What kind of life insurance should I buy?

What kind of life insurance should I buy?

You’ve probably heard about life insurance, but you might be uncertain what the best options are for you and your family. In this article, I’ve put together some general tests to determine what product would be better for your situation. For a brief introduction to the types of life insurance, please look at my prior article The Basics of Life Insurance

The most basic type of life insurance is term insurance that covers a person for a set number of years (though you can get a permanent kind called a Term100). If you are in your prime working years, this is the best way to have affordable coverage for 10, 20, or 30 years at a set premium to cover your income earning potential for that time and protect your family. This is the ideal insurance to buy when you are unable to put much into savings and need to cover debt like a mortgage. A lot of insurance companies like Empire Life, Manulife, and Equitable Life also allow you to bundle critical illness insurance into it for an extra premium. Term insurance is also good for a business owner who intends to retire out of the business or sell at a later date and only needs insurance for a certain number of years.

Whole life insurance is a permanent kind of insurance where the insurance company invests the premiums in a fund and pays dividends to each policy holder yearly based on the performance of the fund and whether more or less people insured died than were expected to die. The dividends are very consistent year over year, making a whole life policy a very stable investment that will far outperform a GIC or most bond funds. In some ways, a whole life policy is like a TFSA on steroids. As long as the cash you invest in the policy stays in the policy, the return on that investment is tax-free. The cap on how much you can put in a whole life policy is quite high, so if you have already maxed out your TFSA and want more tax-free savings, this could be ideal for you. The down side, however, is that it usually takes over 12 years for the cash value of a whole life insurance policy to surpass the premiums you’ve put in – meaning you better not need liquidity from it anytime soon. Also, whatever cash you pull out of an insurance policy directly will become taxable, so when the policy eventually does have a large cash value, the best way to tap into that is to get a line of credit against the cash value. Manulife Bank specializes in these kind of insurance policy loans for a reasonable interest rate.

Many people get a small whole life policy to help pay for final expenses and combine it with a term insurance rider to cover those income producing years. Combining all the insurance needs in one application can reduce policy fee costs and save time. If possible, use an insurance broker who can shop for you among the major insurance providers for the best rates for your age and health status.

If you are a business owner who is saving a lot of your business earnings in a holding company, permanent life insurance can have huge tax benefits. Be very careful to put the insurance in the correct company since insurance cannot be moved on a tax deferred basis between companies like most assets can. Generally, a permanent insurance policy should never be put in the active business company, especially if it is a business you might sell in the future.

Permanent life insurance in a private company is a tax-free investment just like in personal hands, meaning that putting money into an insurance policy instead of a regular investment portfolio can reduce taxable investment income. As of 2018, any taxable investment income over $50,000 grinds down the small business limit for earnings that get to enjoy the lower tax rate compared to the usual business tax rate.

The greatest tax benefit of permanent life insurance for a private business is the death treatment. On death, the majority of the insurance payout becomes an addition to the capital dividend account from which tax-free dividends can be paid out to shareholders. This can greatly reduce the tax on death for the estate of the shareholder who is insured or enable other shareholders to buy out the deceased shareholder with tax-free dollars.

If you would like to discuss the kind of insurance that might work best for your situation, feel free to reach out for a free initial consultation.