What is life insurance?
Is a contract between you and the insurance company that requires the insurance company to pay an agreed upon guaranteed amount of money called the “face amount”, upon the death of the person insured. The tax-free proceeds of the insurance are paid to a beneficiary or multiple beneficiaries, usually within a few weeks.
Why would I obtain life insurance?
This immediate cash upon death can protect loved ones, save your home, secure your business and future succession, pay off debts and taxes owed, and eliminate estate related expenses. Life Insurance, can in the right hands and with thoughtful consideration and advise, be a sophisticated tool in tax mitigation and enhanced tax-sheltered asset accumulation. Life Insurance can improve your flexibility in using other assets and savings, for your greater use and enjoyment. In this regard Life Insurance is an asset.
Why should I keep this insurance?
My mortgage is paid off; I’ve accumulated sufficient savings;
My children have grown and are established, why should I keep this insurance?
Too frequently insurance is decried by the ignorant and unsophisticated as a waste of money. Daily they advise the surrendering of millions of dollars of guaranteed assets, without any regard for its value as a planning tool, nor it’s continued usefulness. Their advice alternative is a promise, in the future, of a greater value than the guaranteed values in Life Insurance. Further without understanding the inherent financial flexibility that Life Insurance offers, they increase both the risk and reduce the options available for sustained financial well-being. All too often this strategy fails both in fact and in concept. Ignorance has cost countless families and businesses, incalculable billions in assets and the opportunities these billions would provide.
Are there different types of Life Insurance?
There are 2 fundamental types of Life Insurance: Term Insurance and Permanent Insurance. Each type has an important and vital role to play in protecting assets, loved ones and your money.
RENTED – For a set period of time and for a set price, you can rent an amount of insurance that provides financial security for the period of time that you rent this coverage. If you fail to pay the rent, the life insurance coverage ceases.
Terms typically are for periods of 10, 20, 30 years. At the end of each period the price will increase to a new guaranteed price. At the time of purchase, term insurance is always cheaper than permanent insurance.
Over time this cost advantage is eliminated and term insurance over time becomes the most expensive coverage. In essence the escalating price eventually makes this coverage unaffordable and is consequently cancelled.
However, if you are a young family with small children, mortgage obligations and other significant bills, encumbering your family with these responsibilities upon your death can ruin them. For relatively small amounts of money, these burdens can be eliminated with the stroke of a pen.
Feel free to explore this Insurance Needs Calculator. Or perhaps it’s time to connect with a qualified professional. We can continue the discussion of your specific needs.
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OWNED – Like buying a house it is initially more expensive however, the premiums never increase but the value does.
Over time the increase in value can allow the policy to pay for itself which allows you more savings.
The best of these products will also grow in the face amount of the coverage and accumulate cash value. With very few exceptions, cash values which build up inside an insurance contract do so sheltered from tax. Upon death, these tax-sheltered cash values(lets call them retained earnings or dividends), as well as the insurance coverage, are paid tax free to your beneficiary(s). These same cash values can be the source of emergency funds. The increase in value that can accumulate inside the insurance policy is governed by limitations in the Income Tax Act.
These accumulating values can have tremendous benefits for your financial well–being. It isn’t just the death benefits. Many strategies using Life Insurance can provide strategic Living Benefits. Tax and Estate Planning, Deferred Compensation, Corporate Tax Sheltering of Retained Earnings, Asset Diversification, Unlocking other Assets in Your Financial Plan for Your greater use and enjoyment, De-risking Your Retirement Income Planning are all strategies and concepts which have “living” benefits for you.
Using the above terms Whole, Universal and Term to 100 we can distinguish these products into their basic features. Below are very general descriptors that are for reference only. Each Insurance Company will provide their variations on each of these products. Whole Life has escalating cash and coverage values in which the insurance company manages all aspects of these escalating values. They will provide estimates of these future values. Insurance companies come under regulatory scrutiny for integrity and responsible asset management.
Whole Life is most frequently used to provide long term stability and value to business owners and individuals. It is the product most frequently used in sophisticated strategies involving both living and estate benefits. In many ways these products can be viewed similar to pension plans. Modern pension plans are increasingly sophisticated and global in their construction and investment management. While insurance company portfolios are generally more conservative in their investment mandate and management, like pension plans they have consistent and stable track records of declared income and asset accumulation.
This is a self-directed asset management product with guarantees for the insurance coverage. This shared feature typically allows for greater flexibility in premium payment by the policy holder. The insurance company will typically give you a minimum premium amount to pay for the insurance protection and give you a range of “extra” cash you can deposit into the insurance investment account. The deposited “extra” cash can be allocated across a range of investment options, provided to you by the insurance company. You can change these investments with a reasonable amount of frequency. Over time the accumulated values can earn you the ability to cease making payments and the earnings within the policy will be sufficient to pay the continuing premium required to pay for the insurance coverage.
Term to 100
Is not term insurance, but in fact permanent. You pay continuously for this coverage till your age 100. While it does not increase in value nor does it accumulate cash, it does build up value. The longer you pay the less the insurance company is funding the risk of you dyeing prematurely. Consequently, the policy will build up actuarial value. At age 100 the value of this cash and the face value of the policy will be equal.
These policies at this point are frequently cashed out. The proceeds are tax free.These policies are most frequently used in estate reconciliation strategies for either individuals or corporations where the tax bill is known a known value.
If you’ve gone this far in your consideration of these product, respectfully we would suggest that now is the time to talk to a qualified professional.
May we invite you to give us your contact information, so we can continue the conversation?
“Life is what happens to you when you are making other plans”
– John Lennon