You have three, divided into two categories: term and permanent.
- Term is for temporary needs. It is like renting your insurance.
You pay as long as you have your policy, and there is no cash value – it is simply a pure cost of insurance. It’s great for protecting high debts or family income needs with the lowest initial cost, but as time goes on it becomes more costly. Your intention should be to match the length of the term with the length of your need. But keep in mind, more than 85 percent of term policies never end up paying out, expiring worthless for three reasons. Firstly, people outgrow its need and cancel it. Secondly, as the cost goes up at some point many feel the cost eventually becomes prohibitively expensive and they cancel it. Thirdly, you outlive your coverage. Happy birthday, you are now uninsured!
Term just replaces income. Permanent increases wealth.
Wealth is not just what you make but how much you get to keep, how it works for you and how many generations you keep it for.
- Permanent insurance is for your permanent needs, ones that you cannot outlive. This type of insurance is ideal for estate planning, sheltering money from tax, and if you want a policy that you are assured to get money back from. Surplus deposits you invest in can grow tax advantaged in your policy. It appeals to those who don’t want to keep paying forever. You have two choices here:
- Universal – offers high flexibility and low guarantees.
You choose your investment mix. This choice offers you greater control and customization on your investments but with it comes more responsibility. Accumulating cash values can be used to pay your insurance cost or to increase your death benefit.
- Participating (PAR)–offers low flexibility early on and high guarantees.
Think of it as putting your policy on an auto-pilot that is professionally managed with very high quality investments to reduce volatility. It has predictable consistent returns and sustainability as you participate in the dividends of the insurance company. PAR is a great way to grow an estate or supplement retirement income over the years. It is an asset class that not enough people have explored. Some insurance companies in Canada have paid consistent dividends for over 160 years, and they vest annually so the company cannot take them away once they are paid out, and do not drop in value when the markets go down.
This insurance product should be used as the fixed-income component of your investments. It offers institutional bond pricing at a retail level, with incredibly low expense ratios and professional management of the equities for proper diversification. My high net worth clients love smoothing out their dividend returns via the PAR account. They love minimizing the erosion of taxes on their nonregistered fixed income investments by using this product, and they love the idea of leaving tax-free money to their family.
In the past 20 years many financial advisors will say that these participating permanent products have been the best performing product their clients have had, given that financial markets have collapsed twice in that time. These products were consistent in volatile markets – in that they were very stable – and were among the only products to deliver what people expected. Many people in the first year of having this product may consider the investment a financial stretch, but will love it after 5-10 years. I have had clients who have spoken to me about their wish to go back in time to buy more if they could.
In many cases, widows that live well into old age can thank their spouses for setting up permanent insurance policies. Without this planning, they may simply have been left with only a portion of the income from their spouse’s pension.
Are you interested in a GIC equivalent return of nine percent? This rate is supported by major insurance companies and some of them have never missed a dividend payment for over 160 years. Most people don’t think of insurance as an asset class, only as an expense. Are you ready to change your thinking? Reach out to me for a conversation.
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