Term Life Insurance – Two Valuable Options

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For many Canadians, especially those with young families, term life insurance is most often the product of choice for protecting one’s family.  The major reason for this is that it is the lowest entry-level cost to purchase life insurance.

While permanent, cash value life insurance presents tax-advantaged opportunities for growth, the paradox of this type of insurance is that it is cheapest when you can least afford it.  For those wanting to make sure that their loved ones are adequately protected should they die, term life insurance is an easy decision.

The good news is that once the life insurance is in place, you have protection guaranteed for the lifetime of the policy contract.  The bad news is that with renewable term life insurance, upon renewal, the premiums increase substantially.  

How to keep your insurance premiums affordable

  • Reapply before the renewal date to obtain current rates for a person in good health

  • Convert at the earliest date possible to level cost or cash value insurance

The amount of the premium increase can be reduced if the insured re-applies for the coverage by providing new medical and other underwriting evidence.  Sadly, the possibility of becoming fully or partially uninsurable before the renewal date exists.  Should this occur and the coverage is still required, the insured might have no other option but to renew if it were not for two particularly important provisions contained in most term insurance policies.  These two options go a long way in protecting your future insurability. 

Two options to consider

  • Conversion option – At any time before age 70 or 75 (depending on company) the term insurance policy can be “converted” to a permanent plan without any medical evidence.  This is a valuable option for an insured who now requires lifetime protection for estate planning needs, such as payment of taxes upon death.  There is no medical exam required for this option, so your insurability is not considered.  Generally, the term policy can be converted to any permanent plan offered by the company including Whole Life, Universal Life or Term to Age 100.

  • The Exchange Option – The “exchange” option allows you to switch to another term insurance policy with no evidence of insurability. This feature allows for the policyholder to start a term policy with the lowest entry level premium (10 year renewable term) and without any risk of losing his or her insurability exchange it for a 20 year or 30 year renewable term during the first five policy years.  This option generally can only be used once but the exchanged policy would still have the full conversion option available for a future non-medical change to permanent coverage. While the conversion option is a feature included on almost all term life plans, the availability of the exchange option may not be available with all term insurance policies.  

If you have recently purchased a term insurance policy and want to look at securing rates for a longer term, you may want to investigate exercising either your conversion or term exchange option.  

If you are currently considering purchasing term insurance, you will want to make sure that the plan you are considering offers both conversion and term exchange features.  

Reach out to me if you have any questions. As always, please feel free to share this information with anyone you think would find it of interest.

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CERB Extended | Business Owners who did not qualify previously – expanded CEBA starts June 19th

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CERB Extended 2 more months

Great news for Canadians out of work and looking for work. The CERB will be extended another 8 weeks for a total of up to 24 weeks.

As the country begins to restart the economy, the Federal government will be making changes to the program to encourage Canadians receiving the benefit to get people back on the job. From Prime Minister Justin Trudeau’s website:

“The Government of Canada introduced the CERB to immediately help workers affected by the COVID-19 pandemic, so they could continue to put food on the table and pay their bills during this challenging time. As we begin to restart the economy and get people back on the job, Canadians receiving the benefit should be actively seeking work opportunities or planning to return to work, provided they are able and it is reasonable to do so.

That is why the government will also make changes to the CERB attestation, which will encourage Canadians receiving the benefit to find employment and consult Job Bank, Canada’s national employment service that offers tools to help with job searches.”

READ ABOUT CERB EXTENSION

More small businesses can apply for CEBA $40,000 no-interest loans

Applications for the expanded Canada Emergency Business Account (CEBA) will be accepted as of Friday, June 19th, 2020. Small businesses that are:

“… owner-operated small businesses that had been ineligible for the program due to their lack of payroll, sole proprietors receiving business income directly, as well as family-owned corporations remunerating in the form of dividends rather than payroll will become eligible this week.”

Read about expanded CEBA

Apply online at the financial institution your business banks with:

There are restrictions on the funds can be used. From their website https://ceba-cuec.ca/:

“The funds from this loan shall only be used by the Borrower to pay non-deferrable operating expenses of the Borrower including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.”

A Lifetime Gift for Your Grandchildren

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The Cascading Life Insurance Strategy

If you are a grandparent wishing to provide an asset for your grandchildren without compromising your own financial security, you may want to consider an estate planning application known as Cascading Life Insurance.

How does the Cascading Life Insurance Strategy work?

  • The grandparent would purchase an insurance policy on his or her grandchild and funds the policy to create significant cash value;

  • The grandparent would own the policy and name the parent of the grandchild as contingent owner and primary beneficiary;

  • The cost of life insurance is lowest at younger ages, maximizing the tax deferred growth of the cash value in the policy.

What are the benefits of the Cascading Life Insurance Strategy?

  • Tax deferred or tax free accumulation of wealth;

  • Generational transfer of wealth with no income tax consequences;

  • Avoids probate fees;

  • Protection against claims of creditors;

  • Provides a significant legacy;

  • Access the cash value to pay child’s expenses such as education costs. (Withdrawal of cash value may have tax consequences);

  • It’s a cost effective way for grandparents to provide a significant legacy.

For the grandchild, he or she ultimately receives a gift that will provide significant benefits:

  • A growing cash value that can never decline;

  • Access to borrow from the policy for education, down payment on a home, or to invest in a business;

  • The policy could also provide an annual income by changing the dividend option to cash;

  • Life insurance which continues to grow in death benefit to protect his or her future family.

Case Study

Let’s look at an example of this strategy. Grandpa Brian is 65 and has funds put aside for the benefit of his grandson, Ian.

  • Grandpa Brian purchases a 20 Pay Participating Whole Life policy on Ian, age 11, for an annual deposit of $5,000;

  • Brian’s daughter, Kelly is named as contingent owner in the event of Grandpa Brian’s death and beneficiary in the event of Ian’s death;

  • At Ian’s age 31, the policy becomes paid up with no future premiums.

If Grandpa Brian were to die at age 85 the following could happen:

  • The ownership of the policy now passes to Ian’s mom Kelly;

  • The cash value of the policy (at current dividend assumptions) would be $ 134,049 and the death benefit of the policy would be $679,634;

  • Kelly has a choice to remain the owner of the policy or transfer the ownership to her 31-year-old son without any tax consequences.

Because of Grandpa Brian’s legacy planning, Grandchild Ian, now age 31, has a significant insurance estate that will continue to grow with no further premiums! By Ian’s age 45, the death benefit, at current dividend scale, would be $1,030,045 with a cash value of 311,811.

Please call me if you think your family would benefit from this strategy or share this article with a friend or family member you think may find this information of value.

Note – The numbers shown in the Case Study are using Equitable Life’s Estate Builder 20 pay Participating Whole Life policy with maximum Excelerator Deposit Option.