needs it? If you haven't got life insurance, you're betting
on one of two things: either that you'll live to a ripe old
age, or that your family will have enough money to carry on
without you. In either case, consider this:
the 215,000 deaths in Canada in 1997, 20 per cent of the deceased were between the
ages of 20 and 64. With one-fifth of Canadians at risk of
death before retirement, how lucky do you feel?
management of the risk of death addresses the financial problems
that dependents will face in the event of the premature death
of their supporter.
the risk is the loss of the income of the bread winner(s)
of the family. However, the loss can be replaced by investment
income from accumulated wealth and/or the proceeds from a
life insurance policy.
common mistake in managing the risk of death is to purchase
some amount of life insurance that is affordable, but that
has no bearing on the amount of capital required to support
the deceased's financial dependents.
amount of life insurance required to provide
incomes for a surviving individual or family depends upon:
► the amount of after tax income required by each member
► other sources of income including CPP survivor's benefits
► average or marginal income tax rates
► the duration over which the income will be required
► an assumed inflation rate
► a pre-tax investment return
addition, capital may be required to pay:
► final expenses including burial expenses and probate fees
► debts including a mortgage on the family residence
► the costs of post-secondary education
► income taxes upon death
may be other capital requirements.
who are retired or approaching retirement often become very
concerned about paying income taxes in the year of death of
a single person or the year of death of the last of a married
couple. Many seniors purchase life insurance to provide funds
to pay these income taxes after their death. Ultimately, there
is no way to avoid the taxes, but simply a choice of paying
the income taxes upon death or paying life insurance premiums
every year until death.
are principally 2 types of insurance products; Term Life Insurance,
Permanent Life Insurance. Briefly, here are the characteristics
Term Life Insurance
insurance is temporary, and good for covering short and mid
term risks, such as dependents and debts. Term Life Insurance
provides protection against financial loss resulting from
death during a specified period of time or term. The policy
only pays if the insured dies within the given period named
in the policy. The period of coverage is usually 1 year, 5
years, 10 years, or 20 years, or until a specific age such
as age 65. At the end of the period, the protection ceases
unless the policy is renewed. As one ages, the risk of death
increases and the premiums for term insurance increase accordingly.
Term Life policies contain a renewable clause that gives the
policy-owner the option to renewing the policy for some predetermined
period of time without a medical examination, usually at a
higher rate of premium. Some policies have a conversion clause
that give the policy-owner the option to convert the term
insurance to a form of permanent insurance without a medical
examination or other evidence on insurability.
Permanent Life Insurance
Term Life insurance coverage usually ending at the insured's
age of 65 to 75, Permanent life insurance provides coverage
for the life of the insured. There are three forms of permanent
insurance: Whole Life, Term-100 and Universal Life.
provides protection for the whole of the insured's life. Whole
Life Insurance has a fixed annual or monthly premium that
is payable for the entire lifetime of the insured. Premiums
can be paid on a continuous payment basis over the insured's
life or on any limited basis, such as a single payment or
annually for 10 years. With Whole Life policies the premium
rate is established at the time the policy is purchased and
is guaranteed not to increase for the life of the contract.
A Whole Life policy is not considered a capital property,
like a stock or bond or building. Nevertheless, it is an asset
and it does have a value, as measured by its cash surrender
value. Investment income is earned on the accumulating fund
that created this value.
general principle in determining the taxation of the death
benefit of life insurance policies is that the premiums paid
for individual life insurance are not allowed as a tax deduction,
or tax credit, and the proceeds from the death benefit are
Insurance is a
form of permanent insurance that matures when the insured
reaches 100 or dies, whichever come first. Unlike Whole Life
Insurance, Term-100 does not usually build up any cash surrender
value, has no loan value, is not participating and does not
pay dividends. As a result, the premiums for Term-100 are
lower that the premiums for Whole Life. Term 100 can be issued
as a joint life or last to die policy. It is often purchased
on a joint life basis with benefits payable on the last death,
in order to pay income taxes on registered plans and capital
Life Insurance The
primary attraction of a Universal Life policy lies with its
flexibility. Traditional life insurance polices were bundled
meaning that, with the exception of dividends on participating
plans, all the cash and coverage elements of the plan were
inextricably tied to each other. The premium and cash surrender
value were a function of the initial face amount and all were
established at policy issue and could be predetermined for
the life of the policy.
Life on the other hand, unbundled these elements from each
other and created the leading edge in life insurance flexibility.
A Universal Life policy allows the policy-owner to:
► increase or decrease the
face amount of insurance.
► add additional lives insured.
► substitute one life insured for another.
► pay the cost of insurance based upon yearly term or level
► have a guaranteed or variable
cost of insurance.
► had an accumulating fund
plus other accounts
► have a guaranteed or variable
investment return on the accumulating fund and other accounts.
► make any amount of contributions,
as long as there is a minimum cash value.
policies do not offer all of these options.
traditional plans, where the policy account value was invested
in a portfolio by the insurance company investment managers,
Universal Life offer the policy-owner the option to choose
the weighting of investments within the account from a wide
range of options, including:
► savings accounts.
► guaranteed term deposits.
► funds that track specific market indices.
► mutual funds.
use of the investment account is not limited to funding the
death benefit. This investment component or cash surrender
value (CSV) can be withdrawn, providing funds to supplement
retirement income or for emergency situations. However, access
to the investment fund through surrender or policy loans results
in a disposition for tax purposes which may mean tax consequences
to the insured.
alternative and perhaps more effective method of accessing
the CSV of an insurance policy- is by using it as security for a bank loan. Because this is
not a policy loan, there are no immediate tax consequences.
This loan can be used for any- purpose, including as a means
to provide regular cash flow on retirement. If
used for business or investment purposes, the related interest
is likely tax-deductible. To provide a supplementary
retirement stream, the policy's CSV could secure a bank line
of credit. The insured could then draw on the line of credit
at regular intervals or as needed and the agreement could
be structured such that no repayments would be required until
death, at which time a portion of the tax-free death benefit
would be used to repay the loan. If the debt load exceeds
the security limit, premature repayment could be required
and where cash is limited, this may mean surrender of the
policy, which could result in significant tax liability.
products are complex and vary widely from insurer to insurer.
Don't try to do this on your own. Ask a professional well-versed
in Universal Life insurance to guide you.
The information contained in this commentary is designed
to provide you with general information only, and is not intended
to be comprehensive advice applicable to the circumstances
of any individual. We strongly urge you to seek professional
assistance before acting upon information included herein.