Advantages/Disadvantages of Universal Life vs. Mutual Funds Alone?

[EliteNinja]

Please elaborate and use lots of numbers to convince me to one or the other, especially you Canadians out there!

[Peter666]

Hi EliteNinja,

A Universal Life Policy is a good thing to have as part of your portfolio, but it does not necessarily replace your primary investments (although it could as explained below). Universal Life insurance is a way to combine both investments and insurance in a plan that provides great value.

You want Universal life if you have life insurance needs. As an average funeral costs around $15,000 plus additional legal fees etc everybody ought to have at the very least $25,000 set aside for this, unless you want to screw your immediate family and let them take up the bill. On top of that you need to factor in any other debts such as student loans, credit cards, mortgage, and living expenses for wife and kids when you are not there to provide a salary. A good rule of thumb for a family man is to have 15x your average annual salary in place.

Universal life has the advantages of both term and perm insurance in one package. Term is cheap for young people, but does not provide cash value. Perm gives cash value, but pulling that money out cancels the life insurance plan. With Universal life, you have permanent insurance and cash value that can be invested and treated as seperate from the life insurance policy. Eventually the cash value properly invested can pay for the policy itself, or you can pull out the money for whatever reason without cancelling the insurance portion. Also, when the person who owns the policy dies, the beneficiaries get both the insurance and any investments totally tax free.

I think the best long term investment is to place a Universal life policy on your parents (if they qualify healthwise) if they did not get one for themselves. This may sound morbid, but if they die in a short period of time, you have won the jackpot, because you have invested very little to get a big amount of tax free insurance money. If they die in the distant future, you got a great retirement nest egg because of all the investment money in the plan. If you die before your parents do, you can leave the policy in the hands of your own family and children.

A combination of Universal life and term insurance is the way to go for a young person. Then on top of that you want to invest in a good mutual fund or two and individual stocks.

For Canadians: The government in Canada allows you to put a certain amount of investment money in your Universal life plan that is not taxed on a yearly basis, so it acts like an RRSP. For people who earn below $30,000 or over $90,000 a year, a Universal life policy is a better place to shelter your money from taxes than an RRSP because of various government benefits provided to low income people, and restrictions placed on high earners.

PS: I sent you a private email with more info, but it did not appear to go through.