Term or universal life?

Q –  My wife’s job status has recently changed from a full-time employee with benefits, to a casual employee without benefits. We also have a new addition to the family and therefore have a need for additional life insurance.
We had initially thought we would purchase a 20-year term policy of $400 000.00 each because we know that term life insurance is the cheapest you can buy. However, we are now considering a Universal Life policy that also has an investment component that allows unregistered income to be invested into specific mutual funds.

Our broker has advised us that the biggest advantage to this plan is that this investment grows tax-free. As well, it allows us to borrow money against the value of the policy (presumably as income during our retirement years) without having to pay tax because this is deemed to be a life insurance policy and therefore tax-exempt. Also, the money would not have to be paid back to the lending institutions until we die. The borrowed money does not compound, but instead it capitalizes until death, at which time our beneficiaries would repay the debt from the remaining balance of the investmencomponent, as well as the death benefit if necessary.

Because my wife and I have always had adequate group life at work, I have never investigated the pros and cons of Term vs. Universal Life and therefore do not know the long-term implications. I would greatly appreciate your input on the merits of a UL as an investment and tax-hedging tool and if there are any short or long-term pitfalls we should be aware of — other than being more expensive. Is Term Life still the best and cheapest insurance? – T.C.

A – This is too complex a question to be dealt with in a brief answer. Also, your decision will depend on a variety of personal considerations that only you and your wife can weigh.

In general, term is the better choice for young families because it provides the maximum coverage for the money —  a very important consideration when children are young.  Universal life has greater appeal to older people, who may not need as much protection but who like the tax-sheltering advantages. I recently converted my own term policy to universal life for this reason.

For a younger person, my general advice would be to buy term and use an RRSP for tax-sheltering. However, make sure the term policy comes with a conversion option that does not require a new medical. – G.P.