The "Hole" In Life Insurance - Part Two

This is my last post for 2017 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. I will comment on the recent Liberal revisions to the "income sprinkling" proposals in my first blog post in January. The timing of these proposals (just before the Christmas holidays), the subjectivity still remaining in these rules and the fact the passive income rules are still apparently a couple months away has left the small business community seething and still pretty much paralyzed (in many cases, dividend planning is intertwined with the future passive income rules). 

Last week in Part one of this two part series on Life Insurance, Doug Leyland and Jordan Matters two Chartered Professional Accountants who deal full-time in insurance solutions for Leyland Insurance Solutions Inc, discussed the basics of Term and Permanent insurance and in which situations you would typically utilize these two types of insurance.

Today, Doug and Jordan move from your insurance needs to possible insurance strategies for Permanent Insurance. I thank Doug and Jordan for their insightful posts.

As noted last week, please keep in mind that these two posts are Doug and Jordan's opinion and there may be insurance advisors and accountants who may have differing opinions on whole life insurance.

The “Hole” in Whole Life Insurance

By Doug Leyland and Jordan Matters

Last week we left off just after we explored some of  the various needs for permanent insurance. Today, we conclude with planning for the appropriate strategy and product, once your needs have been determined.

When illustrated and presented, Par permanent insurance strategies definitely look attractive. However, in our opinion, a deeper dive into the workings of a Par policy exposes some often-aggressive assumptions that will most likely lead to actual outcomes being materially lower than illustrated. Where the strategy’s goal is to solve a specific need, or maximize an estate, a fully guaranteed UL contract provides a better option in our opinion.

We can spend a lot of time reviewing the inner workings of Par policies, but that’s for another day (if Mark invites us back). In short, the performance of a Par policy is highly dependent on the dividend scale applied by the insurer. Dividend scales for insurers across the board have been on a steady decline because of the low interest rate environment.

If we were to present historical charts for the various insurers, they would reflect a declining trend of dividend scale being paid to their own Par policies. In the early nineties, dividend scales were over 10% and today they are around 6%, depending on the insurer. We believe that this downward trend will continue and this belief is backed-up by literature published by various insurers.

The uncertainty of future dividends creates a problem when trying to position a Par contract into a life insurance strategy designed to solve a specific need.

When considering a Par policy, it is essential to illustrate the projected values at the current dividend scale, current -1%, and current -2% in order to understand the variability associated with the policy.

Typically, you already have enough risk in your traditional investments and business interests – why add risk to your insurance contract?

We strongly recommend the use of minimum funded UL contracts in strategies that require the guaranteed outcome that UL insurance provides, including funding a future tax liability, estate maximization, estate equalization, or share redemption.

When structured properly, UL insurance contracts pass all investment risk to the insurance carrier and can be illustrated on a guaranteed worst-case scenario basis.

From a Cost Perspective

In almost every scenario we have considered, premiums for Par are more expensive than guaranteed UL when comparing the same guaranteed death benefit and funding time horizon. Therefore, you can fund a specific estate need at the lowest cost through UL. The savings in premiums can be invested in your existing portfolio at your direction.

Whether you are a successful business owner or individual, you have worked extremely hard to accumulate and preserve your wealth and it is likely that you would like this wealth to benefit future generations. It’s no secret that the two guarantees in life are death and taxes, because the government will always want their pound of flesh. Upon passing, wealth is allocated among three beneficiaries: 1) Your heirs, 2) Charity, 3) Canada Revenue Agency. A properly structured permanent life insurance strategy can minimize the amount of your wealth allocated to the CRA in favour of your heirs and those organizations you care about.

We always advise clients to consider the permanent life insurance policy in concert with their overall asset mix as an estate bound investment, whether it is UL or Par. As with any investment, it is essential to fully understand the associated risks. Mark comment: I have been told by some very astute investors, that they consider "investment" money they put into a life insurance policy as a fixed income component of their portfolio. i.e. They don't worry about the insurance cost of the policy as long as the return after policy costs/funding is superior to that in which they can receive on other fixed income products.

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 dleyland@leylandinsurance.com and jmatters@leylandinsurance.com 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.