Life Insurance in Canada

Life insurance options can be divided into two very broad categories - term insurance and permanent life insurance. Term insurance policies basically cover you for a limited period of time, e.g. ten or 20 years. Permanent policies on the other hand, can cover you for your lifetime. Furthermore, there are three additional categories of permanent life insurance policies: Term 100, Universal Life and Whole Life. The latter two options have several variations and a qualified independent broker can find the best solution that’s right for you.

When you pay the premium for a Whole Life policy, it already includes the investment component, but in case of Universal Life policies, it is paid separately. Another difference is that for Universal Life policies, the selection of investment possibilities is wider. When you are deciding for the best life insurance, the key aspect is that it has to fit your situation and needs. Let’s suppose your needs are met and you can afford a permanent policy. Next you need to ask - is it a sound investment?

Opinions on this subject vary, in part because life insurance as an investment is a very misunderstood topic. The most important advantages and disadvantages of using life insurance as an investment will be described in the following part of our article:

Pluses

* Profits within the policy and the MTAR limits grow on a tax sheltered basis. Whole Life policies adjust the premium, so as not to exceed the MTAR limit, and Universal Life policies set a maximum premium, which has the MTAR line in mind.
* Both the investment portion on an increasing death benefit Universal Life insurance and the dividends on a Whole Life insurance are added to the face amount and paid out on top of this face amount, tax free.
* On a permanent policy, you can use the investment portion to pay for future premiums. This way, you will be able to pay with pre-tax dollars, rather than after-tax.
* The minimum investment rate guarantees are in excess of 4% for many Universal Life policies. In the current low interest rate world, this is a great feature.

Drawbacks

* For many permanent policies, there are strict penalties, if you decide to cancel your insurance within the first few years.
* Generally, it is not a good idea to purchase a permanent policy, if you don’t need a permanent life insurance, since the mortality charge for the life insurance would be higher.

I don’t have to remind you, how dangerous times for investment we are living in these months. Stock markets collapsed and buried eight years of growth. Real estate prices are falling down.

More, interest rate after the recent cut by Bank of Canada down to 50-years low value of 1.5% means your money in banks are making less than the inflation rate takes, because inflation in Canada is around 2%.

And we can expect $4 billion spending soon, due to government’s commitment to participate on the North America car industry bailout. This can get the inflation rate even higher, due to bigger government spending. Interest rate can hardly go higher in upcoming months, because FED cut the interest rate even lower - near the 0% value and the Bank of Canada is usually following FED’s steps.

So is there any risk free solution with guaranteed growth over the inflation rate? Yes, there is. Some Canada life insurance universal policies offer 4% guaranteed growth. How is this possible? Easily, these products offer festure you can find anywhere else. It’s name is tax shelter, which is not influenced by the financial market!