Universal Life Insurance

Some parents use universal life insurance policies to finance their children’s education costs. Universal Life Insurance policies have two components—a life insurance portion and an investment fund, in which investment income can compound tax-free until it is withdrawn. Parents take out a universal life policy on themselves, joint life, first to die. The policy would also have some term coverage lasting 18 years. The funds contributed to this universal life policy can grow free of income tax.

If either of the parents die prior to the child attaining age 18, the term insurance would be paid free of all taxes to the survivor. At 18, the parents give the policy to the child. The child is able to withdraw funds from the investment account in the policy to supplement her education costs. Some of the amount withdrawn will be taxable, but at the student’s tax rate, which may be zero percent.

The advantages of a universal life insurance policy are:

►    if the supporting parent should die, the life insurance component will pay a death benefit that can be adequate to fund the child’s education;

►    even if the supporting parent is disabled and unable to continue making premium payments;

►     the accumulated funds are under the parent’s control and need not ever be given to the child;

►    the accumulated funds can be used for any purpose and need not be used only for “designated   educational purposes”;

►   there are many investment alternatives available using the insurance companies’ segregated or guaranteed funds;

►     income tax on the investment income is deferred until the funds are removed from the policy;

►    the policy can be transferred from the parent to child without any income tax implications to the parent; and

►    the policy can be used to provide funds for another child if the original beneficiary does not go on to a post-secondary education

 The cost for all of this is the premium for the policy. However, the universal life policy has all of the tax advantages of an RESP. 

The information contained in this commentary is designed to provide you with general information only, and is not intended to be comprehensive advice applicable to the circumstances of any individual. We strongly urge you to seek professional assistance before acting upon information included herein.