The Basics
Permanent, or participating whole life insurance is a sophisticated option for people looking to both protect their legacies and build wealth in a low risk environment.
Similar to term insurance, you purchase an insurance policy with an insurance company. You pay the premiums, and the insurance company promises to pay a death benefit in the event that you pass away. While term insurance is usually implemented for 10 or 20 years however, the deal you make with the insurance company for permanent insurance is for your entire life. This means that as long as you continue to pay the premiums, the insurance company will one day pay the benefit to your beneficiary (and as always, this is tax free!).
The Cons
It costs more. Because it is guaranteed, the premiums on the insurance are going to be higher. Permanent insurance is generally more expensive than term insurance so you have to have the cash available to fund the policy.
The Pros
It’s guaranteed. With term insurance, the policy will hit it’s designated anniversary date (Usually 10 or 20 years) at which point the premiums generally skyrocket (on the order of 2-3x). With whole life, you make the deal with the insurance company, and the premiums will stay the same forever.
It’s flexible. With whole life, you are given the option to pay the premiums in a condensed time. This is usually referred to as a 10-pay when it is over 10 years, or a 20-pay when it is over 20 years. This is really useful when you are in your prime earning years as you may have more disposable income and can essentially front load the financial burden.
It grows. You can use permanent insurance to build wealth in the long run. The next few paragraphs explain how.
Building Wealth
While permanent life insurance is primarily insurance, savvy Canadians use the product as a low risk wealth building tool. When you use a 10 or a 20 pay, the insurance company will take the extra amount and invest it in their company. That investment yields a dividend, which is then used to purchase more insurance (and eventually fully pay your premiums).
Using the power of compounding, this mechanism grows the value of your death benefit to be much larger than you initially purchased. It is common for illustrations to show the total death benefit increasing by 2x over the first 20 to 30 years.
Accessing the Wealth
The death benefit is one thing, but there is another mechanism at play that can give you access to the wealth you are building in your lifetime. This mechanism is called a Cash Surrender Value. Remember how the Insurance company is guaranteed to pay you the death benefit eventually and that the benefit is increasing every year? The insurance company offers you an option to surrender the policy instead of keeping it active. Essentially they buy you out of the deal. The amount of the Cash Surrender Value (CSV) differs based on the policy, but it increases over time proportionally to the death benefit. The CSV really starts to increase in value in years 20-30 of the policy. Fundamentally this is a low risk and long term strategy, and if you do surrender the policy, there may be a tax burden owed on the withdrawal.
Collateral Loans
Taxes are a reality of living in Canada. Plus, they are complex. We won’t get into the math here, but there is an alternate way to access the funds built up in your insurance policy as a loan. Essentially, you find a lender (usually a bank) to loan you the money you are looking for. In exchange for the loan, you pay the lender interest every year and use your insurance policy as collateral (ie, the guarantee that the lender gets paid back). This loan can be used for whatever you want. It is often used to purchase assets (like a house, cottage, or office space) or start a business. The big benefit here is that Instead of having to pay the taxes (Sometimes 50% of what you might be withdrawing) you only need to pay the interest costs of the loan. You also keep the Insurance policy in effect so it continues to grow and compound. You then have the flexibility to repay the loan, or continue to service the debt (just keep paying the interest).
Is It Right For Me?
Permanent Life Insurance can be used by all types of people. While it’s always dependent on your situation, this is where the team at Citron Insurance comes in. We’re available as your trusted experts and can advise you on what options might work best for you. We can show you how much or how little insurance might be right. We can also help you get creative with strategies like blending permanent and term coverages among many more. Because of their flexibility, there are a lot of options. Our ultimate goal is to inform and educate you, present the options, and then let you decide.