Life Insurance: Is it a Good Investment?

Posted on September 24, 2009 and updated December 6, 2012 in Life Insurance Canada News 4 min read

Life insurance can be broken into two broad categories: Term Insurance and Permanent Life Insurance policies. Term insurance policies generally cover you for a temporary period of time, e.g. 10 or 20 years. Permanent policies on the other hand, can cover you for your lifetime.

Permanent policies can be further sub-divided into three additional categories: Term 100, Universal Life and Whole Life. The latter two policies have several variations and a qualified independent broker can find the best fit that’s right for you.

The primary difference between Whole Life and Universal Life is that on a Whole Life policy, the investment component is built into the premium, but on a Universal Life policy it is separate. In addition, Universal Life policies offer a wider variety of investment options.

The number one quality of any life insurance policy is making sure it fills your need. Assuming your needs are met and a permanent policy is within your budget, the next question is whether it’s a sound investment?

Opinions on this subject vary, in part because life insurance as an investment is a very misunderstood topic. The following are the advantages and disadvantages of using life insurance as an investment:

 

Advantages

  • Proceeds within the policy and the Maximum Tax Actuarial Reserve (MTAR) limits grow on a tax sheltered basis. Whole Life policies set the premium, so as not to exceed the MTAR limit, and Universal Life policies set a maxium premium, which keeps the MTAR limit in mind.

  • The investment portion on an increasing death benefit Universal Life Policy and the dividends on a Whole Life policy are added to the face amount and are paid out on top of the policy face amount tax free.

  • You can use the investment component on a permanent policy to pay for future premiums, allowing you to pay future premiums with pre-tax dollars, rather than after-tax dollars.

  • Many Universal Life policies have minimum investment rate guarantees in excess of 4% (these rate guarantees have reduced in the last few years). This is a great feature for the risk adverse investor in today’s low interest rate environment.

Disadvantages

  • Many permanent policies have surrender penalties if the plan is cancelled within the first few policy years.

  • Permanent policies are generally an inadvisable investment if you don’t  have a permanent life insurance need because you’ll be paying a higher mortality charge for the life insurance.

If you would like more information, or would like to receive a customized quote, please don’t hesitate to call our office at 1-866-899-4849 or visit our Whole Life or Universal Life quote pages.

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