Finance, Insurance and Politics
At our core we always feel like there should be a right and a wrong or a good and a bad and it frustrates us when we are unable to separate the two. When it comes to finance, insurance or politics, sometimes there is just not a clear cut answer to right or wrong.
Virtually all “Tax Free Retirement Specialists” agree that life insurance is a vital aspect to creating a well-rounded retirement plan. Unfortunately, they do not all agree on which type of life insurance one should use to accomplish this. As a life marketer, I am continuously engaged in the debate between life concepts. Which is better? Should we buy term and invest the difference or should we buy permanent? Should we buy Whole Life or Universal Life?
If I asked the question “which is better, Republicans or Democrats”? I would get answers full of conviction supporting both sides. The same would be the case if I asked insurance agents the question “which is better, Whole life or Universal life”. Much like politics the answers are easily skewed and twisted to make a point and even a trained professional could walk away confused.
However, there are some absolute differences between these options. First, there are a couple key elements that apply to both whole life as well as universal life.
- Administration cost- This covers the cost of administrating the policy as well as covering the premium tax.
- Mortality cost- A cost associated with covering the actual cost of the life insurance death benefit.
- Savings or Investment- Commonly called “Cash Value” or “Cash Surrender Value”. This typically illustrated value is the sum of a client’s deposits after the administration cost and the mortality costs are deducted.
- Return on the savings or investment- the interest rate that is credited to the cash value in your account each year.
Term insurance is typically the cheapest form of life insurance. Many young people buy this type of insurance simply because of tighter budgets. Some believe in the philosophy of buying the cheaper term and investing the savings. This can be an effective plan if the investor makes the correct moves with their money. The downside to this is the insurance portion of this plan lapses at a certain period and, depending upon the insured’s health, they may no longer qualify for life insurance thus eliminating many retirement and legacy planning strategies.
Whole life policies were designed to provide permanent insurance and to fill many of the holes that term insurance has been criticized for. Whole life insurance has a level cost of insurance for the life of the insured; however, the costs of insurance as well as the administration cost are typically not disclosed. Once the cost of insurance and administration cost are covered then the balance of the premium is the savings or investment portion. The actual rate of return on the savings or investment portion is dependent upon the excess interest and investment earnings, operating expenses, savings in mortality costs, and the will of “the insurance company board of directors” who has the ability to choose what they will pay.
To summarize, apart from a minimum guaranteed return, whole life policies do not disclose the cost of insurance, the administration costs, or how they calculate the returns on your savings portion. Not only does the insured not have the ability to choose where the money is invested but the insurance company does not have to disclose the return you are receiving.
Universal Life insurance policies were designed to provide a counter to the advice that you should “buy term and invest the difference”. Many older Universal life polices did not illustrate the cost or the savings but over the last few years universal life policies now illustrate mortality cost, administration cost and also offer a list of investment options that have similarities to mutual funds. In fact, many are designed to provide returns that mirror well known mutual funds and they are managed by mutual fund managers. Examples would be Standard and Poor’s Index Accounts, Canadian Index Accounts, Canadian and American Equity Index Accounts, Bond Index Accounts, and 1, 5, and 10 Year GIC Type Accounts.
The returns inside an insurance policy are generally slightly lower than mutual funds will generate but, they have some significant advantages compared to mutual funds.
- The funds grow tax-free
- The funds are “creditor proofed” assuming the policy is set up correctly.
- If the policy is set up correctly, the entire investment account plus the face value of the insurance policy goes to the beneficiary tax-free upon death of the insured with no probate cost.
With the common speculation that taxes are on the rise, the hottest topic of discussion these days is how to prepare for estate taxes. With the unrivaled tax advantage of life insurance, they may be no better way to plan for this event regardless of which type one chooses.