Universal Life Insurance/Other ways to pay for Education

A universal life insurance policy is a blend of life insurance protection and investment accounts. Part of the premium paid goes towards insurance; the rest to the investment component (also known as the fund value). The growth within the investment component is tax-deferred, subject to certain limits.

Upon the death of the life insured by a life insurance company, all proceeds (including the fund value if applicable) payable from whatever type of policy will be received tax-free by the designated beneficiary. The estate of the policyowner may incur some taxable income if the policy is a segregated fund or registered as an RRSP; however the discussion below does not pertain to either of these two types.

During the lifetime of the policyowner, he or she can access the fund value of the policy, although withdrawing cash can trigger taxes (and possibly early withdrawal penalties, also known as surrender charges), and withdrawing from the savings component will reduce the amount available to the beneficiaries at the time of the death of the life insured.

A parent (or grandparent) may apply for a universal life insurance policy where the child (or grandchild) is the life insured and the parent (or grandparent) is the owner. The owner will pay the premiums. The maximum tax actuarial reserve attributable to a child is lower per $1,000 of insurance compared to a policy where the life insured is an adult. This means that the ability to fund the policy at a high level is somewhat restricted the younger the life insured.

Once the insured child reaches the age of majority, the original owner can transfer ownership of the policy on a tax-deferred basis to the child; no policy gains will be realized at the time of the transfer. As the policyowner, the child can access to the policy's fund values and draw on them to help pay for university or other lifestyle expenses, subject to surrender charges. The taxable portion of the cash withdrawals will be taxed at the child's marginal tax rate, which is likely much lower than that of its original owner (i.e. the parent or grandparent).