When most people get married, buy a house
or have a child, they feel compelled to buy insurance, which is why
there are a lot of rich banks and insurance companies in Canada. I have
found it astonishing at how many folks have big, expensive life
insurance policies that they, or their beneficiaries, stand about a
zero chance of ever benefiting from.
Let's review the only two kinds of life insurance that you need to know about.
This is called "term insurance," which means you own it for a defined
period of time, so long as you make the payments on it. Typically,
people buy a 10-year term, with it being automatically renewed for
subsequent terms, but at ever-higher rates. As you age, you become
statistically more likely to die, so the insurance cost rises.
get term insurance, count on filing out a detailed application form,
then being contacted by one or two people who will grill you on various
financial aspects of your life (the more insurance you want, the more
questions), and having a medical examination that will include blood
work, a urine sample, electrocardiogram and various fingers stuck in
various orifices. The process usually takes a couple of months, from
application to approval.
Term insurance is
relatively cheap, and as the banks all get into this business, that
trend will continue. You should buy it for very specific purposes, like
providing a tax-free lump sum payment to your spouse or family upon
your death; to pay off an outstanding mortgage or other debts; to
finance children's educations; and for funeral expenses. You should
expect the insurer to offer you guaranteed premiums over the term of
the insurance, regardless of changes to your age or health; renewable
coverage with no medical exam or questions at the end of each term
until you reach a certain age (typically 80); and the ability to
convert a term policy into a permanent one, also until a specified age
These days you can get much of the approval process done online, but you still have to undress for the physical.
There are a few variations, including whole life, variable life and universal life.
kind of insurance is more flexible; it lasts your entire life; and it
can play an integral part in lifetime financial planning, including
providing tax-free retirement income.
life pays you a guaranteed death benefit like term insurance, in return
for you making premium payments that stay the same forever, regardless
of age or health. The younger you sign up, then the lower these
payments will be. A whole life policy also has a cash value that builds
up over time, and you can borrow against that at relatively low rates,
or use it to make premium payments themselves. Whole life costs more
than term insurance and a truism is most people are better off "buying
term and investing the difference,"
life is just that - unpredictable. So, while the premiums you have to
make stay the same, the actual cash value of the policy fluctuates
according to the performance of the investment assets you choose to
have the policy invest in. The death benefit part is guaranteed. Given
the fact that you might have this kind of policy in place for ten, 20
or 30 years, hitching it to a major stock market through an index fund
is probably a brilliant move.
Universal life is
divided into two parts - a basic term insurance policy that will pay a
stated death benefit so long as basic premiums are paid, and an
investment account. You are allowed to put more money into this policy
than is required for the basic death coverage, and that additional sum
goes into a tax-free account, just like an RRSP. Within that account,
you can elect to invest in just about any kind of asset you want, from
fixed-income bonds to high-octane index or equity growth funds.
retirement, you can use all the accumulated cash inside the plan as
collateral at the bank to receive a loan paying you income for the rest
of your life. The most outrageous aspect of this plan is that, because
the money is flowing from the proceeds of a life insurance policy, the
retirement income is tax-free. You can also roll it over inside your
estate on a tax-advantaged basis.
So, here's a
strategy: For most people, term insurance is the way to go - certainly
until you hit your forties and start making the best money of your
life. At that point, while still in relatively good shape, convert to a
universal life plan. This will retain the death benefit, and yet allow
you to be making serious investment choices within a tax-free
environment, for relatively low basic premiums. This is especially the
case for people with higher incomes, who have money left over every
year after maxing out their RRSP contributions.
Be aware that the section of the Income Tax Act which allows this
tax-free pension to be enjoyed might be repealed. In fact, I'm sure it
will be since it's such a sweet deal. However, any existing insurance
policies stand an excellent chance of being grand fathered. Interested?
Then do it - now.