Permanent Life Insurance

Did you know that the Canada Revenue Agency allows you to invest and keep funds in permanent life insurance policies only? This is an essential financial and tax planning tool, whether as an investment or to protect your family.

Permanent life insurance, in the form of whole life or universal life insurance for example, often plays a key role in the retirement and estate planning of investors with significant wealth. This type of investment strategy is a tool that you should not neglect! Its uses are many.

When you die, your beneficiary receives the death benefit tax-free. With good estate planning and clear instructions to your beneficiaries, you can use the policy proceeds to fund tax liabilities upon your death. You can preserve the full value of your estate.

With proper planning, it is possible to transfer business assets in a tax-efficient manner. Life insurance proceeds can sometimes be used to pay tax-free capital dividends to shareholders. To do this, it is essential to be surrounded by a team of professionals who will be able to guide you in establishing this strategy.  

In Canada, several term and permanent life insurance options are available. As the name suggests, term life insurance gives you coverage only for a predetermined period, usually 10 to 45 years. Your beneficiaries will receive the amount provided if the death occurs during the coverage period provided for in the contract, no more.

Permanent life insurance does not expire and is more of an estate-planning tool. Beyond the value of the policy itself, it can include a surrender value that accumulates tax-free over the life of the contract, which allows you to build up capital. As an investment product, this type of insurance allows you to capitalize on the absence or near absence of debt typical of retirement. You or your beneficiaries will receive a lump sum that is more than enough to pay the inheritance tax and the remaining taxes on capital gains, related to your property or your investments for example.

Since its cash value grows tax-free, permanent life insurance can be a strategic vehicle if:

1. You have contributed as much as allowed to your Registered Retirement Savings Plan (RRSP) and your Tax-Free Savings Account (TFSA); and
2. You are looking for other ways to keep your money growing tax-free.

Three permanent life insurance options are available to you:

1. Whole life insurance
2. Universal life insurance and
3. Term to 100 insurance

Since whole life insurance is designed to meet your long-term goals, it is important to keep it in force for your lifetime. With this type of product, the insured does not need to choose his investment options, it is the insurance company that takes care of it and manages the surrender value. This is the perfect option for the investor who knows nothing about the stock market.

There are two types of whole life insurance:

1. The first allows you to receive annual dividends or credits that will help grow cash value and increase your coverage.
2. The second only gives you the cash value, without the possibility of obtaining dividends or an annual credit to increase your coverage.

With this type of life insurance, your beneficiaries will only receive the insurance amount as a death benefit. Although its cash value can be a very useful tool during your lifetime, it is not paid to your beneficiaries.

Unlike whole life insurance, your beneficiaries will receive both the insurance amount AND the built-in cash value over the life of the policy, so a larger sum in the end. You can also put additional money in the contract and choose how you invest the cash value.

This type of insurance is a more flexible and convenient option than whole life insurance, which generally allows you to choose:

• The premium payment schedule
• The amount of cash surrender value you wish to pay (subject to certain limits)
• The allocation of investments corresponding to the degree of risk you are prepared to assume

The third type of permanent life insurance offered in Canada is term to 100 insurance. It’s halfway between term life insurance and permanent life insurance, providing coverage for as long as you live, but no cash value.

Beyond protecting your loved ones or providing you with cash value, this type of life insurance can be used:

• As loan security and to obtain cash advances
• As cash by simply withdrawing the cash surrender value from the policy (which terminates the policy itself)

If you choose to cash in the cash value, certain applicable fees will be removed, and the policy will terminate. Unless you wait until retirement to withdraw the cash surrender value, and depending on your financial picture at the time, the cash surrender value may be taxable.

Yes, absolutely. It is an alternative asset class offering low risk and good return. Permanent life insurance often generates higher rates of return or after-tax returns than more traditional investments such as GICs and government bonds.

Life insurance is a very different product from home, car or liability insurance, which can give rise to litigation. The risk associated with bankruptcies is very low: there have only been four bankruptcies in the life insurance industry in Canada. In all of these cases, the Canadian policies had been transferred to solvent life insurance companies and the vast majority of policy owners were protected. Note that the insurance industry is regulated by the Office of the Superintendent of Financial Institutions of the Canadian government. Canadian insurers are also highly rated by credit rating agencies, which rate the creditworthiness and financial strength of insurance companies. Finally, all life insurance companies in Canada are members of Assuris, a non-profit organization that protects consumers in the event of the bankruptcy of an insurance company.

Permanent life insurance is an essential tool to evaluate in establishing good estate planning. It helps to significantly increase the value of the assets of business owners and wealthy people. Among other things, it protects the erosion of assets and optimizes the transfer of assets to heirs for tax purposes. To do this, a personalized analysis of your needs is necessary, and it is important to be well supported by a team of seasoned professionals in the field. Sogemec Assurance and its partners have this expertise. Speak to one of our advisors for more information.