Life Insurance is an essential investment tool that protects you against financial ruin. Find out more about this topic here!
Life Insurance is a form of protection against death or disability. In other words, it provides financial support for dependents who may be left behind after someone dies.
Life Insurance can be transferred tax free to another person.
Life Insurance can be used to transfer wealth to the next generation, and as an investment.
The investment portion of Permanent Life Insurance grows tax-free and especially participating Whole Life Insurance. You can also borrow against the cash value to buy a house or pay for your children’s college costs.
- Guaranteed
coverage for life, never expires - Guaranteed
premiums for life, never increase - Best suited for permanent needs – estate planning, end-of-life expenses, retirement savings beneficiary gets insurance tax-free and outside of estate.
- Withdraw
cash value for future needs i.e. potential return of premium - Cash
value can be used as a collateral for loan - Potential for death benefit to grow yearly by investing the dividends in paid-up additional Insurance.
How a Whole Life Policy works.
I started paying Whole Life Insurance annual premiums 20 years ago into a Whole Life Policy that was designed to have low loads and high cash values. Each March, right after receiving my annual bonus from work, I faithfully wrote a premium check to the insurance company. Nothing much happened with my policy during those 20 years other than the cash value account in the policy grew tax deferred.
Fast forward to when my family was grown, and I had transitioned from working in industry to working in academia. In other words, I did not need the death benefit anymore, and my taxes were lower. I made a tax-free exchange of my policy into an immediate payout annuity. Now my wife and I receive a monthly guaranteed amount that will pay us until the last of us die. Also, the taxes on the cash values that I experienced over the past 20 years are being prorated over our life expectancy. Keep in mind that I could have died during my pre-retirement years, and my wife would have received a substantial tax-free death benefit. But I did not die, and yet I made an approximate 6% after-tax internal rate of return on my premiums.
Call Glenn Stewart Life Insurance and Investment Broker, Advisor
at 519-896-9970
Life Insurance as an investment in estate planning
To be clear, most life insurance is purchased for risk management. The death benefit is a hedge that provides cash in the event of an unexpected death. It’s intended to pay off debt, provide a survivor income or otherwise generate liquidity for a premature death.
However, Life Insurance, largely because of its tax benefits, I use it as an investment. And it’s not just because of the cash value associated with permanent insurance. Consider how the death benefit of a policy can generate millions in tax savings for a wealthy family. Rich families often use Permanent Life Insurance to Transfer Tax Free Wealth to the next generation.
Life Insurance as an investment in retirement planning
More typical of how Life Insurance can be used as an investment then converted to tax-efficiently supplement our monthly retirement income. The policy first deferred taxes during my high-income earning years, and now spreads both the income and the income tax out over my lower earning years.
Pros and Cons of Permanent Life Insurance
There are many arguments in favor of using Permanent Life Insurance as an investment. However, many of these benefits are not unique to Permanent Life Insurance. You can often get them in other ways without paying the high management expenses and agent commissions that come with Permanent Life Insurance. Here are a few of the most widely advocated benefits of Permanent Life Insurance.
1. You get tax-deferred growth.
This means you do not pay taxes on any interest, dividends, or capital gains on the cash-value component of your Life Insurance policy until you withdraw the proceeds. Also, there is no tax to a beneficiary when death occurs.
If you are maxing out your contributions to RSP or TFSA accounts year after year, investing in Permanent Life Insurance for tax reasons may make sense.
2. You can keep most policies up to age 105 if you pay the premiums.
After 20 plus years you could stop paying premiums and covert your Whole Life policy to Extended Term Insurance or a reduced amount of insurance. Also the annual dividends of a participating Whole Life policy maybe enough after 20 years to pay the annual premium to keep your policy in force for the rest of you life.
Another touted benefit of Permanent Life Insurance over Term Life Insurance is you don’t lose your coverage after a set number of years. A term policy ends when you reach the end of your term, which for many policyholders is in their 60s. But by the time you’re 105, who will need your death benefit? Most likely, the people you originally took out a Life Insurance policy to protect – your spouse and children – will either be self-sufficient or have also died. However, if you anticipate people being financially dependent on you beyond the length of a typical term policy (for example, a disabled child), this benefit may be attractive to you.
Life Insurance can be invested in the same way as stocks and bonds.
3. You can borrow against the cash value.
If you need money to buy a home or pay for college, you can borrow against the cash value of a Permanent Life Insurance policy or use it as collateral at a bank. Conversely, if you put money in a tax-advantaged retirement plan like an RSP and want to take it out for a purpose other than retirement, you might have to pay penalties.
It is generally a bad idea to jeopardize your retirement by raiding your retirement savings for another purpose. What’s more, when you borrow money from your Permanent Insurance Policy, it will accrue interest until you repay it, and if you die before repaying the loan, your beneficiaries will receive a smaller death benefit.
Learn more about Life Insurance
Life Insurance available in Kitchener, Waterloo, Guelph, Milton, Mississauga, Toronto, Elora, Elmira, Listowel, Mitchell, Stratford, New Hamburg, Brantford, Hamilton, Burlington, Fergus, Oakville, and Cambridge area.
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at 519-896-9970
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