Bill’s BLOG | January 12, 2023
When it comes to life insurance, there are many options—discovering the best solution or solutions to your insurance needs is vital. For example, term insurance is an excellent fit for many people, young families, buy-sell agreements, covering short-term loans, etc. But it is essential to understand these policies only have a set time frame and will become far more expensive at renewal, especially in your 50s and beyond. Secondly, you could be uninsurable at renewal time if you had a severe health event. So, having Permanent Insurance supplementing your term policy may be an excellent way to overcome these realities.
So in today’s Blog, let us consider the costs of death. What is Permanent Insurance, and what are my options? Who might be the best fit for Permanent Insurance? What is the best age to get Permanent Insurance? You may be surprised.
This generation is facing historically high inflation, and death is also becoming more expensive. Sorry for the bad news. One day last year, I decided to call up a few graveyards and mortuaries to get an idea of the costs of cremation and full burials. I was a bit shocked at how expensive dying had become. You may want to do this to know the approximate costs of a funeral or cremation for planning purposes. Some people are freaked out about death or even thinking about it, but I remind people we all have an expiry date and better to plan than leave a mess for our loved ones.
So what is permanent Insurance? By definition, it generally means 100 years old, but many carriers will extend this as we have more and more centurions in Canada. What are my options? There are many. You can have a term 100 with no cash value (not very popular anymore). You can also have a whole life or universal life policy with or without cash value. We can also create hybrid solutions that combine permanent and term Insurance to create a comprehensive lifetime strategy. The most important thing to consider beyond cost is what the Insurance is for and does it achieve your objectives.
Who might be the best fit for Permanent Insurance? Truthfully, there are many valid applications for Permanent Insurance.
- Cover your burial or cremation costs could be 10K to 50K or more, depending on your wishes.
- Leave a legacy to loved ones or charity.
- You are a business owner with a HOLDCO and want to build up wealth tax-free as part of your retirement planning. However, you require a minimum of 10 to 15 years to maximize the strategy.
- Participating (PAR) Whole Life policies can provide an excellent way to diversify an individual’s wealth by accumulating cash value (tax-free) and creating a tax-free income for retirement. Ideally, you need 20-plus years for this strategy to work best. Most insurers with WL PAR provide a 6% dividend annually, which can vary based on interest rates.
- PAR WL can be an excellent gift for a grandchild. It ensures insurability for the child. In addition, the policy cash value can become significant over time and provide a lump sum for education or some other priority once they become adults. Best to borrow against the cash value rather than cash it out due to tax consequences.
- Let me explain how WL PAR works and then provide a real-life example. Each year the insurer pays out a dividend to the policyholder. The insurer manages the excess reserves, so you do not have to worry or think about the investment. I prefer WL PAR to UL policies (where you manage the investments). Insurers are typically very defensive in wealth management. So when the dividend is annually issued, part of the proceeds goes to purchasing more Insurance for the policyholder, and the other part goes into your cash account. Over many years the Insurance and cash value will grow dramatically and provides two excellent benefits…more Insurance and a tax-free investment strategy. Lastly, the Premium remains the same whether you do a life pay or a ten or twenty-year paid-up option.
- Example: A 30-year-old male, a non-smoker, wants $50,000 WL PAR coverage. Life Pay Premium: $72.31 per month. At age 70, the Cash-Value = is $72,748, and the Insurance is now $123,497. If the person only wants to pay for 20 years (fully paid-up option), the Premium is $113.72 per month, and here are the results: At age 70, Cash-Value = $95,909 and Life Insurance = $153,580. ***These are approximate values and can vary.
- Example: Female Girl age 3: Parent or grandparent wants to provide a $25,000 WL PAR policy to ensure insurability and provide a gift for her down the road. Premiums are Life-Pay = $20.07 per month or 20 Pay Option = $32.29 per month. Results of Life-Pay at ages 65 = Cash-Value $56,031 and Insurance Value = $113,188. 20 Pay Option = Cash-Value = $77,277 and Life Insurance Value = $154,162. Again, these are approximate values which can vary.
So, what is the best age to get Permanent Insurance? You guessed it, the younger, the better, as long as they are in good health. Sadly, if a child or teenager gets juvenile diabetes or another serious health issue, they are uninsurable. Unfortunately, dozens of other serious health issues can make a child or adult uninsurable.
In summary, having some permanent insurance as a part of your life insurance needs makes sense on many levels. If you are a BC resident and would like to discuss your options and have me prepare a quote, please feel free to reach out to me.
All the best in 2023,
Bill Westmacott, Owner