Contact MD Life
If you have questions about universal life insurance and would like to speak with an expert on the topic, please contact your MD advisor or a MD Insurance Consultant.
If you have a specific question about an MD Life Plan policy that you own, you may contact your MD advisor or the MD Life Client Services Centre at 1 800 701-2824.
Insurance Basics
How is universal life insurance different from other types of insurance?
Life insurance is structured to pay a lump sum to a beneficiary upon the death of the person (or persons) insured. There are three basic types available: universal life, whole life and term life.
Term insurance is life insurance that provides death-benefit coverage for the insured, provided that death occurs within a specified period of time. Terms are usually for five, 10, 15 or 20 years. Some term insurance can be converted to permanent insurance, which has no time limit and lasts for your lifetime.
Whole life insurance is permanent life insurance with benefits payable on the death of the insured, whenever it occurs. The premium payments are somewhat inflexible and may be payable until the death of the insured person. Premiums are invested in the life insurance company's general account.
Universal life insurance is permanent life insurance that offers greater flexibility than term or whole life insurance. Premium payments can fall within a minimum and maximum range, with anything over and above what is needed to pay the monthly deductions being invested as per the client's directions. Income and earnings on the investment accounts are sheltered from annual accrual taxation. The policy owner can manage the investment portion of the universal life insurance policy, selecting investment accounts that suit his or her investor profile and financial objectives.
During your lifetime, universal life insurance allows you to access the money in investment accounts if you need it, either through a policy loan or withdrawal or via a tax-advantaged withdrawal if you become disabled. (Note: fees and taxes may apply on loans and withdrawals.)
If you have a specific question about an MD Life Plan policy that you own, you may contact your MD advisor or the MD Life Client Services Centre at 1 800 701-2824.
What are the benefits of universal life insurance?
Universal life insurance offers a wide range of potential benefits in addition to providing for your family and beneficiaries after your death. Properly structured, your policy can become an integral part of your overall investment strategy, providing investment flexibility, growth and tax benefits for you, your heirs and/or your professional corporation.
Quality investment options
A diverse array of investment options is available within a policy. They are generally linked to market indexes or mutual funds, or are investments with a guaranteed interest rate. You can choose from these investment options, allowing you to create a diversified portfolio of investments within your policy, just as you would in your RRSP or non-registered portfolio.
Tax-advantaged now
Investment growth and earnings within a universal life insurance policy are tax-exempt as long as the money remains inside the tax-exempt policy.
Tax-advantaged later
A universal life insurance policy can be structured to transfer ownership to a child or grandchild tax-free prior to or upon your death. This is a very tax-efficient way of transferring assets to a next generation.
Health care fund
A universal life insurance policy can also serve as an emergency health care fund. If you become disabled money can be withdrawn from the investment portion of the policy tax-free.
Charitable giving
A universal life insurance policy can also be used as a means to give money to an eligible registered charity. Depending on your financial goals and how you structure the ownership and beneficiary designation of the policy, you can either claim charitable donation tax credits as premiums are paid, or your estate can be provided with future charitable donation tax credits.
Estate advantages
The beneficiaries of a policy receive the death benefit directly from the insurer. If an eligible beneficiary is named, money from the policy is excluded from the probate process (where applicable), and does not incur probate fees or probate tax.
Disabled children/adults can also benefit from the proceeds of universal life insurance without disrupting the provincial disability payments they receive, if a comprehensive estate plan is in place.
The proceeds of a universal life insurance policy can be used to pay estate taxes and fees, such as taxes due on deemed dispositions of investment assets and on appreciated vacation property, probate fees or probate tax and other estate expenses. By paying these fees and taxes with policy benefits, your estate assets remain intact and can be distributed in full to your heirs.
For professional corporations
Within a professional corporation, universal life insurance policies can provide a means to transfer corporate surplus to surviving shareholders or your estate on a tax-efficient basis, or can act as key person insurance to ensure business continuity in the event of the death of a key member of your practice team.
Do you pay premiums for universal life insurance for the rest of your life, or is there an end date?
You do not have to pay premiums for your core life insurance benefits forever, MD Life Insurance Company offers the opportunity to pay insurance premiums over a 10, 15 and 20-year period on coverages. If you have any additional riders or benefits on the policy, the cost of those would continue beyond the chosen time frame. Please contact your MD advisor or MD Insurance Consultant for more information.
Insurance Investment Accounts
Do universal life investment accounts differ from mutual funds, index participation units or GICs?
Yes. MD Life Plan, a universal life insurance policy from MD Life Insurance Company, offers three types of accounts or investment options: market-index, guaranteed interest and daily interest accounts.
Market-index accounts provide you with an indirect link to indexes and/or mutual funds. Market-index account values will fluctuate according to changes in a particular stock or bond index or indexes, but some are based on the fluctuations of unit values of well-known mutual funds. Guaranteed interest accounts increase in value according to their designated interest rate, established at the time of deposit to the account. Daily interest accounts increase in value according to the daily interest rate established for that account.
Regardless of the type of account you choose, you own an insurance policy. You do not own mutual fund units, index participation units or GICs. You cannot vote alongside mutual fund unit holders, nor do you receive annual reports and other documents from any relevant mutual fund company. The taxation (or lack thereof) between the products is different, as are consumer protection guarantees and a variety of other features. The terms "market-index accounts" or "guaranteed interest accounts" help to differentiate universal life insurance investments from investments you may hold outside your universal life insurance policy.
Are there fees attached to market-index accounts?
Yes. There are management expense charges on market-index accounts. Where the market-index account is linked to a mutual or segregated fund, the market-index account management expense charge is in addition to the mutual or segregated fund's management expense ratio that is collected by the fund manager.
The market-index account management expense charge is taken from the value of investment accounts prior to calculating account unit values. The insurer uses the proceeds of the management expense charge to offset expenses associated with, among other things, the investment management of the fund, administration and record-keeping, regulatory fees, legal fees and investment-related taxes and provides the insurer with revenue.
Insurance companies may differ in the range of management expense charges each applies to the market-index accounts offered.
Your MD advisor or MD Insurance Consultant can inform you of the management expense charges applicable to your market-index accounts. The information is also available on our website under Unit Values then select the Investment Plan Category applicable to your policy and click on the account for which you would like to know the management expense charge.
I have universal life insurance investments, an investment portfolio and a financial plan. How can I integrate them?
Your MD advisor can help you integrate your various investment vehicles into a single, co-ordinated investment strategy. Your consultant has the expertise and experience necessary to assess your financial and insurance goals and can structure your MD Life Plan insurance policy's portfolio of investments to help you attain your objectives.
Policy Information
Where does money go after it is deposited to a universal life insurance policy?
When you pay premium into a universal life insurance policy, the premium pays a number of costs, such as: provincial premium tax, cost of insurance (includes the cost of any riders that may be on the policy) and an administration fee. Depending on the premium amount you deposit to the policy, you may also allocate some premium to investment accounts within your policy.
The provincial premium tax is paid as a premium is deposited, the cost of insurance and administration fee are charged against your policy monthly.
Your MD Insurance Consultant can help you understand the particulars of costs associated with your policy and details on how premium payments you make into your policy are allocated.
Why does the investment account value of my policy fluctuate when life insurance is guaranteed?
There are a number of possible reasons for fluctuating values within the investment portion of your universal life insurance policy.
You may be invested in market-index accounts, the value of which will fluctuate (positively and negatively) just as the linked stock and bond indexes fluctuate or as the unit values of the linked mutual fund fluctuates.
You may be invested in a guaranteed interest account, the value of which will increase according to the interest rate in place at the time you purchased the account.
Your monthly cost of insurance and administration fee may have been withdrawn from your investments since you last looked at their value.
You may have chosen Yearly Renewable Term (YRT) as your type of cost of insurance. In that case, as you grow older, your cost of insurance increases therefore the amount withdrawn from your policy to pay the cost of insurance will vary.
You may have made additional deposits or a withdrawal.
The insurer may have transferred value from your tax-exempt policy to your Express Account (other insurers may use different terminology to describe this type of side account) in order to maintain the tax-exempt status of your policy. You can verify this by checking on your policy's anniversary statement to see if it mentions an "Express Account" value. Alternatively, the insurer may have moved value from your Express Account back into your insurance policy.
Your MD advisor or MD Insurance Consultant can review your MD Life Plan with you and provide you with a more customized analysis of why your policy value fluctuates.
What role do interest rates play in my universal life insurance policy?
When interest rates in Canada change, the rate on new guaranteed interest accounts may change. Any new investments you make in guaranteed interest accounts, and any value that rolls over, will acquire the new interest rate.
At the time your policy was issued, a projection of the policy's future value was provided to you in a policy illustration document. These projections are based on a number of assumptions, including future interest rates. Actual interest rates will not behave as illustrated and neither will the illustrated value of your policy investments.
A regular review of your policy with your MD advisor and MD Insurance Consultant will help ensure that your MD Life Plan policy continues to meet your financial objectives.
What is "maximum premium"?
Every universal life insurance policy has a maximum premium, which is the maximum deposit allowed while still maintaining the tax-exempt status of your policy. This maximum premium amount will change each year. To maximize the investment opportunities available in your universal life insurance policy, you should consider depositing the maximum premium in any given year. For MD Life Plan clients, your universal life insurance anniversary statement will indicate the maximum premium allowed for your upcoming policy year.
What is "minimum premium"?
A universal life insurance policy minimum premium is the sum of your cost of insurance for the base plan and any riders, plus the policy administration fee. This total is then grossed up by the provincial premium tax. If only the annual minimum premium were paid, the universal life insurance policy would acquire little or no cash value. If only the monthly minimum premium were paid, the universal life insurance policy would have no cash value.
I deposited a very large sum in the first year/few years of my policy. Am I guaranteed that it will be sufficient to pay for all future insurance costs? No. There are no guarantees that your initial deposits will cover all future cost of insurance.
When you establish your universal life insurance policy, an illustration document is prepared for you showing projected future growth and death benefit amounts for your policy. These projections are based on a number of assumptions including anticipated investment returns, interest rates, tax rates and your insurance needs. As these assumptions will differ from reality, the projected value of your policy will differ also. As a result, you may need to deposit additional premiums to pay for future insurance charges. You can minimize this risk by investing extra premium in a guaranteed interest account that grows at a rate sufficient to pay the cost of future deductions.
I've got some extra money; can I deposit this to my insurance policy?
Your MD advisor and MD Insurance Consultant can help you decide on the best strategy for investing your extra money. Depositing it to your universal life insurance policy is one option, as long as the amount to be invested falls below the maximum premium allowed for the year. If that is the case, you will be able to pay more of the insurance cost of your policy from the growth and earnings on investments within your policy. That growth and earnings is in pre-tax dollars, so the expense of your policy is less than what you would pay if you used after-tax dollars.
I have established a professional corporation. Can I change the ownership of my policy so that it is owned by the corporation?
A universal life insurance policy can be a wise investment for a professional corporation and it is possible to transfer a personally-owned policy to a corporation, but it will have tax consequences for you. It may be more efficient to purchase a new policy for your corporation. Your MD advisor, MD Insurance Consultant and accountant can provide you with information regarding the best approach for your circumstances.
Withdrawals & Taxes
How can I get my money out of my universal life insurance policy?
You can withdraw money from the investment portion of your policy, although all or a portion of your withdrawal may be subject to tax.
To understand the tax consequences, you must first understand the concept of Adjusted Cost Basis (ACB). The ACB of a universal life insurance policy is the base amount used for tax calculation purposes. You do not pay tax on ACB amounts. When you withdraw money from your policy you will be required to include, in your income, amounts received in excess of the ACB. Generally speaking, the ACB for life insurance policies increases by the amount of the premiums paid to the policy, and reduces by the net cost of pure insurance (NCPI)1. The taxable portion of a withdrawal is proportional to the ratio of overall cash value to your ACB. For example, if your ACB at the time of withdrawal was equal to 50% of your cash value, then 50% of your withdrawal would be taxable. However, if you withdraw in later years, when your ACB is zero, your entire withdrawal will be subject to income tax.
You can also access the value within your policy by taking out a policy loan. A policy loan allows the insurer to loan you money using your policy as collateral. The amount of the loan is derived from the amount you have invested in accounts within your universal life insurance policy. At the time of the loan, the amount by which the policy loan exceeds the ACB is subject to tax. In addition, you may be able to claim a tax deduction for interest paid on your policy loan, based on current tax rules.
If you become disabled, as per the definition of disability in your MD Life Plan contract, you may be eligible to access the value of the investment portion of your universal life insurance policy without incurring taxes.
If you have more than one person insured on a MD Life Plan policy, you may also access the cash value within your policy after the death of one of the insured persons.
Money invested within your universal life insurance policy is accessible in the event that you need it. Your MD advisor and MD Insurance Consultant can advise you on the tax implications of any withdrawal and discuss the most tax-efficient way of accessing your money.
Note that this section only refers to some of the tax consequences of withdrawing or borrowing from your policy. There may be other fees assessed including market value adjustment charges on guaranteed interest accounts and surrender charges.
Please see your policy documents, MD advisor or MD Insurance Consultant for details.
1 NCPI for a given year is equal to the net amount at risk (the amount of pure insurance purchased) multiplied by a prescribed mortality rate for the life insured's current age and smoking status. This amount is unrelated to the premium paid into the policy in any policy year.
How can I make my universal life insurance policy benefit me now?
Your MD Life Plan insurance policy already provides you with a range of benefits including tax-sheltered investment growth and earnings, estate planning benefits and the security of knowing that your family will be taken care of financially after you pass away. You can also assign a registered charity as an owner and/or beneficiary of your universal life insurance policy, and you or your estate benefits by receiving charitable donation tax credits.
You can also access your money through any one of various methods. Please see the question "How can I get my money out of my universal life insurance policy?"
Your MD advisor and MD Insurance Consultant can provide more information on the various ways your MD Life Plan policy benefits you now, both in relation to your original objectives and any new objectives you may have.
Can my universal life insurance policy be used to help my children?
If your financial goals have changed and you want to financially support your children or grandchildren in the near term - there are ways to access the value associated with your universal life insurance policy - but they all involve some element of risk or cost that must be weighed against the urgency of using the money right away. Please see the question "How can I get money out of my universal life policy?"
A better way to help your children could be to establish a universal life insurance policy for each child, with him or her as the insured. The policy can be transferred to the child tax-free prior to or upon your death, at which time he or she can decide how to manage the policy, by either withdrawing the cash value, taking out a loan or allowing continued investment growth. The child assumes any related risks and tax consequences. This is referred to as a Cascade policy.
Why is universal life insurance exempt from annual accrual taxation?
Life insurance policies that operate within limits prescribed in the Income Tax Act (Canada) are exempt from reporting annual accrued gains as taxable income. In return, the prescribed rules also limit how much premium you can deposit to your policy each year. These limits are based on a set of assumptions determined by the insurer and will vary between companies. Insurance policies are tested each anniversary and any necessary adjustments are made to ensure they remain tax exempt.
What part of the Income Tax Act (Canada) refers to the tax-exempt status of insurance policies?
The CRA Interpretation Bulletin IT87R2 called Policyholders' Income from Life Insurance Policies indicates the sections and parts of the Income Tax Act (Canada) that provide details about the taxation of an insurance policy. It can be found online at: www.cra-arc.gc.ca/E/pub/tp/it87r2/it87r2-e.html
Another Bulletin, IT244R3, discusses Gifts by Individuals of Life Insurance Policies as Charitable Donations. This Bulletin outlines the implications of charitable donations of a life insurance policy that has been absolutely assigned, and the tax credit that may be available for premiums paid into the policy for the charity. It can be found online at: www.cra-arc.gc.ca/E/pub/tp/it244r3/it244r3-e.html
It is best to consult a tax specialist about your particular circumstances.
Is investment growth and earnings within a universal life insurance plan taxed as interest income?
Investment growth and earnings attributed within a universal life insurance policy does not distinguish between interest, capital gains and dividend income. Therefore, even if growth comes from equity- or dividend-linked investments, all is considered interest income for tax purposes. This usually does not matter as the policy is structured to be exempt from annual accrual taxation.
If you withdraw from your policy, the taxable portion of the withdrawal is treated as ordinary income, i.e. there is no distinction or recognition of capital gains or dividend income.
If the value within an MD Life Plan policy exceeds the maximum allowed for a tax-exempt policy, the excess money is moved into an Express Account (other insurers may use different terminology to describe this type of side account) in order to maintain the tax-exempt status of the policy. This transfer is treated as a partial withdrawal and a portion of it may be subject to tax as ordinary income. Income earned within the Express Account is taxable as interest income.
Risks
Universal life insurance seems too good to be true. What are the risks?
Like any financial product, universal life insurance does have elements of risk to it.
There is a risk that the money you invest in market-index accounts will go down in value, or will not increase as much as you had hoped.
There is a risk that the money in your investment accounts may not be sufficient to pay for the cost of your insurance over the long term. When you purchase your policy, you are given projections of the policy's anticipated investment growth, based on various scenarios and growth rates. These are estimates only; your investment accounts will return a different amount than illustrated.
There is a risk that tax rates (provincial premium tax and personal income tax) may rise, rendering inaccurate the analysis done previously to calculate income replacement needs and potential RRSP/RRIF/non-registered tax burdens. As a result, your universal life insurance death benefit may not fully cover all the taxes or expenses it was meant to pay for. It may also result in higher minimum premiums for you to pay.
Your MD advisor and MD Insurance Consultant can help you accurately assess and balance the risks and benefits of universal life insurance and develop a policy best suited to your financial circumstances and objectives. Your consultants will also meet with you regularly to review your MD Life Plan policy to ensure that it continues to support your financial goals.
MD Life Plan Reporting
Who can I call if I need help understanding the statements and confirmations I get for my MD Life Plan policy?
Your MD advisor and MD Insurance Consultant are available to help you.
The MD Life Client Service Centre can be reached at 1 800 701-2824. The Client Service Centre staff are able to help you with changes to your MD Life Plan policy (e.g., change in address or a change in beneficiary) and can answer questions about your policy.
