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About 40% of life insurance sold is permanent insurance.

This type of life insurance accumulates a Cash Value; it is permanent and is generally carried for a lifetime. You pay premiums to keep the policy in force. Part of your premium goes to the insurance company for the death benefit element of the policy. In addition, whole life policies have the potential to build cash values or dividends, Premiums generally remain fixed for the duration of the policy, or until they reach what is referred to as “Paid Up” status when no future premiums are required to keep coverage in force. It is important to know your policy provisions. In whole life policies, the insurer takes on the investment performance risk.

Whole life insurance is an umbrella term for a variety of plans that combine a death benefit similar to a term life plan but with tax-sheltered savings arrangements which are usually guaranteed by the insurance company. Permanent life policies, as their name implies, are meant to be held and paid into for the duration of the insured’s life, (Most insurance companies today also offer permanent life policies Paid Up in 10 years, 20 years or at age 65 etc.) there are some fees associated with setting up the policy. Despite these fees, the tax advantages can make permanent life a valuable investment over a long period of time. Beside the benefit that the policy is always renewable and premiums are fixed and calculated based on the age of the insured when the policy is initiated. If the death benefit is paid early in the policy, the money will come mostly from the insurance policy, and if the death benefit is paid late in the policy most of the money will come from the savings account. As the savings become more and more significant, less insurance is needed to hold down the cost of insurance as the holder ages.

The cash value portion of the policy is invested in a savings account. Accordingly, value accrues in the policy over time. There is usually a guaranteed cash value guaranteed by the insurance company regardless of the performance of the market where the money is invested, and another cash value which is not guaranteed and depends on the market where it is invested into, meaning that if the market performs as forecasted then the total cash value will be even better of what was guaranteed.

Another benefit to a whole life policy is that it becomes an asset belonging to the policy holder, and it is assignable, meaning that it can be transferred to another person with insurable interest, or used as collateral for a loan. Policies may even be converted to an annuity at retirement age to provide income during retirement.

Removing money from the account before settlement for expenses other than the insurance premium is not recommended because taxes and fees may be incurred.

Permanent insurance is also used for estate planning and retirement planning. The primary difference here is that the need is not temporary and you want the insurance company definitely to pay when you die – hopefully at a very senior age. About 40% of insurance sold is permanent insurance. In this case, many people did not know they had a need until a well knowledgeable broker 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.

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 is, to transfer money that is 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.

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 for your spouse to live on.

While saving taxes is an important issue, in many cases it was not the most important. Some other issues addressed are:

• Premiums can remain level for the life of your policy.
• A portion of your premiums accumulated tax-deferred (cash value) and can be borrowed at favorable rates or withdrawn*. Or you may take a loan from a bank with the policy being the collateral.
• You can use the policy’s underlying cash values to help supplement retirement, college expenses, or other future cash needs through the aforementioned loans and withdrawals.
• 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.
• How to structure things so that a second wife or 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 leave money to a charity – there are some very interesting tax strategies around charitable giving.

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.

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 that you get good advice.

If you are in Quebec, email us at broker@delsangroup.com with your date of birth, sex, smoker or non, and amount you would like us to quote on and we will get back to you.

Delsan Group is there for you, to serve your needs in financial services, financial security and advice.

For more information, contact the Delsan Group.