Life insurance as a means of maximizing wealth
Illustration by Julie Smith David
A life insurance policy’s primary purpose is to replace the income of a family breadwinner in the event of his or her untimely demise. The typical example is a family with two young children and a mortgage – if one of the parents were to die, the surviving spouse would likely find it impossible to maintain their current standard of living.
But what about families with minimal debt and full grown children? Why would they need or want life insurance. Could life insurance help in maximizing wealth?
In many cases, yes. Life insurance has several benefits for maximizing wealth:
- Life insurance is tax efficient: the proceeds from a life insurance policy are paid out tax free. Moreover the death benefit of certain Permanent policies – more specifically Participating Whole Life and Universal Life policies – grow on a tax sheltered basis. They are paid out TAX FREE. The accumulation fund within a Universal Life policy or dividends within a Participating Whole Life policy can also be used to offset future premiums, allowing these premiums to be offset with pre-tax dollars rather than after tax dollars.
- Life insurance is a risk free asset. Although the returns on life policies are often compared to returns of a portfolio of stocks or equity based mutual funds or exchanged traded funds, this is not a fair comparison. Returns on an equity based account have significant downside risk while the face amount on a life insurance policy are guaranteed. Even the accumulation funds one can add to a Universal Life policy’s death benefit are often guaranteed. RBC Insurance, Transamerica and Empire Life all have minimum guarantees of 4% or higher on their Universal Life accounts.
- One downside to life insurance that can’t be ignored is the money contributed to a straight investment account can be accessed while the owner is alive, whereas the face amount on a life insurance policy is not paid out until the insured is dead. On many Universal Life policies, even the accumulation fund may not be accessed until the policy has been in force a certain number of years. Still, when stacking up the returns of a Universal Life or Whole Life death benefit against other risk free investments, they compare very favorably.
- Life insurance is liquid. Another key advantage to life insurance is that proceeds are paid immediately to policyholders beneficiaries and are not subject to probate fees. Probate fees are highest in Ontario: on a $1,000,000 estate the probate fees would be $14,500. The liquidity of life insurance is superb. When there is a significant tax liability from a family cottage or business, life insurance is exactly what you need to offset those liabilities and pass on an estate whole.
So life insurance remains an extremely valuable tool in the financial toolbox for estate planning, even later in life when your full mortgage is paid up and your children have grown older.