May 12, 2021
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What is Whole Life Insurance and how does it work? Well, by the end of this blog I’ll give you all the important facts on Whole Life and your other options available to you, so you can make an informed decision before you decide what is best for you and your family.
Now, in all honesty, I really see life insurance as a necessary evil. You can’t escape death and so the question is, what do you want to do while you’re alive and what do you want for your beneficiaries upon your passing? And more importantly, is one of your estate goals to make sure that Revenue Canada is not the biggest beneficiary of your estate?
Well, I hate to pull down the curtains, but the answer to this question is Permanent Life Insurance…the next question is, what is the right coverage?
In Canada you have 2 choices for Permanent Life Insurance – You have Universal Life or Participating Whole Life. Both are permanent insurance policies, but each one has pros and cons associated with it. If you are only interested in minimizing your estate taxes and maximizing your estate for your beneficiaries, then perhaps Universal Life is the way to go. You can pay the minimum amount of premium, don’t overfund it, and you will achieve your estate goals.
However, if you also want guarantees associated with the life insurance and the ability to tap into the cash value while you’re alive, then Whole Life is the preferred choice. Whole Life has been around for over 150 years and it comes with guarantees that Universal Life does not have. Every year, like clockwork, providers of “Par Whole Life” declare a dividend to their policy holders, and once the dividend is declared, they become vested, and they cannot go down in value. Where else can you get an investment product – that’s correct, Life Insurance as an investment product – that provides you with a Dividend each year, and once that Dividend is declared it is guaranteed and it cannot go down in value?
Universal Life does not have these same guarantees. Whole Life companies in Canada have been declaring Dividends for over 150 years and so even during WW1, WW2, 911, and even in 2008 when the stock markets went down 35% to 40%, the Cash Value inside a Universal Life policy also saw a similar decline of 35% to 40% – however, the average Whole Life Participating policy in Canada in 2008 had a Dividend of 8%.
I usually refer to a Whole Life policy as the Fixed Income Anchor in your overall investment plan.
Think about this for a second – It’s better to have life insurance and not need it, than need it and not have it.
Now, Whole Life insurance comes with 3 components – Premium, Death Benefit and Cash Value Accumulation (savings aspect). When you pay your premium, a portion is applied to the death benefit and cash value.
Depending upon how you design it, for the first 5 to 10 years a majority of the premium is usually applied to the death benefit, which is referred to as the cost of insurance. However, over time the cash value will receive a greater portion of the premium and this will build up a bucket of money that we can tap into when we reach retirement.
When the Federal Government overhauled the insurance industry in January 2017, new unique products started to emerge in the Whole Life space. I don’t know about you, but I don’t want to be paying premiums on my life insurance policy for the rest of my life, so I have a Pay-10 policy. What that means is that if I make the following payments over that 10-year period, then the insurance company guarantees that my policy is paid up in 10 years and no more premiums are required. However, the policy and the Cash Value will continue to grow and as I reach retirement, the Cash Value is designed to grow like a hockey stick curve…up and to the right. Which means I will have more money to tap into, on a tax-free basis, during my retirement.
If you have at least 20 years prior to retirement, then a Pay-20 Whole Life Policy is the preferred way to go. In the Greater Toronto Area, I have a client who is a female business owner in her early 40’s and she has a Pay 20 Whole Life policy. When she turns age 65, the policy is designed so that we could turn on an annual tax-free paycheque of $239,000 until age 90 – or if she waits until age 71 to turn it on, similar to when we have to convert our RRSPs to a RRIF, then the annual tax-free retirement paycheque will be $345,000 per year to age 90. So while she was alive, she took out $6.9-million in a tax-free pension plan, and when she passes away, her beneficiaries will still receive the balance of the death benefit.
Want to learn more about a Corporately Owned or Personally owned Whole Life policy, designed for maximum cash flow in retirement? Contact me at the coordinates below to apply to become my client.
Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
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