LIFE INSURANCE FUNDAMENTALS:

Permanent Insurance Explained

Life insurance comes in two types – temporary and permanent. Most people have some type of temporary insurance either as a term insurance policy, mortgage insurance, or group insurance policy (likely through work or an association plan like an automobile club). Some also have permanent insurance either in the form of whole life, insurance, universal life insurance, or Term to 100 Insurance. This article will discuss the purpose of Permanent insurance with some examples as well as considerations when purchasing it as well as 4 money saving tips.

Permanent insurance is used for estate planning and retirement planning. The primary difference here is that the need is not temporary and you want the insurance to pay when you die – hopefully at a very senior age. About 40% of insurance sold is permanent insurance. In this case, many clients did not know they had a need until we had spent considerable time discussing what these people wanted to have happen on their death and discovered some major differences between what they thought would happen and what would really happen.

While saving taxes was an important issue, in many cases it was not the most important. Some other issues we addressed was how to structure things so that a second wife of husband would not strip out assets they wanted their current children to get, ensuring that if a child married and it did not work out that the inheritance was still with their child. The reasons for choosing this type of insurance follows

To ensure you spouse will have sufficient money to retire even if you spend more than anticipated during your retirement - this was my reason for purchasing a permanent policy “I wanted to ensure that my wife or spouse has sufficient cash when I die to enjoy her retirement regardless of what we spend in retirement”

To guarantee that you will leave some money to children – it goes to them tax free and probate free if the beneficiaries are set up properly.

To leave money to a charity – there are some very interesting tax strategies around charitable giving. Please email me for a brochure on this issue.

A major use is to provide money to pay capital gains or estate taxes so that your beneficiaries can keep the assets or property on your death and not have to sell some to pay the taxes. This does not apply to your spouse in most cases as assets flow to them tax free.

Part of a tax planning strategy to transfer money in an RRSP (Canadian) which will be taxed at over 40% on death to an insurance policy that will pass tax free to the designated beneficiaries on death with no probate or executor fees. This is frequently done as part of the previous strategy for covering capital gains taxes – I have an article on this with an example using a joint last to die policy.

Maximize your pension. Many of those who have pensions will need to decide whether they want to set it up so their spouses will continue to get a pension (about 66 to 75% of your pension) when you die. Obviously, the pension will be a lot less if you choose this option as the Pension Plan will have to pay out money for a longer period of time. For many, there are advantages to taking the higher pension (where it stops when you die) and purchasing a life insurance policy with some of the difference which will provide a pool of capital when you die and your spouse to live on. I can email you more information on this if you wish.

Business owners use Universal Life Policies for a developing a corporate pension plan that is very tax advantaged

Business owners can also use a Universal Life Policy to get retained earnings out of a company tax favoured basis

These are just a few of the uses for Permanent Policies. They can also be set up so that premiums are only paid for a set number of years – usually 1 to 20 years after which the policy is fully paid up or there is sufficient funds in it to pay the premiums for life. Term to 100 Insurance is frequently used when all you want is a basic permanent insurance policy that you pay for until you die and then the beneficiary collects the money. It is usually the cheapest solution for this need.

Whole life has been around for years but has been replaced by Universal Life Insurance in most cases. Please refer to the article on the difference between Universal and Whole Life policies for more information.

Money Saving Tip 1: Permanent policies frequently have assumptions about the returns you will get within the policy for Universal Life or dividends for whole life. These are generally not guaranteed so be careful that they are reasonable and that you understand that if they are not achieved, the outcome could be very different from the illustration. Ask to see several illustrations with different assumptions so you understand what could happen.

Money Saving Tip 2: Universal Life Policies also have various bonuses built in that can increase the returns by 1.5% or more under certain circumstances. These circumstances usually relate to how much you are putting into the policy (referred to as funding), and how long the policy has been in effect. There are very significant differences between companies so ask to see illustrations from several companies.

Money Saving Tip 3: Universal Life Policies may have an opportunity to purchase riders like Critical Illness or Long Term Care Insurance and term insurance. There can be some real tax advantages to doing this if you are able to over fund the policy or you have a large amount to put into the policy to start. The funds inside a universal life grow with no taxes on the profits. If you are paying for these other policies with funds outside a Universal Life policy you need to pay taxes on the income before you pay the premiums.

Money Saving Tip 4: A few companies now offer preferred rates for Universal Life Policies and if you qualify, the savings can be very significant. Check out a typical qualifying questionnaire for Preferred Insurance. Also some companies consider pipe and cigar smokers to be non smokers.

While some uses of Permanent Insurance, such as providing extra cash for a loved one, is relatively straight forward, the use of an independent life insurance broker for most situations is recommended as many options are generally not known to the general public and even financial professionals like accountants and lawyers may not be familiar with some of them.

These types of policies have some real benefits and should be considered. You are about to sign up to pay a lot of money for a number of years so ensure you get good advice. If your term insurance policy is convertible, you can convert to a universal life policy without a medical.

See for yourself. Get a life insurance quote now.