Whole Life Insurance – A Whole New Asset Class

The recent developments in investment markets and the volatile performance that has resulted have brought about a new appeal to an old workhorse. For investors looking for a diversification in their investment portfolio and a more tax-efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.

Why is Whole Life Insurance a good investment?

  • The tax-advantaged steady growth, combined with significant estate benefits, are the primary reasons why Participating Whole Life is now being thought of as a new asset class.

  • Unlike other accumulation policies such as most Universal Life policies, mutual funds and other equity investments, the cash and dividend value of a Whole Life policy cannot decrease as long as premium payments are made.

Who should consider Whole Life Insurance as an investment alternative?

  • Anyone looking for stable returns on their investment portfolio.

  • For those that have corporations and are accumulating surplus, the use of Whole Life in the corporation not only provides the same stable, tax-deferred returns but also provides opportunities for Capital Dividend Account planning.

What Is Whole Life Insurance?

  • It is permanent life insurance protection – meaning it won’t expire before you do!

  • It has level guaranteed premiums for the life of the policy. (Shorter premium paying periods are often available.)

  • It has tax-advantaged cash value growth.

  • It can pay annual dividends (participating whole life).

  • Dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax-advantaged growth is “paid-up additions.”

  • The assets of the participating pool are professionally managed and largely in fixed-income investments. Management fees are extremely low (some as low as 0.07% management fee), and the funds have very little volatility.

  • This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred. At death, it is paid to the beneficiary tax-free.

Can I access the cash value of the policy?

  • During the lifetime of the insured, the cash values can be accessed by way of partial or total surrender or policy loan.

  • Income tax may be payable on withdrawals. However, one alternative to avoid paying income tax is to use the policy as collateral and borrow from a third-party lender. And if structured properly, the interest on the loan may be tax-deductible.

Favourably compares to a long term, high yield bond

  • Today most portfolio managers recommend that a prudent investor have a diversified portfolio with a significant portion in fixed-income investments, such as bonds, term deposits, etc.

  • Many investment managers suggest one-third to 40% of an investment portfolio be in these types of investments for balanced growth.

Including participating whole life in your portfolio can produce some significant results and reduce overall volatility.

Whether investing as an individual or via a corporation, the significant results that can be achieved by using Participating Whole Life are worth investigating.

Connect with me if you think you would benefit from this strategy, and as always, please feel free to share this article with anyone you think would find it of interest.

Copyright @ 2023 FSB Content Marketing – All Rights Reserved

Having Your Cake and Eating it Too

Having Your Cake and Eating it Too: Seg Funds in an Uncertain Market

Investing in an uncertain stock market is not for the faint of heart. However, fortunately for Canadians, Segregated Fund products offered by many life insurance companies provide a safety net for nervous investors.

Fund products present some interesting opportunities for people looking to get more security in their investment portfolios without sacrificing their potential for growth.

100% Maturity and Death Benefit Guarantee

While many companies have reduced their guarantees to 75%, a few companies still offer 100% guarantees for both maturity value and death benefit. The 100% guarantee offers these advantages:

  • At the maturity date, the value of the investment will be the greater of the market value or 100% of the sum of deposits less any withdrawals taken. In other words, at maturity (minimum 15 years), your worst-case scenario is receiving full value for all of your deposits.

  • At death, the 100% guarantee will ensure that your beneficiary receives the greater of the market value of your Segregated Fund or the sum of all your deposits less any withdrawals taken.

Reset Feature for Maturity and Death Benefit Guarantee

Resets can have significant value in a volatile market. With this feature, you have the ability to:

  • Reset the maturity guarantee value (usually more than once per year). Accordingly, you can lock in your investment gains at maturity. With each reset, you also have the option of designating a new maturity date.

  • Automatically reset the death benefit guarantee, locking in your investment gains at death. (The frequency of the reset varies by company).

How Significant are Reset Options? You Decide.

  • In 2004, John invested $500,000 in a segregated fund and selected a first quartile but highly volatile equity fund as the investment choice.

  • Over the next few years, John’s fund performed very well and his investment grew to $750,000.

  • In late 2007, John exercised his reset option.

  • The market collapse of 2008 saw John’s investment value fall to $380,000.

  • This same collapse devastated many investors. Meanwhile, John was able to recover not only his original investment but also the full $750,000 at his maturity date.

As you can see, reset options give you the ability to lock-in gains. Implementing a reset when prices peak, the guaranteed amount of your seg fund will be increased.

Designation of Beneficiaries Enables Protection

One fact about Segregated Funds that is often overlooked is that as a product of a life insurance company, you can name a beneficiary for the proceeds at your death. This creates the potential that your segregated fund investment may be free from the claims of creditors or potential litigants.

Investing Using a Balanced Portfolio Close to Retirement

Volatile investment markets create a significant amount of stress and emotional turmoil, particularly amongst older investors. The closer you get to retirement, the higher the stakes. Therefore, many investors have forsaken the potential of higher returns for a significant portion of their portfolio. While this does reduce risk, it probably will result in lower returns.

By using Segregated Funds and taking advantage of the 100% Maturity Guarantee and reset options, one could achieve balance in their portfolio without necessarily locking in low yields.

Estate Conservation for Mature Investors

The 100% death benefit guarantee means that you can remain invested in an equity portfolio while not risking the estate value of your investment portfolio. Regardless of what happens in the market, your investment fund is totally guaranteed at your death. This guarantee is available for deposits made p until age 90.

By naming a beneficiary, upon your death, all of your segregated fund investments will flow to your beneficiary without any probate fees, administrative costs or risk of any Wills Variation Act litigation.

Capital Protection

Market downturn is not the only risk to which capital can be exposed. For many professionals and business owners, there are situations that may involve litigation either by creditors or other parties who feel they have a claim against your personal and business assets. By naming a preferred beneficiary, this risk is potentially eliminated.

Complicated Estate Protection

For domestic situations involving previous marriages and the desire to protect capital for present or previous family members, the beneficiary designation could be made irrevocable. The irrevocable beneficiary designation confers rights and protection on the beneficiary, which would not be as enjoyable through the “primary beneficiary” title.

Another advantage of Segregated Funds is that the use of named beneficiaries allows for a confidential transfer of wealth at death. In uncertain times having the comfort of a maturity and death benefit guarantee provides investors with a significant safety net.

Let’s connect to discuss if Segregated Funds will complement your current investment strategy. As always, please feel free to share this article with anyone you think would find it of interest.

Copyright © 2021 FSB Content Marketing – All Rights Reserved

Diversifying in Uncertain Times

Uncertain about where to invest during Covid-19? It may be time to diversify through a Participating Whole Life policy

The Covid-19 pandemic combined with global social unrest have led to an era of unprecedented uncertainty, contributing to global economic concerns and stock market volatility. Potential economic fallouts stemming from disputes between China with both Canada and the United States, along with a new recession looming just over the horizon, have left many wondering if their investments are robust enough to withstand the turbulence of the current times and any future instability.

Diversifying your assets through a Participating Whole Life policy may be key to ensure future financial security for you and your children. The new generation of Par Whole Life policies is now viewed as a separate asset class due to their stable returns. It’s important to understand that the new features of Participating Whole Life policies are not those of our parents’ generation. The new version of these policies includes the following:

  • A stable rate of return, consistent with or better than fixed income or bond-type investments of similar duration;

  • A guaranteed investment designed to increase in value every year, meaning your investment will not decline due to market conditions;

  • Tax-advantaged – your investment grows tax-deferred, possibly even tax-free;

  • Liquid – you can access your investment by several different means, some of which are tax-free;

  • Increased flexibility – some Par Whole Life Policies have been re-designed to afford a measure of deposit flexibility not previously available;

  • This investment could be protected against the claims of creditors or litigants;

  • If you became disabled, your annual investment amount could be made on your behalf and never have to be repaid.

In addition to being a viable option for investment diversification, a Participating Whole Life policy would also ensure that your family is protected from the uncertainty of death. With the re-investing of policy dividends, this type of policy is guaranteed to increase in death benefit each year.

Reach out if you are unsure where to put additional investment funds or if your investments are keeping you up at night due to these unprecedented times. As always, please feel free to share this information with anyone you think would find it of interest.

The Estate Bond

Growing your estate without undue market risk and taxes

Often we see older investors shift gears near retirement and beyond.  Many become risk-averse and move their assets into fixed income type investments.  Unfortunately, this often results in the assets being exposed to higher rates of income tax and lower rates of return – never a good combination.

Or maybe the older investor cannot fully enjoy their retirement years for fear of spending their children’s inheritance.

The Estate Bond financial planning strategy presents a solution to both of these problems.

How does it work?

  • Surplus funds are moved out of the income tax stream and into a tax-exempt life insurance policy.

  • Each year a specified amount is transferred from tax exposed savings to the life insurance policy.

In essence, we are substituting one investment (the life insurance policy) for another (fixed income assets).

The result ?

  • The cash value in the life insurance policy grows tax-deferred and may also increase the insurance benefits payable at death.

  • Since the death benefit of a life insurance policy is received tax-free by the beneficiary this strategy results in a permanent tax shelter.

In other words, there is an increase in the funds available to heirs and beneficiaries after death and a decrease in the taxes payable before death.

 

The Estate Bond in action

Robert, aged 60, and his wife Sarah, aged 58 are satisfied that they will have sufficient income during their retirement years.  They used the Estate Bond concept as a means to guarantee their legacy to their children and grandchildren.

Investment: $30,000 for 20 years into a Joint Second-to-Die Participating Whole Life policy which is guaranteed to be paid up in 20 years

Immediate Death Benefit: $848,900

Death Benefit in 30 years: $2,075,800 (at current dividend scale)

Cash Surrender Value in 30 years: $1,589,400 (at current dividend scale) *

* If surrendered, the cash surrender value would be subject to income tax but there are strategies that could be employed to avoid this tax.  Assumes using Participating Whole Life illustrated at current dividend scale.  Values shown in 30th year at approximate life expectancy.

Alternative investment in action

Investment: $30,000 for 20 years in a fixed income investment earning 2.5% AFTER tax

Immediate Death Benefit:  $30,000

Estate Benefit in 30 years: $1,005,504

It should be noted that obtaining this rate of return in today’s fixed income environment would be challenging. 

Additional benefits of the Estate Bond

  • The estate value of $2,075,800 in 30 years is not subject to income tax. 

  • The proceeds at death, if paid to a named beneficiary, are not subject to probate fees.

  • If the beneficiary is one of the preferred class (spouse, parent, child or grandchild) the cash value and the death proceeds are protected from claims of creditors or litigants during the insured’s lifetime.

  • The use of life insurance with a named beneficiary also results in a totally confidential wealth transfer.

  • Robert and his wife can both enjoy their retirement without affecting their family’s inheritance.

The Estate Bond strategy is designed for affluent individuals who are 45 years of age or older and who are in reasonably good health. For those who meet these criteria and have surplus funds to invest, this concept can provide significant benefits and results.

Connect with me if you have any questions about the Estate Bond strategy or would like to determine if it is right for you.  As always, please feel free to share this article with anyone you think will find it of interest.

Protecting Investments for Your Heirs

Many investors over the age of 60 find themselves in a quandary regarding investments that they intend to leave to their heirs.  The primary concern involves the desire to conserve the investments they are bequeathing while at the same time earning a reasonable rate of return.  As we all know, the volatility of the equity markets can be cruel and this can be most detrimental when investments do not have time to recover after a downturn.  As a result, many mature investors choose to accept low rates of return in order to avoid loss in the funds they wish to leave to family members.

If you share these concerns, then Segregated Funds (also known as Guaranteed Investment Funds) may be the solution.  Segregated Funds are similar in performance and cost to Mutual Funds but come with some very attractive advantages.  Since Segregated Funds are offered by life insurance companies, they contain guarantees both at maturity and at death.  Upon maturity the value of your investment is guaranteed to be the higher of the market value or up to 100% of the amount invested. At death, the guarantee is the higher of the amount invested (less withdrawals), fair market value or a previously reset market value.  It is this death benefit guarantee that is particularly appealing for estate planning.

This guarantee allows for the potential of higher returns without taking on more investment risk.  Without the alternative of segregated funds, a mature investor wishing to protect capital might be forced to invest in a low interest rate fixed income vehicle, which after income tax, may return less than inflation.  With Segregated Funds that same investor could select a well managed investment fund guaranteeing that the beneficiaries could receive no less than 100 % on the funds invested regardless of market performance.

Segregated Funds usually contain a provision which will lock in gains made prior to death.  Depending on the insurance company these resets automatically occur every one to three years up until age 80.

Market volatility is not the only challenge to investments being willed to heirs.  The process of probating a will can also be of concern.  This process can be a lengthy one, sometimes lasting months, occasionally even years.  The cost of probate is also not insignificant especially if lawyers are required to assist.  Also, assets left in a will can be subject to challenge in court causing even further delays not to mention anxiety (and legal fees). Segregated Funds, however, being a product offered by a life insurance company pass by way of a beneficiary designation.  This not only by passes probate, but also does not incur any administrative or executor costs. 

The beneficiary designation also avoids any court challenges such as would be the case in a will’s variation action.  Another important consideration is that, with a named beneficiary, it can be creditor proof and not subject to litigant claims.  The confidential nature of the beneficiary process compared to the public aspect of probate is also be worth considering.

In order to assess if Segregated Funds are right for you as a mature investor, ask yourself the following:

  • Do I want better returns without taking on more investment risk?

  • Do I want to avoid probate fees and administrative costs which will reduce the inheritance I leave to my family?

  • Do I wish to avoid any delays in my heirs receiving the funds I wish them to have when I die?

  • Do I want to avoid any creditor or litigant claims on the funds I am leaving to my heirs?

  • Do I want to keep bequests that I make at my death completely confidential?

If you have answered “yes” to any of the above, then you should investigate the use of Segregated Funds in your estate planning.