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Home Financial Health Blog Active retirement - the early years Protecting your wealth with life insurance

Protecting your wealth with life insurance

by Tim Weichel

Who needs life insurance?

People with responsibility for others

For people who depend on you for support, a spouse, children or dependent adults, life insurance can play a fundamental role in their continued financial well-being.  In addition to making up for the loss of your income, the proceeds from a life insurance policy can be used to take care of funeral expenses and other costs such as a mortgage, loans or credit card payments. If you’re a stay-at-home parent, the role you play also needs to be covered because of the additional expenses associated with childcare if something happens to you.

People without family ties

Over the course of a lifetime, situations and responsibilities change.  Even if you are single, or you and your partner both work but don’t have a family, life insurance can still play an important role in your financial security plans.

A life insurance policy can provide an efficient and cost-effective way to take care of any expenses or unpaid bills you might leave behind, such as legal fees and taxes, medical expenses, funeral costs, mortgage debt or car loans. It can also be used to leave a gift to a loved one or a favourite charity or to provide a supplemental income while you are alive.

People with estates to protect

Many people believe as they get older and become more financially independent, their need for life insurance decreases. However, over a lifetime, estate values tend to rise. Life insurance can help pay the inevitable taxes that are due on an estate upon death. This can ensure as much of your estate as possible is passed on to your beneficiaries.

Business owners

If you’re a business owner, either on your own or with a partner, you may have personal liability for the debts of your business. In fact, the vast majority of your wealth is likely tied up in the business. You have a greater need to protect what you have built against unforeseen circumstances such as death and disability or to ensure liquidity for a variety of reasons including funds for retirement.

In case of death, it is important that you have adequate insurance.  Otherwise, the claims of business creditors could significantly reduce your personal estate and leave your beneficiaries without the financial security you had intended.  Equally important is the smooth transition of ownership of the business to a family member, partners or a key employee. A life insurance policy can make this possible.

Your business is an asset that provides income for your family, both while you are alive and after your death. It is also likely your largest asset and will provide you with a retirement income. Life insurance can ensure your family receives fair value for this asset at your death.

People who want to leave a legacy

You may wish to leave money to family or a favourite charity. Life insurance coverage allows you to leave a lasting personal legacy and provide your favourite charity with stable funding over the long term without reducing the estate available to your family or jeopardizing your future financial independence. A carefully arranged planned gift can be tax effective, and at the same time balance your final needs and the needs of your family.

People starting a child’s or grandchild’s insurance program

Life insurance provides a powerful foundation for building your child’s or grandchild’s financial security plan.  Insurance can work as a flexible asset that grows along with your child.  Premiums are relatively low for children and this low premium can be maintained throughout their lives.

What are the benefits of life insurance?

An instant estate

Few individuals, particularly those with the responsibility of a young family, have sufficient savings to adequately protect their loved ones should the main income earner die.  Life insurance can help create an estate at a time when funds may be needed most. This is a low-cost way to ensure your family’s continued financial well-being.

Money in hand – quickly

Your beneficiary, the person(s) you name to receive the insurance money, will be paid within a few days of the insurance company receiving the required information. By contrast, savings and other assets may be tied up legally for some time after death.

Financial benefits you enjoy

Some people have the impression that insurance pays only if you die.  That’s not the case. Many permanent insurance policies (i.e. participating and universal life) build cash values that you can access during your lifetime. The cash value is the equity you have built up in your policy. Cash values can accumulate within your policy on a tax-advantaged basis. The growth in the cash value is generally only subject to income tax when it is withdrawn from the policy. Your policy’s cash surrender value can be used to:

  • provide funds in an emergency
  • finance a down payment on a home or cottage
  • launch or expand a business
  • act as collateral for a loan from a third-party lending institution
  • supplement your retirement income
  • provide income for long-term care or home care for you or your spouse

How you use the money is really up to you.

Other advantages

  • the death benefit is not subject to income taxes
  • probate costs can be avoided if you name a beneficiary other than your estate
  • unlike a will, information regarding your life insurance can remain private
  • in many instances, life insurance may be protected against creditors.

When should you buy life insurance?

The best way to buy insurance at a reasonable price is to buy it when you don’t appear to need it; that is, when you’re healthy. However, it is seldom too late, or the wrong time to buy life insurance.

You should review your life insurance protection annually or whenever there are changes in your life, such as the birth or adoption of a child or a change in marital status. The purchase of a home or cottage, or a new job or launching your own business are also circumstances which should prompt a review of your insurance protection.

How much life insurance do you need?

The key to understanding your insurance needs is to determine what protection you need today, and keep in mind what may be important tomorrow.

How much coverage you need, combined with your cash flow, and the length of time you need the coverage, are all used to determine the type and how much life insurance you should buy.  Try this life insurance needs analysis online calculator.

What type of insurance can you buy?

There are two types of life insurance: permanent and term. They are two different types of protection that satisfy many different life insurance needs. Term may be all the life insurance you’ll ever need, or it may be used as an interim step before purchasing permanent insurance.

Possibly, a combination of term and permanent in the same policy may be the best solution for you. We can show you the strengths of each and their differences.

Permanent life insurance

Permanent life insurance – as the name implies – protects you for your lifetime. It can build cash surrender values and provide a death benefit.  Some permanent policies pay policy owner dividends (participating or par), and others don’t (non-participating).

If the permanent policy you are considering has a cash surrender value, you should review the product guide provided by the insurance company to better understand how the assets backing the policy are managed and how these assets are used to accumulate value within the policy.

Universal life

Universal life provides permanent life insurance with a tax-advantaged investment component. As cash values accumulate, they can be used to pay part or all of the cost of your insurance or to increase the death benefit. You select an investment mix that is as individual as you are – taking into account the amount of investment risk you are comfortable with, and your financial goals and circumstances. This type of policy is generally non-participating and is attractive for people who want to actively manage their life insurance policy.

Permanent participating insurance

Permanent participating insurance policies have potential for earning policy owner dividends. Favourable investment returns, mortality and expense experience generate earnings in the par account – a portion of which can then be paid to policy owners in the form of dividends. (See the glossary for a detailed definition of policy owner dividends.)

You choose how you want your dividends to be used. The most popular dividend options are either to use dividends to buy additional permanent coverage each year or to buy a combination of term and permanent insurance, which can make a larger amount of coverage more affordable. The first option provides an increasing death benefit that can offset the effect of inflation over the longer term. Higher premium options generally provide higher long-term growth (i.e. paying a high premium may mean you will receive higher values over the longer term). The insurance company manages the investment portion of a participating policy, so it doesn’t require hands-on management by the policy owner.

Assets in the participating account are managed in a diversified portfolio and are invested primarily in bonds, mortgages, equities and real estate.

Term life insurance

Term life insurance is well suited to meeting high, short-term protection needs for the lowest initial cost. For example, a couple with young children and/or a mortgage might select term insurance as an affordable way to obtain the full coverage they need today. Many term insurance plans do a good job of meeting immediate needs and provide the freedom to later move, or convert to a permanent product without providing proof of health. However, this ability to convert to permanent insurance often expires around age 65 or 70.

When purchasing term insurance, it’s important to understand what conversion options you have. Some companies impose significant restrictions or have a very limited choice of permanent plans for conversion.

Many term plans are renewable after five, 10 or 20 years without providing proof of health. The price will increase to be appropriate for your age at renewal, and the increase in premium can become substantial in later years. Coverage ceases for the majority of term contracts once you reach the age of 75 or 80.

When reflecting on the cost of term insurance, be sure to consider the following factors impacting your total cost:

  • the initial premium,
  • the renewal rate and whether evidence of insurability is required at time of renewal,
  • how long you’ll need the protection, and
  • how much flexibility you want in case your needs change in the future.

Other types of term insurance

Decreasing term (also known as creditor insurance or mortgage life insurance)

Most lending institutions offer creditor or mortgage life insurance as part of their lending or mortgage packaging.  Its primary purpose is to protect the lender. Creditor or mortgage insurance from a lending institution is generally non-convertible term insurance (you can’t move to a permanent insurance plan if your needs change) – there are no cash surrender values and no premium flexibility. A personal life insurance policy has distinct advantages over typical creditor or mortgage insurance such as:

  • you can control the amount of coverage, because it’s not tied to the balance of your loan or mortgage.
  • your beneficiaries can choose how to use the funds – to pay off the loan or mortgage, provide a monthly income or take care of other immediate needs. It’s their choice, not the lender’s.
  • you choose the type of insurance that best suits your needs with premiums to suit your budget – the cost may be lower than creditor or mortgage insurance from a lender.
  • you own the policy, not your lender. You have the freedom to switch your loan or mortgage to another lending institution without jeopardizing your life insurance coverage.

It pays to compare. Insure yourself, not the lender.

Group insurance

If you’re working, there is a good chance your employer offers group life insurance. You may also obtain life insurance coverage as a member of an association, professional body, union or club.

Group coverage provides simple, low-cost insurance protection; however, it can have some drawbacks when compared to an individual life insurance policy.

Group coverage doesn’t offer the level of control, portability or choices that can be obtained with your personal life insurance policy. With many group or association plans, you are insured only as long as you remain part of the group. Employment related group coverage is owned by your employer and is subject to change at their discretion based on an annual review. With a group life insurance plan, you have the right to convert to an individual plan when you leave the group or retire, but this is not always practical. Depending on your age when you retire or leave the company, converting to personally-owned permanent life insurance could be expensive or may not be possible.

The right insurance for your needs – value for your money

Life insurance is one of your most personal and important buying decisions. A carefully considered purchase today can benefit you and those you care about for the rest of your life. There are several variables affecting the cost of life insurance and that’s why value doesn’t necessarily rest with the lowest-priced policy. It’s important to understand the factors that affect the cost of your life insurance policy.

  • Gender – women pay less than men because statistics show that on average they live longer
  • Age – the younger you are, the lower the premium you’ll pay
  • Health and lifestyle – good health and sound lifestyle habits usually mean you qualify for the best rates. Non-smokers get a discount.
  • Type of policy
  • you pay less initially for term insurance
  • you pay more for a policy that builds cash surrender values because it provides benefits beyond the basic insurance protection
  • Method of payment – you’ll pay less if you choose to pay your premium on an annual basis rather than monthly
  • Other factors that may impact the premium you’ll pay
  • Occupation or avocation – some occupations or hobbies/sports are riskier than others from both a health and accident standpoint which may impact the premium you’ll pay
  • Foreign residence – Canadian insurance policies are based on Canadian mortality experience. If you live outside of Canada, you may be exposed to an increased mortality risk which may impact the premium you’ll pay

Your best buy is a policy with features that suit your situation today with flexibility to meet changing needs in the future.

Get professional advice

Purchasing life insurance that meets your needs now and in the future can be complex. That’s why it’s essential to get professional advice from a knowledgeable advisor, supported by a team of experts.

Life insurance is definitely not a one-size-fits-all product. Your advisor will take the time to understand your financial goals and insurance needs, your risk tolerance, and the control you want in managing your policy. Then he or she will help you to consider your options and ensure your life insurance is a good fit for you now, and in the future.

Finally, you need to be certain your policy is backed by an insurance company that is established, reputable and secure.

New isn’t always better

Your life insurance policy represents an important part of your financial security. If anyone suggests cancelling your policy, ask for a written proposal to provide you with complete and accurate information. Most provinces have regulations or guidelines under the Office of Superintendent of Financial Institutions that require advisors to provide a written comparison statement when they replace an existing life insurance policy.

Get in touch with the company that issued your existing policy to confirm and double-check the details presented in the comparison statement to enable you to make your decision based on all the facts.

Factors to compare when considering replacing your current life insurance policy with a new one:

  • death benefit
  • cash surrender values
  • premiums
  • tax considerations
  • guarantees, and
  • any extra contract benefits or riders in the policies

Always compare the entire policy and not just one or two features. Also, be sure to compare it over the long term as well as the short term.

Remember that the policy originally recommended to you was probably designed to be flexible. If your needs have altered, your existing policy may be adaptable to suit your new requirements.

If you do decide to give up an existing policy, don’t leave yourself unprotected. Keep your present coverage in place until you have a new policy safely in hand.

 

 
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