Financial planning: Life insurance

– Mark Halpern, CFP, TEP

Review your existing life insurance

Do you have adequate life insurance protection? Ensuring you have the right life insurance can be an important component of your overall retirement planning, and tax planning strategies. Low interest rates are great if you are buying a home or need a loan. But they also carry a downside. In this low interest rate environment, $1 million of life insurance proceeds generates less than $30,000 of pre-tax income. Sadly, 85 per cent of Canadians are under-insured.

You might want to think about term insurance, a form of life insurance that provides coverage for a specific period of time.

The cost of term life insurance has dropped by as much as half in recent years. If you are healthy, a review of your policies that are more than 10 years old could provide premium savings and/or more coverage.

Consider permanent “whole life” insurance, which has always been popular but is back in vogue in this low interest rate environment.

Depending on your age and health, you can turn your fixed income cash into a pre-tax return of four to six per cent, with full access to your capital and the added bonus of having your insurance premiums paid up for life in as little as six years.

The insurance proceeds can eventually go to your heirs, or be used to pay taxes or make charitable legacy gifts which will also save your estate a great deal in taxes.

Consider Critical Illness Insurance

This is insurance that provides a lump-sum of up to $2 million tax-free if you get sick. The funds are paid 30 days after diagnosis of any of two dozen illnesses, including cancer, heart attack, stroke, bypass surgery, multiple sclerosis, Parkinson’s and Alzheimer’s.

The money can be used for any purpose, including immediate access to the finest medical attention available outside of Canada.

Many people complain that they pay thousands of dollars in insurance premiums and then never get to use it. While this is the very basis for all insurance (after all, you don’t buy house insurance hoping it will burn down), Critical Illness insurance features a unique return-of-premium option that refunds all premiums paid if you don’t make a claim.

There are those who can’t get regular coverage due to poor health, pre-existing conditions or family medical history. Those people can usually get a guaranteed issue product that does not require a medical. It can cost less than $1 day, pays out a maximum of $75,000 tax-free, and also features the return of premium option if desired.

Mortgage insurance from the banks or mortgage life insurance?

The answer to that question is simple: personally-owned life insurance is a far better choice because it costs less and provides many additional and important benefits.

For example, bank mortgage insurance coverage decreases as the mortgage decreases but the cost of premiums stays the same. Effectively, the cost per $1,000 of coverage increases because bank mortgage insurance will only pay the balance of the mortgage outstanding at death.

But if you get life insurance the payout remains fixed throughout the term.

Bank mortgage insurance takes good care of the bank, because it typically pays the balance of the mortgage outstanding only to the bank. No one else gets paid.

With life insurance, you decide who will be your beneficiaries. If you leave the money to your spouse, he or she may decide the money is better spent on paying for the children’s educations or a new roof and simply continuing to pay off the mortgage on a regular basis.

In addition, if you decide to switch financial institutions for your mortgage, you have to re-qualify for bank mortgage insurance with the new financial institution.

If a number of years have gone by since you last applied for the insurance, you may now have a difficult time getting it.

Those are just a few of the reasons to avoid mortgage insurance from the bank and why life insurance is a better, smarter and more cost-effective choice.

The TaxLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846


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