Insurance Permanent Life Insurance
Permanent Life Insurance
There are two main types of life insurance, namely permanent life insurance and temporary life insurance. Usually, people in general have temporary life insurance policies in the form of policies such as mortgage insurance, term life insurance or even group policies is insurance such as the one’s you get through your employer or through a club.
A few people also have policies such as Universal life insurance, term-to-100 life insurance and even whole life insurance, all of which are permanent life insurance policies. The following paragraphs in this article explain what permanent life insurance is and the purpose behind such policies. You should know of all the things to consider when take such policies so as to take the best, money-saving decisions.
The best thing about a permanent life insurance policy is that it can be used for retirement planning purposes as well as for estate planning purposes. The biggest differentiating factor for permanent life insurance are the motivators – namely that your need is not short-lived or temporary and that you want your insurance to pay out something when you actually pass away.
From the total life insurance policies sold each year, approximately 40 percent are of the permanent life insurance kind. Most people overlook this need that they have until an insurance agent actually explains to them the kind of circumstance that they may find their families to be in once they pass away. Client usually discover a big disparity between their perception of what will happen when that happens and the reality of what may actually happen.
The objective of saving tax is also an important motivation thought it is not necessarily the most important one. There are also some other objectives, such as safeguarding what you have left behind for your children from any asset stripping intentions of the second husband or wife; or leaving something behind for a married child incase the marriage does not work out for him or her; etc.
The main reasons for the choice of permanent life insurance policies are as listed below:
- One main reason for it is to ensure that one’s spouse as enough cash to live out his or her retirement in relative irrespective of the retirement spending, after you have passed away.
- To provide for your children with probate free and tax free money, if you set your beneficiaries in a proper manner.
- In order to leave behind some money for your charitable interests. There are several good tax strategies that revolve around giving money for charitable institutions and causes. You can contact the IDC to get a brochure explaining them.
- An important use is to leave some money for estate taxes and capital gains taxes in order to let your beneficiaries keep your properties and assets without having to pay for them. Beneficiaries other than your spouse (who usually gets them tax-free) usually need to pay these.
- As part of the strategy that aims at tax planning, people can transfer money to a Canadian RRSP, which get taxed at more than 40 percent to an insurance policy on death. The proceeds of this strategy pass on the beneficiaries, absolutely tax free and with no executor or probate taxes.
- In order to get the maximum pension benefits. When setting up pensions, people need to decide if the wish to set it up in such a way that their spouses continue to get a part of the pension amounts after you pass away. The pension is obviously a lot lesser of this option is chooses as in essence the pension plan with be paying out amounts for longer time periods. On the other side, if the higher pension is option the pension payouts stop on your death and coupling it with a life insurance policy that pays out a significant sum on your death will help you leave behind some money for your spouse to live on.
- People who own businesses may use Universal life insurance policies develop some pension plans of the corporate nature and enjoy some tax advantages through them. These Universal life insurance policies can also be used as a means to route retained earnings out of the business and that too with a lot of tax advantages.
- Some insurance companies have built in provisions for critical illness, which allow you to get tax-free cash out when there is a critical illness.
- For businesses that need the insurance cover but are also struggling with their working capital requirements, there is a strategy that allows the company to get as high as 97 percent of their total premiums back as a loan. Additionally, both your insurance premiums as well as your loan are both effectively paid off in 15 years. The uses explained above are not exhaustive and there are several more uses of Permanent life insurance policies. You can tailor your insurance policy by discussed your needs with your agent. Some policies can even be set up in such a way that insurance premiums are only paid for a predetermined number of years, say for example 20 years, after which the insurance policy is termed as ‘fully paid up’ or enough of a money pool has accumulated so as to pay for the premiums through the rest of your life.
When you just want a basic permanent life insurance policy, it is a term-to-100 policy that you need, as this will only require you to pay for the policy till the time you die, after which your beneficiary will get the insurance money. A term-to-life insurance is actually one of the least expensive ways to fulfill this basic insurance need. Term-to-life can also be taken as an inexpensive funeral insurance that pays out between $25,000 and $50,000.
Though Whole Life insurance is a positively ancient insurance product that has been around for ages, it has effectively been nudged aside by Universal Life Insurance in many cases.
Most permanent life insurance policies are based on certain assumptions regarding the returns from a Universal Life policy or even the dividends from Whole life insurance, and unfortunately most of these assumptions are not guaranteed. Make sure of two things:
- You know that these assumptions in your policy are pretty reasonable ones.
- You are aware that if there is a failure in meeting such assumptions the results of the policy may be drastically different.
With Universal Life insurance policies, you can avail certain more benefits, which can effectively increase the returns by about 1.5 percent or even more in some circumstances. The circumstances that can give these favorable results usually pertain to the funding put into the policy and the period for which the policy has been in effect. If you check these examples for different companies though, you may see drastic differences between them.
You may be allowed to purchase certain insurance policy riders such as critical illness cover, term life insurance or even long term care insurance along with your Universal life policy. You may also get the benefit of tax savings when you purchase them, if you have a large amount put to start the policy and you are unable to fund it. These funds put in a Universal Life policy actually continue to grow without any taxes on them, while if all the above-mentioned insurance covers are purchased outside of such a policy, you do need to pay your tax on the income before you pay the premiums.
Quite a few companies offer something called preferred rate Universal life insurance policies. If you qualify for such policies, you make significant savings. To qualify, you need to fill in a typical insurance questionnaire where they want to know of your smoking habits and lifestyle choices.
Though certain advantages and uses of Permanent life insurance are perfectly straight-forward, you may need the assistance of an independent life insurance agent or broker to recommend certain options that suit your personal circumstance, as these are not generally known to the public at large. In fact, even financial professionals such as lawyers or accountants may not be able to offer as much help as an insurance agent can.
There are some real benefits of having life insurance policies and you should certainly consider them. Since you are about to shell out a lot of money and keep it going for quite a few years, you should take the best advice from the best insurance brokers. In case the term life insurance policy that you have is a convertible one, you can also convert it into a Universal Life Insurance policy without the requirement of a medical check up.
There are 5 main parts to compare between whole life insurance and universal life insurance and there are as listed below:
Mortality Cost: This is the part of the insurance deposit that is generally interpreted as the pure cost of the insurance cover, in the form of the life insurance death benefit. It is recommended that this cost have insurance be the same or be level throughout the insured person’s lifetime. There are some advantages of having the insurance costs as a annually renewable rate especially during the early years though, as the mortality costs are quite a bit lower in the early years, ensuring that larger investment portions get deposited early on. At the age of 40 or so, it is in the insured person’s best interest to covert his insurance from a renewable version to a level term version as the mortality costs at that age are significantly higher.
Admin Charges: The charges for administering the insurance policy and the premium taxes may be different for both the policy types.
Premium Taxes: The contribution to your policy is usually charged with a premium tax that is usually about 2 percent.
Investment or Savings: This is the remaining amount left behind after the two above mentioned charges have been deducted. This savings value is what will essentially grow and it may also be referred to as the ‘cash value’, ‘cash surrender value’ or ‘fund value’ of your policy.
Return on Savings: This rate of interest is what is credited to the insurance account every year.
There are some insurance policies that guarantee that some of the costs mentioned above or even all of them do not change during the whole tenure and the insured person gets at least a minimum return on investment.
For a single premium every month, whole life insurance policies provide permanent life insurance cover with an additional savings component. These products have grown in popularity and in certain ethnic groups they sell particularly well.
Costs of whole life insurance stay level year on year, which is, they do not increase every year. Whole life insurance does not reveal the ‘administration costs’ as well as the ‘cost of insurance’. The balance of premium that remains after both these costs are deducted is the investment or savings portion of the policy. The returns that one gets on the investment or savings part depends on excess interest on the investment earnings, operating expenditure, savings in mortality costs and the inclination of the company’s directors towards what they will pay. Dividends of over 7 percent have consistently been offered by some insurance companies, making them to be an attractive option even if the cost of insurance is high.
In short, insurance policies only guarantee a minimum return and hide other parameters such as the insurance cost, admin costs and the formula to calculate the returns on your investment portion. Neither can you know the return that you re receiving nor do you get to have a say in the instruments that your money is invested in.
On the other hand, Universal life insurance caters to the prudent belief that one should ‘buy a term life insurance and invest the monetary difference to get returns’. Additionally, they remove some of the common complaints that people have wit whole life insurance, such as non-disclosure of premium allocations between the various costs and the investment portion, and the lack of the power to choose your investments.
With Universal Life Insurance you get some form of transparency as the mortality charges are made known to you and you have the choice to accept level mortality rate, annually increasing mortality rate or a combination where one can change into another in the later years. Even the administration charges are made known, generally about 100 to 125 dollars per year, and they do not change throughout the policy period.
The investment options within a Universal Life Insurance policy have grown exponentially in just the last few years. Though there are some older policies that still do not reveal the rate of returns, most new ones offer you the choice of choosing your investments, thus ensuring that you know your own returns. Some universal insurance policies are designed to imitate the return movements of some popular mutual funds and are even managed by proper managers. S & P Index funds, bond index accounts, Canadian investment accounts and some GIC type accounts are good examples of this.
When it comes to returns, mutual funds usually provide marginally higher returns than life insurance policies but there are 4 major advantages of life insurance over mutual funds and these are explained below:
- The growth in your life insurance policy is a completely tax free income that is quite like an RRSP except that unlike the RRSPs there are numerous ways to make tax favored uses of that money.
- Hundred percent of the savings component of a life insurance policy can be invested in an index where performance based returns can be earned. The index needs to be outside of Canada and can be any one of the popular S & P indices, bond indexes and American and Global Equity indexes. MER or the Management Expense Ratio of the options of investment funds inside Universal Life Insurance policies have historically been something of a concern but not any more, as many now argue that there are benefits of them together with the policy making the extra cost completely justified. Some companies do offer some fund options now without any additional MER contribution.
- If your insurance policy is set up in a proper manner, its funds should be ‘creditor-proofed’. Irrespective of your how large a credit you owe to your creditors, they cannot in any way touch the funds inside your life insurance policy and this is especially important for people who own businesses or have lawsuits.
- Again, if set up properly, the whole investment amount in your life insurance policy and its face value so completely tax free to the beneficiary when the insured person passes away. No probate fees apply and this is the same case with whole life insurance policies except that the cash value may or may not have additional face value inclusions.
There are life insurance policies that allow the whole cash value to go to the insured person in case he falls victim to a critical illness with no additional costs cutting into it.
To explain the tax treatment differences between Universal life insurance policies and RRSPs, let us consider an example.
Let us make the assumption that Sheila had $100, 000 as the investment portion in a Universal Life insurance policy and the same amount invested in a standard mutual fund before she passed away. The whole investment part of the life insurance would then go to Sheila’s beneficiaries without any tax or probate cuts. Also, the amount would be released in the form of a check, just a few days after the insurance company receives some death proof. On the other hand, the mutual fund investment of $100, 000, would not only reduce due to income tax cuts but would also be charged some probate fees. Additionally, the funds may not get released till Sheila’s whole estate has gone through probate cuts and the whole matter is settled.
Universal life insurance is in much demand not only because it caters to the standard insurance needs of people but also is also popular as an estate-planning instrument. This type of life insurance can be used to make numerous tailor-made estate planning and tax saving strategies.
If you believe that you have already accumulated enough funds for a comfortable retirement in your RRSP, you should consider stopping its contributions and set up a more beneficial Universal Life insurance policy with that amount. Your estate and retirement planning process should consider its timing (as to when it will be most beneficial to start) as well as its benefits.
The life insurance policy’s face value can cover your expected estate taxes and its investment component, which grows in a tax free manner contrary to the 43 percent cuts that RRSP funds take, can pass on to the beneficiaries without probate fee cuts. In comparison to withdrawing money from your RRSP, if the need thus arises, you can reach at the savings portion of the money in your policy. On the flip side, there is no tax credit on the RRSP contribution that you make though it makes complete sense from the perspective of estate planning.