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?


Article comments

Karim says:

I love Whole life insurance.

Buy it young and enjoy the long term benefits.

Dave says:

I suspect that Colin does not sell permanent insurance policies. Everyone’s objective is different depending on age and circumstance. I personally feel term insurance is great for when you are younger but as soon as you are nearing retirement (50+) you should be looking at permanent insurance policies. This is a great article to read https://www.wealthsimple.com/en-ca/magazine/how-to-life-insurance. Talk to your wealth management adviser to give you the advise best for you.

Charles says:

Im glad I never bought this product.

Colin says:

As a life insurance agent I found the cited article from the Globe and Mail contained several errors. Most notably that it suggests in a WL policy that the insurance AND savings components are paid out. They aren’t. Also UL is designed to collapse on itself over time unless premiums increase or funds are transferred from the low rate of return investment side. Further, money made in these plans are taxed as interest, not as capital gains. Lastly, “dividends” in a participating policy are NOT profits from the insurance company, but instead are a refund for over payment of premium.

Nearly all experts agree with “Buy term and invest the difference.”

Ben says:

Please correct me if I am wrong but this is what I have been taught. There is usually a cap on your returns when invested in an insurance policy; so even if your investment gains 12% they may cap you at 8%. Also when you get older your premium will increase but instead of paying more monthly they just invest less and take more. Once your premium raises past your monthly payments they start taking your premium out of your investments until you have no money left and your life insurance/investment will collapse.

Kyle says:

I don’t think there is a “universal rule” for universal life insurance Ben. It likely depends on the policies of each provider. What you propose makes sense though. Buy term and invest the rest!

WealthynWise says:

Big yay!
Two big points, the money inside an RRSP is going to be taxed when you want to retire. You’re paying taxes how many times!? When you buy stuff, when you earn income, when you save your money… (RRSP) and when you die!! (Estate Taxes) the less taxes you pay the better! (Legally)

Being able to mix life insurance and investing is genius! If I die too soon.. My family gets money, tax free, if I live too long, with the right type of strategy utilizing universal life insurance I can get my money from the insurance tax free for my retirement and still leave a healthy death benefit.
Big yay!

Kyle says:

But earning significantly lower returns through life insurance premiums vs investing in your own is NOT yay. BTW, RRSP isn’t about not paying taxes, simply deferring them – unlike the money you’re using in your insurance premiums. Your comparison is faulty.