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Understanding your Permanent Insurance Options

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Understanding how insurance will factor into a wealth plan is an important part of any financial or wealth planning process.  In many instances, insurance will be the most effective strategy for protecting a financial future in the event of a disability or death.  People buy life insurance for one reason. They buy life insurance because they love their families, or they love their employees, or they love their partners, or they love their charities, or they love themselves. But the only reason that someone makes an immediate sacrifice for a deferred benefit is because of love. An insurance plan will usually be an adjunct of the other components of a wealth plan, but due to the complexities and potential long-term benefits, it warrants specific attention as life insurance can be used to create an estate, to preserve an estate or to equalize an estate.

Most people  who have life insurance have either a group policy at work or term insurance to cover a mortgage or a debt however most do not pay much attention to what they have or whether it is sufficient to cover the need.  Permanent insurance differs from term insurance in that it provides insurance coverage not just for a defined term, but for your entire lifetime (or as long as you choose to keep the policy).  One of the advantages with permanent insurance versus term insurance is the insurance will continue in force even if you become insurable and for this reason it is recommended to apply for some permanent insurance while health and young to ensure coverage.

Term to 100 Insurance

Term to 100 insurance is a type of term insurance that never expires, so the coverage is in fact permanent.  Generally, the premiums do not rise, but this type of insurance is for risk protection only - there is no investment component or cash value.

Whole Life Insurance

Whole Life Insurance is a type of permanent insurance that has an investment component inside the policy as well as an insurance component that grows on a tax free basis up to certain limits.  It is this opportunity for tax-free growth that has made whole life insurance a popular wealth planning strategy for many Canadians. 

Whole life insurance is an instrument that was invented in 1740 by two Scottish mathematicians, which was a result of a request by the Presbyterian church of Scotland, which asked these 2 mathematicians in Edinburgh to create a formula in to which the church could put money aside for the future benefit for the widows of their former pastors who died too soon. 2 years later, the formula was finalized, and has gone on to become the root formula for what we now know today as actuarial science. And the fact is that this formula has governed permanent life insurance policies over the past quarter of a millennium, that when properly applied has resulted in unprecedented financial stability and impact for those who have seen fit to invest in it.


Universal Life Insurance

Universal life insurance is another type to permanent insurance that includes an investment component with tax-free growth.  However, with a whole life policy, the investment choices are quite limited and tend to be quite conservative.  With a universal life policy, individuals have increased choice, with the possibility of increased return.  However, this can also mean increased risk.  This type of insurance may appeal to more sophisticated investors who are comfortable making ongoing decisions regarding the investments in the policy.

Basically, what has happened in the Life Insurance industry in the last 25 years or so, is that it tired of being ultra conservative and it saw opportunity in risk.  So, the companies that offer the products left the security of guarantees, and explored the world of equities.  The insurance industry listened very closely to a company called E.F Hutten in the early 1970’s, who had as its motto; “when E.F Hutten speaks, everybody listens”. E.F Hutten separated the guarantee’s in whole life insurance from the risk factor and they were the first commercial company in North America to create what we call today Universal Life. They were an investment firm, and they created a product called equity based Life Insurance, which in Canada we know as Universal Life. But the risk of this transition was that they gave the keys of the fire department to the arsonist because they allowed the client to make the ultimate decision to as to where the money should be invested, but if the clients really knew where the money was to be invested, then the client would be in the investment business, not a doctor, or a lawyer, or a car dealer, or a teacher, or a funeral home director, or a business owner.  The reality is that most people who are in the investment business today don’t have the answers as to where the money should go so why would or why should the amateur buyer.

Winston Churchill said ‘we make a living by what we get, and we make a life by what we give.’ When determining the amount and type of insurance you need, it is very important to speak to a financial professional to insurance that the insurance products you use are appropriate for your needs.  Many individuals simply purchase group insurance offered by their employer, or mortgage insurance offered by the bank, without considering whether that is the most economical or appropriate choice.