The advantages of whole life insurance
The advantages of whole life insurance are tremendous.The idea began with James Dodson in 1762. The cash surrender value--CSV is guaranteed and increases each year. As a client nears age 100 the cash surrender value increases until at age 100 the CSV and the face amount of the insurance policy are the same. One of the other advantages of whole life insurance is owners of it may borrow the cash in CSV as a policy loan. Borrowing against the policy with a policy loan allows for continuation of the policy, while accessing the funds A client can also access the cash value by canceling or surrendering the policy, but then the y lose the coverage. The cost is greater than Term because of the Cash Surrender Value feature. Whole Life policies used to be sold as a “Retirement Savings vehicle", as it has a guaranteed value at retirement. This proved to be a mistake I had a policy when I was 16 with a guaranteed cash value of $25,000 at age 65. As my parents had just bought a house for $22,500 this seemed like a lot of money to me. In the early days of Insurance sales only whole life policies were available. So it was sold as a way to save for retirement while having Insurance coverage. In many cases the folks that bought this were not properly Insured, and even though the returns inside the policy were tax sheltered, with poor returns and large fees many folks found the large cash value that was projected was quite small in comparison to other methods of saving for retirement. This disappointment caused many people to become disillusioned with Life Insurance and Life Insurance Agents. Which is where we get the phrase “Buy Term and invest the difference”. The problem is people don't buy the Term, or invest the difference. Where then would someone use Whole Life or Permanent Insurance? It is designed for the person who wants a guaranteed value upon on their death with no risk. Case StudyA client who wants to leave his 3 children $100,000 each, at the time of his passing.He is prepared to invest $600 per month for this purpose. To get the results the client wants we would need to invest the $600 monthly for approximately 20 years at an average 7% rate of return to get to $312,000. Upon the client’s death, the Estate would go through "deemed disposition" under Canada Revenue agency rules and all the gains of the investment, would be taxed at his full marginal tax rate. If he Willed the children the $300,000, his Estate would face the tax bill for that. If the Estate did not have the money to pay the tax, C.R.A. is within its rights to go after the children for the tax owing. It gets worse, suppose the client died a year after he started his investments. There is no way the account will have accumulated the funds he needs to achieve his goal. Our client may or may not achieve his goal -- giving each child $100,000--upon his death. Using the advantages of whole life insurance. The client buys a $300,000 whole life policy and even if he passed away the very next day his children would receive the $300,000 tax-free and estate-clear. Regardless of the financial position of the estate CRA has no claim to any of the insurance proceeds. By using Insurance instead of investing in equities. We guarantee the client’s goal will be met regardless of what takes place in his life or in the stock market. This is just one of a number of Estate Planning issues where Insurance can solve the problem. Some folks would like to leave their favorite charity a bequest upon their death and this and Universal Life Insurance work great for the that plan. As you can see there are advantages of whole life insurance in the right circumstances.
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Terry Johnston CFP J C Mitchell Financial Services Inc. Phone: 866-721-7781 ext. 232
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