Life insurance, an Untapped Treasure in High-Net-Worth Financial Planning
Life insurance is not just a “death benefit.” It’s an important tool that can help save money and transfer wealth, particularly for individuals with high net worth.
Throughout my 30-year career, I have observed some common misconceptions about life insurance products. For many, life insurance is simply a reliable, long-term way to make sure their loved ones are financially secure after they pass. While this is true, for wealthier individuals, there’s much more that life insurance can do.
Financial Advisors view life insurance differently. It’s much more than just the death benefit – it’s a tool that can provide a stable return on investment, is useful for estate planning, and even allows easy access to cash. In a time when Canada has experienced low returns on investment for over a decade and ever-increasing taxes, life insurance has become an important part of preserving and transferring wealth.
This versatility comes from the different ways life insurance policies can be financed, and how they steadily grow in value over time. Essentially, using some of these strategies doesn’t jeopardize the original purpose of life insurance – making sure your loved ones are financially safe after you’re gone.
To comprehend how life insurance can play a bigger role in your financial plan, it’s important to understand the types of products available. Permanent life insurance, unlike term life insurance, is more than just coverage. It also includes secure investment features. The payments made into a permanent life insurance policy help build an asset pool, which can later be used to cover insurance costs. This means policy owners often only need to make payments for 10 to 20 years or even less.
There are two types of permanent life insurance: universal life policies and whole life policies:
- Universal life policies offer a variety of investments chosen by the policy owner, meaning they can vary widely and have the potential for varying degrees of volatility.
- Whole-life policies offer more certainty and are based on solid guarantees. They are supported by a single, highly-rated asset pool managed by the insurance company experts, and focus on high-quality, fixed-income securities across various sectors. The returns are also vested at the end of each policy anniversary which is very attractive in volatile times.
Permanent insurance has the following three notable qualities. It’s beneficial for tax planning, provides liquidity, and can be an alternative to tax-exposed, fixed-income investing. Permanent life insurance grows in a tax-preferred way. Furthermore, it can be used to declare tax-free dividends if owned by a corporation. However, these policies can also be expensive, which is where financing comes in. With support from major life insurance companies, financial lending institutions are making financing insurance policies almost as routine as getting a home mortgage.
From a borrower’s perspective, the tax planning benefits, and death benefit of the policy are maintained, and the annual premium cost is greatly reduced. From a lender’s perspective, permanent whole life insurance (also known as PAR insurance) represents attractive and secure collateral, backed by large pools of high-quality assets.
Finally, life insurance can be viewed as an investment asset class with attributes more attractive than traditional fixed-income investments. It offers predictable returns over a defined period, grows on a tax-efficient basis, and ultimately includes valuable death benefit protection.
Given the high-tax environment in Canada, we recommend re-examining insurance as an increasingly essential tool, particularly as markets and tax laws remain unpredictable. Contact your financial advisor to explore how insurance can help fortify your financial plan.
Written By: Shawn Ryan, Insurance & Estate Planning Specialist