Legacy is not what’s left tomorrow when you’re gone. It’s what you give, create, impact, and contribute today while you’re here that then happens to live on. –Rasheed Ogunlaru
Think about the footprints you left behind when you walked down the beach this summer – they didn’t last forever. Now, consider these two questions:
- Am I living life to the fullest (regardless of Covid)?
- What legacy will I be leaving behind?
If you placed the answers to these two questions on a teeter-totter, you might want them to balance. After all, if you’re living your life now to ensure a future for someone else, aren’t you missing out? And, if you’re ‘living it up’ with no attention to what you’re leaving behind, are you putting someone else at risk? Heavy questions for a walk on the beach, but necessary.
Insurance is one tool that can be implemented in your financial life plan to strike this balance. The persistence of the pandemic has made us all more aware of our vulnerabilities. It may be timely to explore insurance strategies to offset these risks. Let’s start with the types of insurance available.
Types of insurance
Provides additional coverage to provincial health plans including services and products such as physiotherapy, chiropractic, massage, psychiatric, home care, eyeglasses, hearing aids, prosthetics, and more. Your health insurance policy may also cover dental and travel insurance. Some of the insurance carriers are introducing travel insurance plans with specific emergency medical coverage for Covid-19 and related conditions.
Replaces a portion of your regular employment income for a specified period of time. Many employers offer Disability insurance as part of their group benefits plan. Plans may provide short-term and/or long-term benefits. Short-term disability usually lasts for up to 6 months. Long-term disability benefits usually last for at least 2 years, typically cover 60-70% of income (up to a maximum amount), and tend to kick in after short-term benefits, sick-leave, and EI have expired. Coverage may be available up to age 65 depending on your occupational classification.
Critical Illness Insurance
Provides a lump-sum payment in the event you or a dependent is diagnosed with a life-threatening illness covered by your policy. Most critical illness policy claims are due to cancer, heart disease, and stroke, but policies usually cover an array of illnesses. Claim payments are non-taxable and can be used to replace lost income, improve medical care, and explore treatment options that may not be covered by provincial healthcare.
Term Life Insurance
Is usually the least costly life insurance product. It is available for different terms such as 5, 10, 20, or 30 years and has a specific expiry date, often age 85. The death benefit is usually level or fixed. Premium increases at the end of each term. For example, for a 10-year Term policy, the premiums stay the same for 10 years and then increase with each subsequent 10-year period. You can purchase declining term life insurance policies that typically have a level premium but declining coverage (often to cover the amortization schedule for a mortgage or loan).
Permanent Life Insurance
There are 3 types of insurance contracts that provide permanent coverage for as long as you live:
- Term to 100,
- Whole Life, and
- Universal Life
Term to 100
Term to 100 insurance usually has no cash value but as long as the premiums are paid the plan will remain in force. If you live beyond age 100 the plan in most cases becomes paid up and no future premiums are due.
Whole Life (WL)
WL insurance is more expensive than Term to 100 because it builds up a cash value over the life of the plan. Each year the insurer pays a “policy dividend” to each whole life policy. Depending on the terms of the contract, the policy dividends may be withdrawn in cash or allowed to accumulate within the policy. The dividends may also be used to reduce premiums or to buy more coverage each year (paid-up additions) and increase cash value at the same time.
If you have a life insurance contract with level premiums that has both an insurance and an investment component, this is how it works. 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 while the policy is still inforce.
Universal Life (UL)
A more flexible kind of permanent life insurance is called universal life. It combines the low-cost protection of term life insurance with a tax-sheltered savings component (similar to whole life insurance). The main difference is that the policy owner can select the investments to be used.
A strategic approach to implementing insurance in your financial life plan
STRATEGY 1: Mortgage insurance owned by the lender vs life insurance owned by you, the home buyer
Jim and Sally are buying a home valued at $400,000. They have a healthy down payment of $100,000, but they still require a mortgage of $300,000. Although their jobs seem secure, they’ve been learning during the Covid crisis that life can throw us a curveball. The lender has offered them “mortgage insurance”.
Mortgage insurance is life insurance that is sold when a mortgage is granted. It protects the lender in the event that the homeowner dies. This also benefits the homeowners’ family as the mortgage will be fully paid. However, there’s another way to arrange this that places the family in control of their insurance rather than the lender.
If Jim were to pass away, it would be great for Sally to be mortgage-free, but what if she needed money for other things right away? It might be beneficial for her to carry the mortgage if she could make the payments, and use the insurance benefit to cover other immediate expenses and perhaps supplement her income.
When Jim and Sally compared the Mortgage insurance offered by their bank with personally owned Term insurance this is what they discovered:
STRATEGY 2: Using permanent life insurance to create an insured retirement plan
Alex and Beth are self-employed. He’s a musician. She is a freelance interior designer. They are both successful but their incomes vary significantly from year to year. Since they can’t count on an employer to provide a pension, they want a strategy that will enhance their RRSP/TFSA savings and make sure they retire well.
They were determined to find a conservative way to help fund their retirement that would be safe from creditors and their own urge to spend rather than save. When they began planning they knew nothing about strategies using permanent life insurance; by the time they finished, they had an insurance program designed to provide a tax-effective income stream in retirement. They would not have to worry about the volatility of the financial markets. They would just need to make their annual premium payments.
If they stay on track with their deposits, at age 65 when they retire, they will take their policy to a lender to secure a loan using the cash value of their policy as collateral. They will borrow an amount, possibly as high as 90%, of their cash value and set up monthly income payments (currently not taxable income).
STRATEGY 3: Use a permanent life insurance policy to create a legacy for your grandchildren
Grandpa is comfortably retired at age 70, getting used to being a widower. He has just settled Grandma’s estate and realizes his pension income is much greater than his lifestyle requirements. He has ample investments to see him through the decades ahead. When he and his wife planned their retirement income strategy, they both elected the joint and last survivor option on their employment pensions. Now that Grandma has passed away, Grandpa is receiving the same amount of pension income as she had been receiving, guaranteed for as long as he lives.
Grandpa wants to use his excess monthly income (about $2,000 per month after tax) to create an estate for his 2 grandchildren (Joey and Jenny). He wants a strategy that isn’t going to be subject to the volatility of the financial markets but where there is some flexibility.
Grandpa could apply for a Universal Life insurance policy with a fixed premium of $2,000 per month. Since he is in good health, he expects to be insurable at a standard or possibly even a preferred health rating. If that’s the case, he will be able to purchase a $500,000 policy. He also will be able to contribute more than the required premium if he chooses to do so. When Grandpa passes away, under the current tax laws the insurance proceeds will go to Joey and Jenny tax-free. He will be confident that each of them will receive at least $250,000 and potentially more if he contributes more than the minimum premium required. It’s a tax-effective way for him to transfer some of his wealth to his grandchildren. Who knows, maybe they’ll want to use it to buy the family cottage at West Hawk Lake!
What kind of insurance is right for you?
Everyone’s situation is unique. Your financial life plan provides the framework for identifying solutions that will work for you. Strategies can be compared and the financial impact examined before looking at specific products. There are many insurance companies offering a variety of products. Understanding what you really want to accomplish is essential. If you haven’t reviewed your insurance program recently, now might be the right time.
The information in this commentary is for informational purposes only and not meant to be personalized financial planning advice. The content has been prepared by the team at Fraser & Partners from sources believed to be accurate.