[coolclayton]

My fiance and I have been talking to a financial planner lately, and she has been suggesting a lot of options we have for building some wealth. One of the things she has been strongly pushing for is a Universal Life policy. I have tried to do some research on it, and have been quickly reading and studying as much as I can, but I need some feedback on it. Most of the information I have read about doesn't fit our exact situation, so I'm struggling to find a good answer.

We are both young (24), debt free, and starting our careers. We are currently trying to save up a large downpayment for our first home. The financial planner is arguing that because of our age, the payments for a Universal Life policy would be quite low, not much higher than a term policy. As of this moment, we have no need for any insurance, as we are not dependent on each other or anyone else, but we realize that once we have a home, we will need at least a term policy. I have recently started investing in a TFSA as a retirement vehicle, and I also wish to invest in RRSP's in the near future with any extra money. I wouldn't mind investing in Real Estate if I have any extra money on top of the TFSA and RRSP, as Real Estate is more related to my field (construction).

Basically, what I am asking is this: Should I be investing in a Universal Life policy? I think I would rather put my money towards real estate properties or even non-registered stocks/mutual funds account, but would I be missing out on a greater investment if I pass on the Universal Life?

 

[MoneyGal]

Run away from your "financial planner" quickly, far, and fast.

I don't think you have a need for insurance at all -- in fact, that's what you yourself say -- let alone the most costly form. Yes, universal life insurance premiums would be lower now than they would be if you were trying to buy insurance at, say, age 65 -- but will you need insurance then, either? That's like saying you should lease an SUV now because you might need it later.

You don't even have your savings STARTED yet and you have identified savings needs that have nothing to do with replacing your unmonetized human capital in the even of your death (which is what life insurance does). And yet you should divert your financial goals to fulfilling a requirement that doesn't exist at the highest possible cost?

Nu-uh. No way, no how. Buying something that you don't need has huge opportunity costs (because the money isn't available for other things that you DO need and want, like a house), and your planner has NO WAY to quantify the size of whatever "foregone opportunity" she is suggesting you would be faced with if you don't buy a UL policy. That is: you are trading a known, present cost for an uncertain future benefit which is generally available at lower cost. It just doesn't make sense.

Of course, feel free to disregard. I'm just too hot in my house here and up in the middle of the night, and there's not much more that gets me going than life insurance salespeople.

 

[MoneyGal]

BTW it isn't as though insurance companies have access to some "special" forms of investing (or investing knowledge) that make buying a UL policy a "better investment" than investing outside a UL policy.

The advantages of a UL policy from an investment side relate to overfunding the reserve account and letting it grow tax-free. UL is (generally) appropriate for tax planning reasons; not for insurance reasons.

But it doesn't sound like you have excess cash sloshing around that you need to shield from taxation, and you can achieve the investment returns that you'd get inside a UL policy yourself (actually, with greater ease than the insurance company, because -- at least ideally -- you will be investing at much lower cost outside a UL policy than inside a UL policy).

 

[FrugalTrader]

coolclayton,

Universal Life premiums bring an awesome stream of income for your financial planner, but probably doesn't bring you a lot of benefit at your stage in life. Insurance is for protecting your dependants. Do you have any?

Just curious though, what is the difference in premium payments quoted to you?

 

[CanadianCapitalist]

Run away from your "financial planner" quickly, far, and fast.

I don't think you have a need for insurance at all -- in fact, that's what you yourself say -- let alone the most costly form. Yes, universal life insurance premiums would be lower now than they would be if you were trying to buy insurance at, say, age 65 -- but will you need insurance then, either? That's like saying you should lease an SUV now because you might need it later.

You don't even have your savings STARTED yet and you have identified savings needs that have nothing to do with replacing your unmonetized human capital in the even of your death (which is what life insurance does). And yet you should divert your financial goals to fulfilling a requirement that doesn't exist at the highest possible cost?

Nu-uh. No way, no how. Buying something that you don't need has huge opportunity costs (because the money isn't available for other things that you DO need and want, like a house), and your planner has NO WAY to quantify the size of whatever "foregone opportunity" she is suggesting you would be faced with if you don't buy a UL policy. That is: you are trading a known, present cost for an uncertain future benefit which is generally available at lower cost. It just doesn't make sense.

Of course, feel free to disregard. I'm just too hot in my house here and up in the middle of the night, and there's not much more that gets me going than life insurance salespeople.

Just unbelievable! A young person just starting out needs to keep things simple: save for a downpayment, max out the RRSPs / TFSAs etc. I don't see why someone young with no dependents would need any form of life insurance -- let alone, a UL policy.

 

[Sampson]

I don't see why someone young with no dependents would need any form of life insurance -- let alone, a UL policy.

I don't see why ANYONE would need a UL policy

 

[MoneyGal]

The advent of the TFSA effectively kills the rationale for UL policies for any young Canadian. It used to be that people would use UL for tax arbitrage.

But now, with a TFSA, when the original poster is, say, 65, and wants to start drawing retirement income, if he fully funds his TFSA he will have at least $205K (if he maintains inflation-adjusted growth) in a tax-free account.

The remaining reason to buy a UL policy is to pay taxes when you die. You buy a UL policy so that at death your estate is not forced by liquidity constraints to sell assets in order to raise money. The family cottage, handed down through generations, is an example.

But mostly this is an example of a "financial planner" who is trying to make what would otherwise be a low-prospect client into one who will provide a significant income stream *for her.*

 

[leslie]

MoneyGal is correct: RUN don't walk.

 

[coolclayton]

Thanks for the response and advice. Most of these suggestions and thoughts were already going through my head, but sometimes it takes someone to agree with you to get yourself to really believe it.

I will say that meeting with the financial planner has definitely been a positive experience. Although she may not have provided me with the best investment opportunities, she has shown me what I don't know, so I have been pushing hard to learn as much as I can for the last 2 months.

For now, I think my plan is going to be to continuing to save for a downpayment, maxing out the TFSA and RRSP's, and then looking for new income streams and investment opportunities if I have any money left over.

 

[coolclayton]

coolclayton,

Universal Life premiums bring an awesome stream of income for your financial planner, but probably doesn't bring you a lot of benefit at your stage in life. Insurance is for protecting your dependants. Do you have any?

Just curious though, what is the difference in premium payments quoted to you?

I don't have the numbers, as she kept all the paperwork with her when she left. This was a bit of a warning sign for me. I remember her saying the difference was "small" though.

Small can be a relative term though.

 

[steve41]

One of the strategies UL plans use is to show the effect of the plan growing to the point that the UL acct can be used to collateralize a future investment loan. The numbers (sort of) work, however be wary.

 

[MoneyGal]

CoolClayton: the relevant difference is not between premiums for term life insurance vs. premiums for permanent life insurance -- it is between the premiums for permanent life insurance vs. no life insurance (i.e., zero).

You don't need insurance. That's like saying the difference in the monthly payments on this Mercedes and that Honda Civic are small -- except the payments for the Mercedes go on FOR THE REST OF YOUR LIFE while the payments for the Honda would stop after 5 years. And you don't even need a car! You are fine riding your bike around!

Focussing on small numbers - "one easy monthly payment" - is intended to make crappy decisions palatable to unsuspecting consumers.

If someone insists on comparing between permanent and term life insurance costs, assume a period of time over which insurance is required (let's say 20 years) and compare the total costs of the permanent insurance (remember, you pay the premiums until you die) and the costs of the term insurance.

I'll do the calcs and come back later.

 

[coolclayton]

CoolClayton: the relevant difference is not between premiums for term life insurance vs. premiums for permanent life insurance -- it is between the premiums for permanent life insurance vs. no life insurance (i.e., zero).

You don't need insurance. That's like saying the difference in the monthly payments on this Mercedes and that Honda Civic are small -- except the payments for the Mercedes go on FOR THE REST OF YOUR LIFE while the payments for the Honda would stop after 5 years. And you don't even need a car! You are fine riding your bike around!

Focussing on small numbers - "one easy monthly payment" - is intended to make crappy decisions palatable to unsuspecting consumers.

If someone insists on comparing between permanent and term life insurance costs, assume a period of time over which insurance is required (let's say 20 years) and compare the total costs of the permanent insurance (remember, you pay the premiums until you die) and the costs of the term insurance.

I'll do the calcs and come back later.

One of the points she brought up though was that the insurance company pays out an annual bonus after a certain number of years. This bonus increases over time, so what we actually pay becomes smaller and smaller until we don't pay anything at all. So after 20-30 years (I can't remember the actual length of time she showed me) we are no longer paying out of our pocket for the premiums. Is there any truth to this? Would this change the scenario?

 

[MoneyGal]

Then she was recommending what is known as a "participating" UL policy. These kinds of policies have the *potential* to pay dividends, but there's no guarantee (it depends on whether the collective set of assumptions used in the policy are more or less favourable than the actual results).

So, now she's saying "buy the Mercedes -- and the monthly payments at some point in the future may go down by an uncertain amount." (If she's saying the payments WILL go down, she's misleading you. She cannot make that statement.)

This still doesn't make it a wise choice for you. Capiche?

 

[coolclayton]

Thanks for the input. I had kinda thought it wasn't the greatest choice for me from the beginning, but I'm glad you backed me up on my opinion. A lot of the research I did related to people in their 30's, who would be paying higher premiums, or people with lots of debt. I'm glad to hear any kind of advice or opinions you can give

 

[OhGreatGuru]

There are several other threads on life insurance on this site, and quite a number on MoneySense. The general consensus seems to be that the only insurance most people need is term insurance, if any. For all other types of life inurance, the "return on investment" (over the cost of term insurance) is very poor compared to what you could do by investing the premium difference yourself.

Universal Life Insurance can be a beneficial estate planning tool in some cases. But that 's not likely to be an issue if you are still young and not wealthy.

 

[MoneyGal]

Another comment on the participating element of the UL policy: what the advisor is saying is that if the insurance company's investments do well, they may pay dividends to policyholders, and those dividends can be used to offset policy premiums.

But think about that logic for a minute. That's like saying, buy this Mercedes, and the "low monthly payments" will remain stable for the rest of your life. And they include a payment to a reserve fund which we will use to buy equities. If our investments do well, we may return some of the excess to you in the form of dividends, which you can use to offset your monthly payments.

Except: why wouldn't you just invest your savings directly? Why use the intermediary of the insurance company?!

"Give us your money, and we'll invest it for our profit, and if we do really well, we might return some of it to you." Does that sound like a deal for ANYONE except the advisor?!

 

[lb71]

When you own a "participating" product, you participate in more than just the investment experience of the company, you also participate in the experience of its expense management and mortality. You can still earn dividends in a lousy investment environment. Regardless, these policies are more expensive than your term policies.

In the late 80s/ early 90s the insurance industry got into a lot of trouble with its "vanishing premium" policies. These were marketed as lifetime insurance but with premiums stopping at some point. The dividends from the policy would be high enough to cover off your future premiums, i.e., they would vanish. Well, these things were created when interest rates were high, and once they started coming down, the assumptions that supported the vanishing premium fell apart. Class action lawsuits were filed, and the industry pretty well paid up. Now, there are regulations in terms of the illustrations agents provide you. The assumptions have to be more realistic, and I believe they also have to provide you with worst case scenarios. If they do not, ask to see them.

 

[Rickson9]

Should I be investing in a Universal Life policy?

No.

 

[Rickson9]

"Give us your money, and we'll invest it for our profit, and if we do really well, we might return some of it to you." Does that sound like a deal for ANYONE except the advisor?!

People are lazy and can easily get sold into it.

In the end everybody gets what they want.