Page 49 - A Canuck's Guide to Financial Literacy 2020

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but is eligible to receive $1,000 in dividends. He can reduce his next year's annual
premium to $3,000.

• Paid-up Additions

A policy holder can use the dividends to buy new paid up whole life insurance. This
is the most common option that policy holders select.

• Dividends Accumulation

Dividends can be accumulated in an investment account where it earns interest
income. The income will be taxed depending if the policy is an exempt policy or non-
exempt policy.

• Term Insurance

With the dividends, a policy holder can buy term insurance with no proof of
insurability required.

Universal Life Insurance

Universal life insurance also known as UL insurance is a type of permanent insurance that
provides the most flexibility in terms of setting up the policy. The policy holder can choose
the amount, frequency, timing, duration, and investments of the contract.

Premiums paid into a Universal Life Policy go into the investment account, where they earn
income and grow tax free. The investment accounts can be broken down into:

Universal Life Investment Accounts

o Tax Sheltered Investment Account (CSV)
o Daily Interest
o Guaranteed Interest Account
o Index-Linked Funds
o Mutual Funds

Out of this investment account, the insurance company deducts the monthly insurance
cost. A policy holder can access their investment account as long as there is enough to
cover the monthly premiums. Universal life insurance is suitable for wealthy individuals who
have excess cash flow and are seeking alternative investments to grow their assets.
Universal life policies offer the potential for tax deferred growth.