I’m thinking of ditching my UL policy in favor of a cheaper TERM policy and invest the difference in the TFSA, which can later be taken out 100% tax free, or transfered to spouse and/or children.

I assume the TSFA will allow for investments such as funds, ETF, bonds etc.

FP makes a great point, but I’d like to take it one further (no offense FP, your blog is still better):

i am 38 years old..i need a life insurance of $200,000

You’re missing a key piece here. You’ve asked a question about the total cost of premiums, so you’re going to get an answer, but that answer will not be relevant b/c the question you’re asking does not contain enough information to be adequately answered… does that make sense?

When purchasing life insurance you need to know:
1. How much do you need? (200k it seems)
2. How long do you need it for? (62 years? 47 years? until you retire? we’re guessing here based on your current age)
3. When will these needs change? (kids moving out? retirement? semi-retirement? job-change?)
4. If you die at 90 (or some other advanced age), how much money do you actually need left over (still 200k?)

You gave us #1, but not #2, #3 & #4 which are also equally important. I can plug all of those numbers into a spreadsheet for you, and find break-even points and provide running totals, etc. But it’s pointless, the resulting numbers will be insignificant b/c I’ll just be analyzing bad data (which tends to give bad results).

Why not try to predict both your current and some of your future needs and then work from there. Do you feel like it’s your duty to have an insurance policy for your kids when you die at 95? Do you just want to leave them the money that you have left? Will you have money left, are you meeting your “retirement” savings goals?

Rather than worry about the difference between term & life – just buy life and don’t buy so much of it. You are 38 now, so getting a 20 year term insurance is not unreasonable but why do you need this insurance from age 58 to 78 and then after that??

Once you have enough money to retire (or get close to it) then you don’t need insurance anymore unless you have a special circumstance.

Mike

option 2-
Term 20..
my beneficiary gets $200,000 only if i die before
85 years(ie within the next 47 years)..if i die after 85 years they get nothing.

the monthly premiums from year 1 to 20 -$21.17
the monthly premiums from year 21 to 40- $255.33
the monthly premiums from year 41 to 47- 1,292.83

again if i die before i am 85..my premium payment starts….

I have heard the argument buy term invest the difference….what kind of return does my investment need to make..for the Term investment to work better than permanent insurance..

thanks in advance..
Sam

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I was under the impression that with UL or VUL you could take out the original amount you paid in without any tax, then the gain that you made over the year you could take out zero cost loans, there by avoiding any taxes. Naturally you would have to not take all the funds out to avoid any future taxes until you passed away.

Steve

Before you cancel that policy consider a couple things. Find out how much of the $45,000 cash value is taxable. I don’t know your income but will it affect GIS,OAS or other tax credits? Remember the death benefit pays out tax free. Are there other ways to use the policy? You know the $84,000 will pay out tax free, what if you took a Manulife one loan against your home, and match it so the future debt is about equal to the insurance death benefit. This will give you some tax free income and may help you squeeze additional government benefits?

If you don’t need the insurance cancel it, but think a little creatively before you do.

You’re starting to get it. One more thing about the tax-effiency. UL mainly saves you tax only if you don’t touch it until AFTER YOU DIE. (I hate it when only death can save tax!)

UL saves tax if it is paid out after you die as a death benefit, but you pay tax on the growth if you withdraw your investments while you are alive.

You can get tax-efficiency while you are alive from corporate class mutual funds. UL essentially only saves you tax if you don’t touch it until after you die.

Ed

The thing to be aware of is whether your “advisor” is actually giving you good advice for your situation or whether he is actually just an insurance salesman.

The insurance industry is full of salesmen that call themselves advisors. I never really liked doing insurance and it is not that profitable, since we essentially only do term (which is all almost everyone needs).

So I dedided to find an insurance specialist to join our team. It took me several years to find someone I didn’t think was just going to sell whatever he could to anyone I referred – someone I would feel comfortable referring cients to.

Does your advisor spend most of your meetings asking about you and your family, what issues are important, and calculating in detail how much insurance you actually need – or do you find you get a few questions and then a sales presentation?

Ed

I’ll have to talk to my advisor and see what he says about all this. I read that link from #13 and it really opened my eyes.

I’m still new to this MER, compound interest, tax sheltering, etc. business and when I get my advisor’s rebutal I’ll definitely share it with you guys.

My first intention of getting UL was that we only had insurance through our work which I found out ends when you retire at which point I heard it would be difficult and expensive to get then. Also, the insurance policy we have at work isn’t much at all compared to the policies we could get with UL or term (which I understand now are more or less the same). And then when I read about the tax sheltering I was all for it. But seeing the points made above I’ll definitely have to re-consider. Luckily for us, we haven’t officially got the UL so we might be able to get out of it if we decide its not right for us.

Thanks for the info!

A couple of comments. First, UL does not usually produce the same return, but less. The link to Perry Kundert in Earl’s post (#13) is well done and shows UL almost always leaves you behind investing elsewhere.

My advice is to never do any investing in a UL. It is more effective to invest elsewhere – even when you include that it can pass to your estate without tax.

The strategy of borrowing against a UL policy is ridiculous. Avoid it. You can also borrow against an investment portfolio and in most cases for similar amounts. If you borrow against a UL, you risk a margin call, just the same as when you borrow against a mutual fund portfoliio (unless you qualify for a “no margin call” loan).

What’s more, with a UL, you lose the opportunity to get a tax deduction by borrowing – just getting it tax-free is nothing.

With a UL or a mutual fund portfolio, you can borrow against it every year to take tax-free money (because the cash is a loan, not income). However, if you have a mutual fund portfolio, you can sell it, take an investment loan and buy the investments back (”Flintstone flip”). Now your loan is TAX DEDUCTIBLE – not just tax free.

Many people who do this strategy of borrowing against a UL may get a margin call when there is a large market decline (unless they buy crappy investments such as GIC’s).

The 5% of your income rule of thumb may make some sense – if your spouse will need ALL of your income to maintain your lifestyle and if you have no other insurance.

You need to differentiate between providing for your income and paying tax on your estate. Most people only need insurance to provide income for their spouse until they retire. At that point, you have a nest egg and pensions that would mostly pass to your spouse. The need for income replacement insurance if normally met with cheap term insurance – not UL.

UL is term for life (plus temptation to make the mistake of investing in the policy). Term for life is mainly to cover tax on your estate.

IF you need 5 times your income of insurance, that is almost defintely term insurance for 10 or 20 years that you need. The need for UL is based on your estate taxes, and is usually a much smaller number.

Ed

The important question is: Do you need insurance (and if so, for how long)? Will your wife be able to maintain her current lifestyle if something happens to you? She would not get alll of your pensions, but she would probably need somewhat less than you need together now? Do you have a reason to have insurance for your estate (eg. pay taxes on a cottage)?

If you don’t have a need for insurance, then you should definitely cash it in and use the money to live now (or invest it to live for the next 25 years). And even if you do need insurance, do you need it for life? If not and you are still insurable, then you might be able to get a term policy for what you need and then cash out the UL.

One of the life insurance sales pitches is that paid up life insurance costs you nothing. This is bunk. It costs you what your cash value would be able to make if you invested it.

If you cash in and then invest the $45,000, you should be able to get $300-350/month (and rising for inflation) of extra income for life. This could pay for a couple of extra trips to enjoy.

Ed