BY: FAZAAD BACCHUS
It’s been long known that most clients buy life insurance typically to cover their mortgage or to offer some sort of protection for their families in the event of their untimely death. They hope that this coverage will be sufficient to keep the family afloat until the children become of age or self-sufficient. As time passes on the need for this coverage may cease to exist which leads to the client canceling the policy. While they enjoyed the protection, all the premiums they paid are non-recoverable.
Typically, this is a term policy and the coverage is also for a term. These policies are very inexpensive in the beginning but the cost can continue to rise exponentially when the renewal date comes along. For example, a ten-year term policy may cost eight times as much when the policy is nearing its end.
Let us consider instead of using a term policy, one uses a permanent whole life policy. These policies can be classified as an asset class whereas a term policy is not regarded as an asset. A permanent policy gathers cash values and this constitutes it becoming an asset. It stands to reason then that if you have an asset at retirement you might be able to utilize that value in helping to fund your retirement.
Let us deal specifically with participating whole life policies and how it can help you at retirement. This is perhaps the only policy that has a guaranteed cash value as well an investment based cash accumulation program. A participating policy invests in such things as equities, real estate, commercial mortgages, bonds and fixed income. This type of policy provides valuable protection during the period that you need it but at the time when you don’t need the protection anymore, cash value in the policy can provide you with options.
Suppose that someone bought a Par policy at age 40, where he pays a premium that is divided into three components, mortality, administration and investments. A larger portion of the premiums goes towards investments and into the Par pool of assets. These investments grow over time and by age 65 the client will have amassed a significant cash value. He now has three options than he can utilize:
- Cancel the policy entirely and redeem the cash value. Two issues here are, the coverage is totally gone and you may have to pay tax on the redemption. So not the best option.
- Borrow from the cash value of the policy. Again, the consequences are tax payable.
- This is perhaps the best option available: use the policy as collateral for a bank or financial institution loan. Some par policies carry cash values which are locked in therefore a bank will be willing to lend you as much as 90% of the cash value. This loan is not taxable to you in the form of income and it does not reduce your government benefits such as OAS or GIS. Upon your death, the coverage pays off the outstanding balance on your loan and the balance is paid to your family.
This strategy is not meant for everyone but can be used where appropriate. Talk to your advisor about whether a Par policy is right for you.