Planning for end of days can be challenging
Complexity of products, diverse individual needs make professional help indispensable
Think of whole life as an investment product with an insurance death benefit attached to it.
MICHAEL HEALEY
ZLC FINANCIAL GROUP
“Show business is my life,” comedian Don Rickles once said. “When I was a kid, I sold insurance but nobody laughed.”
As Mr. Warmth discovered, insurance is no laughing matter. All kidding aside, most wealth management advisers agree that insurance — especially life insurance — should be part of everyone’s financial plan.
They cite three principal reasons for purchasing life insurance: protecting the family, managing the estate and tax planning.
In the first category, a breadwinner will want to leave his or her family with sufficient resources to pay off a mortgage and other debt and to replace lost income in order to maintain the family’s standard of living.
Secondly, a life insurance policy can supply cash needed to deal with tax liabilities arising from registered accounts ( RRSP or RRIF), real estate or businesses; as well as equalizing an estate, for example, between heirs who continue a family business and their siblings who don’t; and avoiding probate fees.
And thirdly, an insurance policy can aid in tax planning by — among other things — providing funding for charitable donations and sheltering investments.
Clearly, buying life insurance is not the same as downloading a song from iTunes, although insurance companies have made it appear almost as easy online. Preparing for the end of days, however, requires a little more thought than a mouse click.
The first step for many is to find out if they’re already insured. “Discover what coverage you already have,” said Jon Palfrey, senior vice- president, private clients & foundations at Leith Wheeler Investment Counsel Ltd. in Vancouver. “It’s not always obvious. It could be part of an employer’s plan, group plan, benefits coverage or private plan.”
From that baseline, with the help of an objective third party, such as an accountant, tax lawyer, investment manager or other knowledgeable adviser, the consumer can establish his or her insurance needs. Only then should the product seller be approached, Palfrey said in an interview. “If you don’t know what you want beforehand, the offerings can be quite compelling.”
Life insurance falls under two broad headings: term, or temporary, insurance; and permanent insurance, which comprises two generic products, whole life and universal life, the latter bearing all manner of optional bells and whistles marketed under appealing brand names. Recall that Freedom 55 was the evocative slogan of London Life Insurance Co. — a mix of insurance, investments and financial planning tools that was so successful it evolved into a separate division of the company.
There is a role for term insurance, said Michael Healey, an associate with ZLC Financial Group. For example, early in their careers, young people might want to insure mortgage liability or ensure money is available to pay for children’s education. Term insurance is based principally on age, gender and smoking history and policies may have clauses that allow for automatic renewal in 10 to 20 years regardless of health status.
Buying term insurance and contributing the maximum $ 5,000 to a tax- free savings account ( TFSA) might serve as a modest alternative to permanent insurance for some. However, while term insurance is useful for temporary needs, it is not an effective long- term solution. For one thing, term insurance premiums that are inexpensive compared with permanent insurance at the outset quickly catch up. For $ 1 million in term life insurance, a 40- year old male might initially be looking at a premium of $ 700 a year, he explained. “But 10 years later, it’s $ 4,800 a year and 10 years after that it’s $ 12,000 and then $ 35,000 a year.”
Unlike term insurance, which simply pays a lump sum on death, permanent insurance may create a legacy, provide for tax- efficient transfer of money to the next generation, pay capital gains taxes on rental property or on income from a RRIF, fund care for a disabled family member, and enhance planned charitable giving.
A participating whole life policy ( one that pays “dividends”) builds cash value and insurance coverage increases over time — and that growth is built into the premium. A 40- yearold could pay $ 22,000 a year for a $ 1- million whole life policy, but by age 80, the cash value, assuming consistent dividend payouts, could approach $ 2 million with a death benefit of $ 4 million. The accumulated value of the policy is an asset that can provide an income stream through periodic withdrawals or be used as collateral security for a tax- free loan.
“Think of whole life as an investment product with an insurance death benefit attached to it,” Healey said.
Universal life insurance offers the same lifetime coverage as whole life but the premium can vary depending on the amount a policyholder wants to contribute to the investment component beyond the pure cost of insurance. The investment side of universal life tends to favour index- based funds and term deposits and, like whole life, the returns on the investments accumulate on a taxexempt basis. Universal life came about to take advantage of booming equity markets in the 1980s, but over the 30- year period from 1981 to 2010, returns from whole life insurance surpassed that of the S& P/ TSX, according to John Archer, a financial adviser with RBC Wealth Management Financial Services Inc. — and did so, he said, with a tenth of the volatility of the index.
Coupling insurance with investment is not obligatory when buying permanent insurance. Not to be confused with term insurance, Term to 100 is permanent insurance without any savings elements or cash value.
Given the complexity of insurance products and varied consumers’ preferences, the answer to the question “how much insurance do I need” is difficult to answer with an online calculator — despite the proliferation of these tools on the Web.
To complicate matters further, many insurance companies offer combination products that package life insurance with add- ons, such as critical illness and disability insurance. But Healey recommends separate policies to manage these risks.