Is Universal Life a good idea?

[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]

Originally Posted by 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.

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]

Originally Posted by CanadianCapitalist

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]

Originally Posted by 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?

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.