Universal Life is an insurance contract that allows for 100% flexibility. This insurance policy has a flexible premium structure with investment options. The policy can be used for protection and as an investment vehicle. The policyholder controls how the investment is structured. One example is the investment could be placed into investment funds and the profits from the investment funds could be used to pay the premiums.
Under the Income Tax Act, the earnings of a life insurance policy are not taxed until the money is withdrawn. Another opportunity available with this type of policy is leveraging, where the policyholder is able to borrow from a third party bank.
Once the investment account had built up for several years, you can maintain the insurance coverage by allowing the company to draw down funds from the reserve to pay the annual premiums. This is unlike other insurance policies, where premiums are paid with after-tax income.
If you are prepared to leave your money with the insurance company until you die, you can transform the tax deferral into outright tax savings. A universal life policy will pay the amount of coverage still in force, plus the cash value build-up, to the estate completely tax-free.
