A few months ago my friends and I were talking about investing and money. I enjoy talking about money with my friends (although they don’t know I write in this blog, they do know I am pretty savvy with my money) and often learn a lot about different approaches.
Two of my friends talked about how they are putting in money towards their parent’s insurance. A little morbid, but they said the investment in the insurance account is tax free and basically they felt that this was a better way to invest than in an RRSP because money is tax free in the event of death. When I first heard about it, it seemed quite complicated and I didn’t understand it, but after doing a bit of research, it is making a bit more sense to me. Seems like it is quite different from term life insurance.
Permanent Life Insurance
I must admit, I am not very well versed on life insurance, even though I remember it was one of the pillars of personal finance in David Chilton’s book, the Wealthy Barber. For one, I have mortgage insurance (haha which is absolutely terrible, I hear) and insurance through my work, but I know I should really purchase term life insurance but haven’t gotten the chance to. I don’t have children (yet?) nor do I have a common law spouse or married partner, and I am sure I will get moving on this once the issue becomes more pressing. I think insurance is a definite must in the context of family, because you never know when you go- disability, cancer, motor vehicle accidents… although none of us expect or want these things to happen, you have to hope for the best and sometimes prepare for the worst.
After doing a bit of research, I think what my friends were referring to was Permanent Life Insurance in the context of Universal Life Insurance. Permanent Life Insurance can be paid out, tax free, in the event of your death.
The Financial Consumer Agency of Canada lays it out quite nicely, Whole Life Insurance, although more expensive than term life insurance from the get go, allows you to cash our the amount you put into your insurance policy if needed. There is a guaranteed minimum cash value for your whole life insurance, and the amount paid out in the event of death is also guaranteed. It also continues until your death, no matter what age, and doesn’t have a limit (as opposed to term life insurance)
Universal Life Insurance sounds quite similar to Whole Life Insurance but combines life insurance with an investment account. One risky aspect of it is that your insurance premiums could increase if the value of your investments within the insurance/ investment portfolio decreases. Here’s a interesting Financial Post article on why investments within a Whole Life Insurance Policy will outperform investments outside. The other thing to consider is that you choose the investments yourself- if you suck at investing and try to time the stock market (like 90% of people out there).
The Globe and Mail has a great article on the pros of the permanent life insurance in Canada, one of which for Universal Life Insurance, you can change your premiums that you pay periodically, so there is some flexibility in this.
Is it Too Good to be True?
Another interesting thing to consider is that the Government of Canada plans to tighten up the rules to use a Universal Life policy as a tax shelter. Those who started a policy before 2016 will be grandfathered in. Maybe this is in replacement of the TFSA because there can’t be too many good things that the government of Canada gives us Canadian citizens!
So in summary, although none of us like to think about our mortality, it is something to think and plan about and it certainly gave me some food for thought in terms of my financial planning.
Like they say, there are only two things certain in life, death and taxes.
And perhaps Life Insurance should be one of them, too, lol.
More insurance-experienced readers, what do you think of this idea of Permanent Life Insurance and Universal Life Insurance? Yay or nay?