The most important use of life insurance is to ensure sufficient capital in the estate to allow the deceased's dependents to maintain the standard of living they enjoyed while the deceased was alive. Other uses of Life Insurance are to provide capital for both Personal needs as in mortgage insurance and/or corporate needs (*retirement compensation, Buy/Sell, Key Person Coverage). Life insurance is well suited to these applications, as it provides a tax-free lump sum payment upon the death of the insured.
Our advisors will prepare a "financial needs analysis" to determine the amount of insurance required on the death of the individual. This involves an analysis of:
> Sources of income that will continue to be available on the death of the life insured;
> Capital assets that can be liquidated to provide income;
> Tax and other liabilities that will arise on death; and
> The income needs of the dependents/corporation/partners.
Should there be a shortfall between the income / capital available on death and the needs of the dependents, insurance can be used to create additional capital. We use various techniques; programs and insurance carriers to ensure the best solutions are achieved.
PERMANENT LIFE INSURANCE
Permanent life insurance has several variations: WHOLE LIFE, UNIVERSAL LIFE and TERM TO 100 are the most commonly known. All are designed to provide insurance protection for your entire lifetime, as long as you keep the policy in force.
Variations of permanent insurance
Although every permanent insurance policy is designed to provide you with coverage for your entire life, the guarantees vary in different policies. This, in turn, affects the premium you pay.
A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component pays a stated amount upon death of the insured. The investment component accumulates a cash value that the policyholder can withdraw or borrow against.
As the most basic form of cash-value life insurance, whole life insurance is a way to accumulate wealth as regular premiums pay insurance costs and contribute to equity growth in a savings account where dividends or interest is allowed to build-up tax-deferred.
Common uses of Whole Life:
Estate Protection for families. Whole Life insurance provides a long-term insurance solution to help families protect against financial loss from the death of the insured. Being a permanent form of life insurance, whole life is a great way to cover the costs associated with final expenses, estate tax or other permanent need for insurance. All while providing the option for tax-deferred growth.
Corporate Insured Retirement Program (CIRP). As a small business owner, a significant part of your wealth may be tied up in your company. Even though you have maximized contributions to your RRSP or pension plan, you would like more flexibility and choice regarding your retirement lifestyle. In addition, you and your corporation need permanent life insurance protection. Therefore, you require a financial planning strategy that will address both your current need for insurance and your future need for flexibility when you retire.
How does a CIRP work?
1. Your corporation purchases a life insurance policy on your life and is named as beneficiary of the policy.
2. The corporation deposits amounts into the policy above the requirement to fund the insurance, creating significant cash values.
3. At a point in the future, the policy is assigned as collateral security for your personal loan, which is structured as a line of credit. You use the borrowed funds to create the retirement lifestyle you desire.
4. When you die, your estate provides other assets as collateral for the bank loan. This allows the bank to release the life insurance policy that has been serving as collateral for the loan and your company receives the policy’s tax-free death benefit.
5. The excess of the death benefit over the adjusted cost basis of the policy is credited to your corporation’s capital dividend account. Your corporation uses the proceeds to pay a dividend to your estate. The dividend is a tax-free capital dividend up to the amount available in the corporation’s capital dividend account, with any excess paid as a taxable dividend.
6. Your estate uses the dividends it receives from the corporation to repay the outstanding loan balance and distributes the excess as directed in your will.
Interest-rate sensitive policies: (universal Life)
Unlike whole life policies, which use very long-term interest rate assumptions, these policies use current interest rates, which can be adjusted periodically if interest rate levels change. This offers the policyholder the potential of getting more coverage for less premium, but it involves sharing some of the risk with the insurer. Premiums could be increased if interest rates decrease. On the other hand, premiums could be decreased if the reverse holds true.
The most popular and flexible of the interest-rate sensitive policies is Universal Life. It consists of two parts: life insurance and an investment account. You decide what to do with each part of the policy, and you can increase or decrease your premiums and your death benefit, within certain limitations. Earnings on the investment account may or may not be guaranteed, depending on the type of investment chosen.
This is valuable to you because your circumstances change, and economic conditions change. For example, as a parent in a growing family, you may want more insurance coverage; as your family grows and becomes more independent, your focus may shift to investment as well as life insurance.
Universal Life can be a way to accumulate wealth on a tax-sheltered basis*. If you like involvement and control over your finances, if you want life insurance that you can tailor to your changing needs over time, Universal Life may be best for you. One very attractive feature is the accumulation of investment returns that can be paid out to your beneficiary on a tax-sheltered basis at a later date.
Here, the premiums usually are guaranteed, but the cash values vary according to the performance of an investment fund or other index. The death benefits may be guaranteed or may vary with the fund’s performance, subject to a minimum guarantee.
TERM LIFE INSURANCE
Term policies provide insurance coverage for a specified period (e.g., a fixed number of years, or to a set age) and then expire. A death benefit is paid only if you die during the term of the policy.
Term policies are commonly available for terms of one, five, 10 or 20 years, or to age 60 or age 65. The premiums usually remain level during the specified term but increase if that term is renewed (e.g., premiums would increase every five years on a five-year renewable term policy). They will also expire at a specific age that varies by company.
Most term policies are non-participating and do not include cash values or other non-forfeiture values. Hence, premium costs are lower than for permanent policies — at least when you’re younger.
TERM TO 100
Often categorized as a permanent plan, term to 100 policies provide life insurance coverage through to age 100.
Usually they don’t pay dividends or include cash values, though some may provide other non-forfeiture values. Accordingly, premiums are lower than for traditional whole life policies.