My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, December 11, 2017

The “Hole” in Whole Life Insurance

One issue that confounds most accountants and their clients alike is life insurance. The products can be complex and you are always concerned whether you are being sold something you don't need or something more than you need.

Today and next week, I have guest posts by Doug Leyland and Jordan Matters two Chartered Professional Accountants who deal full-time in insurance solutions for Leyland Insurance Solutions Inc. I am hoping you find their posts help demystify term life insurance and permanent insurance (whole life and universal life insurance) for you, or at least clarify what you should be looking for in an "investment" insurance policy for you personally or your corporation. I thank Doug and Jordan for their efforts.

Please keep in mind that these two posts are Doug and Jordan's beliefs and there are insurance advisors and accountants who may not necessarily agree with their opinions.

The “Hole” in Whole Life Insurance

By Doug Leyland and Jordan Matters

What is your opinion on life insurance? Chances are it is good, bad, or ugly with no middle ground. Is this opinion based on personal experience or what you have heard from friends and colleagues? There is a vast array of life insurance strategies and products available and this can make the landscape appear to be somewhat complex. Some people base their opinions on a limited understanding of the various applications and benefits that life insurance can offer, especially for business owners. The goal of this post is to provide insight on this and simplify things for you.

The need for insurance and the related tax-free proceeds a policy can provide arises from the undesirable economic consequences of either a premature death or an estate liquidity need (i.e. your estate needs to sell real estate in a down market to raise funds to pay income tax for the estate of the deceased person).

Typically, a term insurance policy is used to cover a premature death, while an estate need is most often satisfied by permanent insurance, either Participating Whole Life ("Par") or Universal Life ("UL"). All types of life insurance are simply a promise to pay by a third party in the event of death.

In the next couple paragraphs we will provide some background on these various insurance options.

Term Life Insurance

Term coverage represents insurance in its most traditional and simple form – transferring risks that are too high for you to accept to an insurance company in exchange for a fee.

If the insured does not die during the term, there is no residual benefit other than the ability to convert the contract to either Par or UL without a medical or to renew the term coverage at contractually specified amounts. In many cases, these polices are left to lapse and are not renewed in any form.

Let us ask you this simple question. What might the financial implications be if you were to die prematurely?

This question leads to a needs analysis that considers the following important issues:
  • How do you replace the decline in a business’ value (Goodwill or Key Person insurance)?
  • How do you ensure there are funds available to buy out the shares of a deceased business partner?
  • Do you wish to have insurance to pay off a mortgage or other debts?
  • Do you wish to ensure there is funding for your children/grandchildren education?
  • Do you want to replace your lost income and provide spousal support, if applicable, to avoid having your spouse needing to find employment?
If your objectives are listed above, a term life insurance policy is likely the most appropriate for you.

Permanent Life Insurance

There are significant differences between Par and UL contracts. Understanding the differences is essential because they will have a profound impact on the premiums required to fund the contracts and the likelihood that your estate financial objectives will be achieved. The key take away here is to understand which party to an insurance contract assumes the investment risk of turning premium dollars into a paid promise.

With a Par policy, the risk is shared by the policy owner and insurance company (this represents the “hole” in whole life). With certain forms of UL, the risk falls entirely to the insurance company (i.e. minimum funded Level Cost of Insurance (COI) and Limited Pay UL contracts).

Where the goal is to fund an estimated estate liquidity need, in our opinion, this risk should be third partied entirely via a minimum funded UL contract.

Once again, please consider the following question. What are the liquidity implications for my estate or spouses estate, when I, and/or my spouse, die near life expectancy?

This question about your liquidity requirements causes you to consider some of the common estate needs detailed below:

1. How do I fund capital gains taxes?
2. How do I ensure Estate Equalization (For example, when some heirs are in the business while others are not)?
3. How can I use insurance to assist with my succession planning (Transfer assets to the next generation tax free)?

Other economically beneficial strategies using permanent life insurance include:

1. Life Insurance as an Investment – Estate Anchor & Maximization
2. Charitable Giving
3. Retirement Income

Now that we have explored some of  the various needs for insurance, next week in Part 2 we will discuss some of the appropriate strategies.

Doug Leyland CPA, CA, MBA & Jordan Matters CPA, CA work together at Leyland Insurance Solutions Inc. in Burlington, Ontario. They assist their clients with insurance based tax and estate planning strategies. If you would like to get in touch with Doug or Jordan, their emails are and or you can call them at 905-331-2885.

The above blog post is for general information purposes only and does not constitute legal, insurance or estate planning or other professional advice of any kind. Readers are advised to seek specific legal, insurance or estate planning advice regarding any specific issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

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