Achieve Long-term Goals with Permanent Insurance

Do you hope to leave an inheritance for your children? Who will pay for your funeral? Will your estate have the liquidity to cover capital gains? Would you like to leave a bequest for your favorite charity? Permanent life insurance can be a great tool to assist in achieving certain long‐term goals.

Permanent insurance is life insurance that provides a lifetime of coverage. The death benefit is paid out to the beneficiaries when the insured passes away at any age, young or old. And because permanent life insurance doesn’t expire, it is usually used as an estate‐planning tool.

Since permanent life insurance covers your entire life, it’s probable that the death benefit (or lump sum of money) will be paid to your beneficiaries in your old age (when you pass away). At that time, you will probably have little to no debt, so the lump‐sum of money that your loved ones will get would be used – among other things ‐ to pay off the costs of settling your estate taxes as well as any remaining taxes such as capital gains on property and investments.

A unique feature of permanent life insurance is that it can include a cash‐value that accumulates tax free over the life of the policy allowing you to build equity. And because the cash value can grow tax free, permanent life insurance can be considered if you’ve contributed as much as you’re allowed to your Registered Retirement Savings Plans and Tax‐Free Savings Accounts and are looking at opportunities to keep earning tax‐advantaged growth. This makes it an attractive choice not only for high net‐worth individuals, but others, too! Younger individuals can also benefit from it, with protection for life and cash value that can grow long term. Plus, the cash value can be used for different purposes and allows permanent life policies to offer some flexibility in terms of coverage and payment. Keep in mind that the growth of the cash‐value is contingent on the performance of the investments chosen, or the dividend rate offered by the insurance company; these rates are not guaranteed.

There are three main types of permanent insurance:

Whole Life insurance contracts include the opportunity for cash value accounts that grow according to a formula the insurance company determines. With some products the insurance company sets the premium, a portion of that premium covers the cost of the insurance, and the remainder goes into an account that can grow depending on the return received by the investments. Whole Life contracts are designed for the hands‐off investor who prefers the set it and forget it approach. The insurance company picks the investments for you and provides a dividend. The cash value in the policy gives you the opportunity to take premium holidays, withdraw the cash, take a loan out against the value, or simply allow it to grow and purchase additional paid‐up insurance.

Universal Life is similar to Whole Life but with more flexibility. With Universal Life the policy owner chooses the amount of premium that goes toward the cash value. They also choose how the cash value will be invested. This is more suitable for the hands‐on investors who like to pick and choose their investments. This premium flexibility can be advantageous for corporations that do not have steady income each year. During profitable years they could put extra money into the policy and during the lean years they can use the cash value to pay the premiums. Death benefits and cash values are paid to the beneficiaries 100% tax free at the time of the insured’s death (if the cash values remain within the policy limits).

Term to age 100 is permanent insurance without cash value.

If you would like to leave an inheritance for your children or grandchildren, a permanent life insurance policy can help ensure that funds will be available at your death to distribute to the beneficiaries of your choice.

Final expenses are a potential concern for some. The cost of an average funeral today is around $15,000, but in 40 years that number could increase substantially with inflation. A permanent life insurance policy can help cover these costs.

For those who own multiple properties, they may be subject to capital gains tax. A capital gain (or loss) is calculated by subtracting the original purchase price including expenses from the current value. With current tax laws, you will have to pay tax on 50% of the total capital gain. Having life insurance proceeds available to pay these taxes can save the executor from being forced into liquidating the property immediately (at a decreased price), to cover the taxes.

Business owners may also be subject to capital gains tax when selling their business. Speak to a chartered accountant to confirm if your business will qualify for the capital gains exemption.

For business owners with multiple children, where not all children are interested in taking over the business, a permanent life insurance policy can be used to assist with estate equalization, so each child is treated equitably. Consulting a lawyer for these scenarios is recommended.

If you have a dependent with special needs, their need for financial support may be even greater when you pass away. Owning a permanent life insurance policy is a cost-effective way to ensure money will be available to cover the financial needs of your dependents, long after you pass away. Setting up an annuity with the life insurance proceeds will ensure your dependents will receive a set amount each month for the rest of their life.

Estate preservation is another great reason to consider permanent insurance. Just like investing in RRSPs and TFSAs have tax benefits, so does investing in a permanent life insurance policy. Your investments will grow inside the insurance policy tax free; when you pass away the cash value and death benefit will all be paid 100% tax free. In Alberta, personally owned policies are creditor protected, assuming the policy was not collaterally assigned.

The cash value inside the policy provides lots of flexibility. Allowing it to grow tax free is one option, but it can also be used to make a down payment on a house, cover the costs of a critical illness, help reduce the financial burden of a disability and provide income at retirement, just to name a few. There are many varieties of Whole Life and Universal Life permanent policies, each offering different benefits. Your insurance advisor can help you find a policy that suits your specific needs.

For your favorite charities you would like to bless, you can list them as beneficiaries of your life insurance policy. Giving to a charity when you pass away will create a tax credit that can be used to offset other taxes.

Do you currently own a term insurance policy? Did you know that some term insurance policies include the option to convert from temporary coverage to permanent, extending your coverage for your entire life? In most cases, this conversion is possible, even if your health has changed. If your health has declined since activating your term insurance policy, then converting to permanent may be a viable option; as your life expectancy is lower and you may not qualify for a new term insurance policy.

Does everyone need permanent insurance? No, but it can be a perfect fit for some. Each individual has unique insurance needs. It is important to review your insurance needs with a licensed insurance advisor every year, to ensure you have the correct policies in force with sufficient amounts to cover your needs.

If it has been a few years since you reviewed your insurance coverage, please reach out. I would be happy to provide my expert advice from a Christian perspective. I look forward to hearing from you!

Blessings,

Ryan Van Niejenhuis, BA, CKA^®
Insurance Advisor
Credential Financial Strategies Inc.