
be sufficient
to and
maintain
If policygoistosurrendered,
insurance
is eliminated, and
contents of accumulation go to owner, less applicable charges.

This summary is brought to you by Raymond James Financial Planning Ltd. (RJFP) for informational purposes only. Statistics and factual data and other information are from sources
RJFP believes to be reliable but their accuracy cannot be guaranteed. This information is furnished on the basis and understanding that RJFP is to be under no liability whatsoever in respect
there of.