Should You Invest In Corporately Owned Permanent Life Insurance?
So, should you consider investing in a corporately owned permanent life insurance policy? The answer is: it depends. In my opinion, permanent life insurance is a product that is far too often sold inappropriately and misrepresented in the market place. When it is sold to someone who is not a good candidate for this strategy, the result is likely to be one where the owner of the policy has a negative experience, and it may end up as a very poor—if not downright terrible—investment. In some specific situations however, it can be used as a valuable component of an overall financial plan.
When should you NOT consider permanent life insurance?
Generally speaking, if you don’t have an insurable interest (i.e. a spouse, child, grandchild or charitable endeavour that you want to provide for after you pass away), you probably don’t have any need whatsoever for permanent life insurance.
If your cash flow is tight and/or you have significant debt and little in the way of savings, you are probably much better off purchasing more affordable term insurance, and using the surplus to pay down debt or save.
What is the difference between Term Insurance & Permanent Insurance?
Term insurance will usually cost significantly less than permanent insurance, so it can be a very cost effective way to get a lot of coverage for a specific “term” (typically between 5 and 30 years). It is more or less the equivalent of renting life insurance: you pay your premiums and you are covered for the duration of the term. If you pass away during the term, the death benefit pays out to your beneficiaries. I always want term insurance to be a bad investment for my clients (because that means they outlived the term—this is always a good goal in my opinion!). It does however provide important coverage for things like debt protection and income replacement at a time when it is needed (an example would be a young family with a mortgage).
Permanent life insurance on the other hand is more expensive (often significantly), but with the advantage that a death benefit will eventually be paid out as long as the policy remains inforce.
My wife and I personally have both term and permanent insurance, and each serves a specific purpose—the term insurance is to cover us while our children are young and totally financially dependent, and the permanent is so that we can leave a financial legacy to our children and possibly grandchildren (hopefully many, many years down the road).
When might corporately owned permanent life insurance make sense?
In my experience, when preparing detailed financial plans for business owners and incorporated professionals, even when using very conservative assumptions, it is not uncommon to determine that whether it is their intention or not, many of them will very likely leave assets behind after they pass away. Where these assets will be left inside of a corporation, the proceeds of a death benefit from a life insurance policy can be an extremely tax efficient way to get the money out of a corporation and into the hands of your intended beneficiaries.
An added benefit of a corporately owned life insurance policy is that the cash values that grow inside of exempt policies do not count against the new $50,000 passive income threshold introduced in 2018, and as a result this can help to minimize, delay or possibly even eliminate the impact of the new rules on those corporations that will be affected.
Is permanent life insurance a good retirement savings vehicle?
Certain permanent insurance products can be designed so that there is a cash value/ investment component in addition to the actual life insurance coverage. Over the years I have seen permanent life insurance presented as an alternative to more traditional retirement savings vehicles (i.e. RRSPs, TFSAs & non-registered investments). It is my opinion that the permanent life insurance is most appropriate when it is viewed as a very tax efficient estate planning tool first and foremost. The fact that there is a cash value or investment component that can be accessed while you are alive is an added bonus, but I prefer to view it as a “failsafe” of sorts in the event you were to run out of money, rather than as a primary source of retirement savings. Additionally, while a permanent life insurance policy may compare quite favourably to a traditional fixed income investment (i.e. a GIC), if you implement this strategy expecting it will out produce traditional equity investments you may be in for a disappointing experience (additional considerations on this last point regarding equity investments include: how likely are you to be comfortable remaining in pure equity investments later in life? What happens if you are unlucky enough to pass away when equity markets are down significantly? And finally, how will a traditional investment compare to the death benefit of a permanent life insurance policy on an after tax basis?).
What is the difference between Term to 100, Universal Life & Whole Life?
There are essentially three different variations of permanent life insurance: Term to 100, Universal Life & Whole Life.
The name “Term to 100” can be misleading as it implies that it is a term product, but in reality is part of the permanent insurance family. It is the simplest form of permanent insurance: both the death benefit and the premiums are fixed, and you pay the premium for life. It is also typically the cheapest form of permanent life insurance. The longer you live, the more you invest in terms of premiums, and you also know the exact death benefit that will eventually be paid out from day one.
Whole Life insurance offers permanent life insurance protection with the potential to grow money inside of your policy over time (called cash value). Where a Whole Life policy is a “participating” product, you are also eligible to receive policyholder dividends, which can be used to buy additional coverage, reduce your premium payments or taken as cash. Where the dividends are used to buy additional coverage, your death benefit will grow over time. One of the major advantages of whole life is its “guaranteed values” and its “vested values”. As the policy grows, both the cash values and the death benefit grow over time. That growth vests each year and can never go down again, unless you access values from the policy during your lifetime or cancel the policy. In fact, the cash values increase every year until age 100 when they equal the death benefit. There are few financial products that guarantee positive growth for up to 100 years.
Universal Life offers greater flexibility in terms of both premium payments and investment options than Whole Life. With Universal Life, there are two separate components: a pure insurance component (generally a Term to 100 policy) and an investment account. There will typically be a minimum premium amount and a maximum premium amount each year, and this flexibility can be very attractive to some people. The premiums deposited above and beyond the actual cost of the insurance component are added to the investment account (and this can be used in a number of ways, including but not limited to withdrawals while you are alive, reducing future premium payments etc.). Your overall experience with a Universal Life policy will be heavily influenced by the performance of your investment selections.
If you and your advisors determine that you are in fact a good candidate for permanent life insurance, it will then become very important to carefully consider your objectives to design and utilize a product that will be right for you. Each of these products comes with their own set of potential pros and cons. The above permanent insurance summary just barely scratches the surface so it is very important that you ask questions and do your due diligence to understand which variation of permanent insurance, if any, is best for you.
So, should you consider investing in a corporately owned permanent life insurance policy?
It depends. If you meet some of the criteria outlined above, then you might be a good candidate for this strategy. It is important to remember that this is a serious commitment. Prior to investing in permanent life insurance it is critical that you undergo a comprehensive financial review including detailed retirement projections based upon conservative assumptions to confirm that the strategy will not prevent you from achieving your other goals and to help you design a product solution that is best for you (otherwise you are essentially just guessing). This process can help you to determine the maximum amount you should consider allocating towards this strategy, and how you should consider structuring it (for example, should you insure individual lives or joint lives, should you use a policy that you pay for for life, or one that can be guaranteed to be fully paid up at a specific point in time – generally between 8 and 20 years).
There are a lot of considerations when it comes to this topic. Permanent life insurance isn’t a good thing or a bad thing, nor should life insurance vs. investing be treated as a “one or the other” scenario. When it is used correctly, permanent life insurance can be a very valuable part of an overall financial plan, but under no circumstances should it be considered appropriate in all (or even most) situations. Speak to a qualified Financial Planner to determine how, if at all, this strategy can be used in your personal financial plan.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Rick Spence is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant. Insurance products and services distributed through I.G. Insurance Services Inc. Insurance license sponsored by The Great-West Life Assurance Company.