LIFE INSURANCE
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.
Term Insurance
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 premium is always cheaper than permanent insurance.
This cost advantage is eliminated and term insurance 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 and the simple stroke of a pen, inexpensive term insurance can unburden your loved ones and give them a feeling of security.
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Permanent Insurance
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.
Permanent insurance Is exactly this, permanent. It is designed and structured to be payable upon your death for your entire life. It is marketed under different names: Whole Life; Universal Life; Term to 100; as well as countless individual insurance company names
Regardless of the name, this is insurance you are buying. Like a home purchase, initially it will be more expensive than renting. However, over time these policies can both build up value and become fully paid for.
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.
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.
Permanent insurance Is exactly this, permanent. It is designed and structured to be payable upon your death for your entire life. It is marketed under different names: Whole Life; Universal Life; Term to 100; as well as countless individual insurance company names
Regardless of the name, this is insurance you are buying. Like a home purchase, initially it will be more expensive than renting. However, over time these policies can both build up value and become fully paid for.
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, Def erred Compensation , Corporate Tax Sheltering of Retained Earnings , Asset Diversification, Unlocking other Assets in You r 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, and at the time of purchase you will be provided estimates of these future values
Whole Life is most frequently used to provide long term stability and value to business owners and individuals.
Universal Life
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” that can be deposited 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. These extra cash values plus the insurance face amount are paid to your beneficiaries tax free.
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 dying 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 a known value.
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 a known value. The government in recognition of the inherent power and benefit of tax free accumulation and tax free distribution of wealth to beneficiaries exercises a decree of control over the amount of value that can accumulate in these policies.
Shouldn’t you consider employing this power for your benefit?
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“Life is what happens to you when you are making other plans”
– John Lennon