Q&A - Answers to basic questions No. 31 to 34
31. Does investment in UL have advantages even when compared with RRSPs?
For retirement saving, for most people, the most important vehicle is an RRSP. Saving within a universal life insurance policy is advised to someone usually only after that person has used all his / her RRSP room. While within an RRSP one can have more investment options than in a UL, the main reasons for this priority given to RRSP is still probably that contributions to an RRSP are tax deductible. This is really an important aspect, but not to the extent that would warrant the big RRSP rush in every February. The existence of this rush is a kind of evidence showing how unbalanced the view most people have about the important features of RRSPs, namely, how undervalued the other main feature, long term effect of tax deferment, is in general.
While universal life policies are not at par on the somewhat overvalued feature, tax deduction, with regular RRSPs, they have certain advantages on the other aspect, tax deferment. The advantage is not obvious, because it is not there in the accumulation period. However, it kicks in at age 69, when RRSP owners lose some of their freedom in managing their money, or may kick in even before that if the person dies.
Whether each of these strengths of universal life insurance policies will remain there is something to be seen, of course. For some people, they provide good food for thought, to say the least. There are others, who do not have enough money to save in a tax-shelter, however attractive it might be, beyond their RRSP limit. These people will obviously want to use the tax deduction feature of RRSPs. It is good to know that they can find RRSP eligible investment options within universal life insurance policies as well.
32. It is just natural that insurance people sing praises about various policies. Who else?
The list of third party approvals to using insurance as a fundamental financial tool is endless. The following excerpts and references represent just an incidental sampling from writings of non-insurance people:
When buying insurance, consider who should be the beneficiary. ...Plan for the succession
of your business. ..." From: Tax planning for you and your family 1997, by KPMG, the
largest professional services firm in Canada.
Mutual fund companies have been expressing their assessment of the importance of insurance by creating partnerships with insurance companies for establishing their own segregated funds recently.
33. I am concerned about the huge financial burden of death; I want to keep wealth in the family. How could insurance help?
As many people realize, death is costly. Even if we do not consider burial costs, paying debts, and the like, probate and executor fees and capital gain tax on various assets evaporate sometimes 30-40%, or even higher portion, of what one could potentially leave to heirs (family, friends, charity, etc.).
When such concerns have to be addressed, permanent insurance usually provides a financially feasible solution. Term insurance for this purpose is inadequate because it can be outlived. In a typical family situation, a joint last to die policy is the best option. By tax-sheltering money in the policy the couple can accumulate enough so that the the /grand/children can comfortably pay all the expenses from the tax free death benefit at due time. In the meantime, the couple themselves can control the growing capital in the policy and use it if needed (withdrawal, borrowing from it, or using it as a collateral).
34. I cannot slice the cottage. How could I prevent my heirs squabbling because of it?
Indivisibility of family assets causes sometimes conflicts between siblings when the parents die. A cottage cannot be halved, and the children may not be able to peacefully agree upon a mutually satisfying schedule of use, maintenance to be done, etc. if it is left to them jointly. The siblings may even be in very good terms otherwise, but their respective spouses, careers, interests, and family situations can be different enough to prevent agreement on issues related to the cottage. Usually it's better to make clear-cut decisions rather than leave the issue open, because it can easily result in deterioration of otherwise amiable relationships in the family. Instead of bequeathing that cottage, one option is, of course, to have it sold after death, and distribute the proceeds in the wanted proportion. Another option is to leave the cottage to one, and make justice by leaving tax free death benefit to the other/s/.
Naturally, the cottage is just an example, though a frequently occurring one. Increasing the total sum of assets to be left behind so that an equitable distribution can be done without the forced liquidation of some valuable asset can be even more important for owners of businesses, such as a store, a farm, etc. Beyond family relationships, here the effective and efficient operation of the business can also be at stake if there remain unresolved issues by the time of death. Again, creating tax free death benefit can be one sensible way of reconciling the wishes for both equitable inheritance and best possible continuation of the business.
A few words of caution: For the elaboration of such inheritance plans, capital gain taxes should also be considered. If the cottage, worth $300K, is left for Jack, and Jill will get $300K tax free death benefit, it's not an equal arrangement, because Jack probably has to pay a hefty capital gain tax. With this, I do not mean to say that parents always should strive for precisely equal monetary treatment of kids, of course. In well functioning families, it's probably the best to clarify in time whether Jack wants that cottage at all, whether Jill wouldn't want or need it more, etc. Insurance solutions can be useful tools but they cannot substitute for open communication in the family.
Top page (on personal financial planning)
Life and health insurance (including disability, critical illness, and long-term care protection)
If you are / have ...
These web pages are for information purposes only. The information contained and presented, while based on and obtained from sources we believe to be reliable, is not guaranteed either as to its accuracy or completeness. The content of these web pages is solely the work of the author, Laszlo Kramar.
The views (including any recommendations) expressed on these pages are those of the author alone, and they have not been approved by anybody. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any product discussed or referred to in these web sites. These web pages are for educational purposes only and are not intended for use by residents of the United Sates; nor are they intended as an offer or solicitation in any jurisdiction outside of Ontario, Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
(c) Copyright 1997-2006 László Kramár. All Rights Reserved.