If the UL policy is structured correctly, any value will be paid as well as the death benefit tax free.

Right now some whole life policies have more cash value for the same death benefit protection. For similar premiums!

As you are aware insurance companies make their money on interest rates so any one who plans on getting buying now saves on two fronts. Their age (younger the better) and because of interest rates so low (I assume for a long time) prices for Universal Policies have been going up.

So waiting to buy permanent coverage costs more guaranteed.

One may want to review http://www.milliondollarjourney.com/how-annuities-work.htm again.

As an aside, even today’s market a male looking to buy an annuity (life time payout) at 71 can get over 8.3% guaranteed on his RRIF. I don’t know anybody that rate guaranteed.

Since you are from the US, there is some differences up in Canada. The cash (whole life) values here are lower (first 10 -15 years). Later, years 20 plus our plans look better.

Plus I think you can roll other other cash values form other life plans without paying any taxes into a new plan.

If they are saying 3% is guaranteed… read the contract it should be there.
Manulife does not have wholelife….they did years ago.

1)you had mentioned a week or so back that Manulife does not have wholelife..

2) the 3% int guarantee by Manulife..do you think the 3% would hold good for all my life..or could they reduce it..

thanks again..

Another idea (depends on your situation) is to consider Participating Whole Life.
If you have a 15 year time frame or more this can sometimes work better than UL.
The investment part is bonds, mortgages and some stocks…MER about .50. Generally UL looks better in the early years but Whole life is better by year 15 plus.

This is complex to go over everything here, but if you want something to read let me know.

thanks for your learned reply…your posts have set me thinking about safety in UL..when i checked Manulife …//////////////

INTEREST GUARANTEE
The effective annual interest rate for this account is set at least weekly and is guaranteed to be at least:
•90% of the weighted average yield over the past 15 years on current coupon Government of Canada Bonds with terms to maturity of 10 years or more less 2.25%, or
•3%,
whichever is greater
//////

ANNUAL COMPOUND RETURNS (as at February 28, 2010)
This table shows the historical annual compound return of the underlying index and the universal life accounts that are linked to this index.

1 Year 2 Year 3 Year 5 Year Since Inception Date of Inception
UNIVERSAL LIFE ACCOUNTS
Average GIA Account
Security UL (On or after June 23, 2001) 3.100% 3.070% 3.060% 3.060% 3.200% Jan 2002
Security UL (Prior to June 23, 2001) 3.100% 3.070% 3.060% 3.060% 3.200% Jan 2002
UNDERLYING INDEX
Government of Canada Bonds 10yrs or more 3.850% 3.940% 4.090% 4.200% –

Past results are not necessarily indicative of future performance and investment returns will fluctuate.
///////////////////////////////
your inputs on this product..please

Great question. Short answer is I don’t know. With UL, I stick to GIC’s or bonds.
Why? The purpose of the insurance is be conservative. With index funds maybe market will go up or down, Taxes is a bigger worry, so why gamble with the market, when CRA can and does more money than any returns you will get from an index fund.

Generally the UL policies charge more(on funds) than you can get elsewhere, the insurance industry generally doesn’t care. Look at what the insurance does, tax free growth, coverage if you die too soon or live too long. If you look at my case study above can you get an index fund with a 7% or better return guaranteed?

based on your experience, which insurance company has the lowest MER for UL..i would prefer an index fund..thanks..

So, thank you Brian.

You were right in saying that it is more complex than the bit you were able to get into wrt the strategies that can be implemented with a UL. And it is not for everyone, but it certainly can work for many, if used correctly, as with any other investment strategy.

Is 4.25% still a good rate for GIC’s in a UL policy? I quoted 4% in my case but I think anything above 4% is good.

I forgot to point out each account is protected up to $100,000 by Assuris see http://www.assuris.ca/ it is a not for profit organization that protects Canadian policyholders in the event that their life insurance company should fail.

regards,

Brian

Here is the part that might help you from the case study.

The holdco uses these excess funds to buy the UL policy. The same growth occurs within the insurance policy and this transfer of funds to buy the insurance essentially reduces the FMV of the holdco for the purposes of calculating capital gains tax due upon death.

You can not do this with buy term and invest the difference.

Brian

Please read the case study again. Chuck Jones is 55 years old. He puts in over $72,000 per year for five years. One can assume if he buys insurance and looks at his age he is conservative.

Term to 100 seems like a good idea, but the money must be withdrawn from a side account every year which would be taxed first. Money cannot be put into GICs or it will be taxed unlike a UL policy;

regards,

Brian

One short term bear market and you are advocating GIC’s? Do you know how many times higher stock market returns are than GIC’s over the last 30 years? This argument makes sense short term, but not for a 30-year term.

In your article above, when you compared investment returns to universal life insurance, did you assume the investments are taxed every year or only at the end? I quick future value of 5 investments of $72,157 @7% for 30 years, I get a future value of $2,410,000. After capital gains tax in the estate, I get $1,939,000. This is almost double your figure and far higher than the UL death benefit of $1,167,903.

Did you also assume the premium tax withdrawn from the estate value in the UL, but not with regular investments? I guess the higher MER would not apply if you are only investing in GIC’s?

What would happen if the client bought a term 100 and invested the difference? This would definitely give them the $1 million tax-free payout at death, plus a decent investment portfolio.

Ed

Now that the markets have gone down around the world, 4% guaranteed vs. investing the difference with term, sometimes being more conservative with extra cash in a holding company is better. Also, term becomes more expensive later in life. So you have investments which may take years to recover…

Brian

If I understand your question… when is the best time to set up a holding company? When you have extra money you do not need in your operating company. That’s when you set up a holding company.

Until you reach this point, looking at UL, doesn’t make much sense. Get some term insurance and replace it when your cash flow is better and when the holding company is set up.

regards,

Brian

Before I answer your questions, here is a brief review of the holding company scenario. The purpose is move extra money not needed in the operating company.

“The business owner can benefit in much the same way through the effective use of a holding company which is typically used to hold the shares in the operating company and store retained earnings not required to run the operating company. The hold co uses these excess funds to buy the UL policy. The same growth occurs within the insurance policy and this transfer of funds to buy the insurance essentially reduces the FMV of the hold co for the purposes of calculating capital gains tax due upon death”

Question #1 & 3.
Looking at my example again, Male, age 55, sole owner of a growing business. A term policy for $1,000,000 will cost $3,000 per year. At age 65 the policy will renew at roughly $20,000 per year. At age 75 he will pay $72,000.

Alternatively, he can apply for a NEW term policy at age 65 and prove his insurability again. If, and I stress IF, he is healthy, this new term policy will cost him $8,900 per year. Since most companies will not issue a new term policy beyond age 70, he can no longer go through the underwriting process again.

While the initial term cost might be favourable, the renewals grow significantly. If the individual is not able to support the renewal, it is unlikely that we will be able to “invest the rest”.

So now he is 75 years old and is paying $72,000 per year until age 80 when the insurance expires. But his business did well and he has a sizable estate that he would like to pass intact to his heirs. There is still an insurance need that might have been addressed with a UL policy when he was 55.

In most situations, the goal at age 55 is “estate preservation” as there are no longer dependant children. The cost of UL can be lessened by the use of a JLTD (Joint Last to Die) policy between husband and wife, which is not available on term. A joint equivalent age is calculated which is less than the premium for the single life policy because the death benefit is not paid until the second death. Assuming the husband dies first, the holding company can elect to receive a fund value payout as a tax-free death benefit. That amount minus the policy’s ACB is credited to the holding company’s CDA (capital dividend account) and can be paid to the Canadian-resident shareholder tax-free.

Another benefit with the JLTD: If our 55 year old is not insurable due to recent cancer history, he can still be included in a JLTD policy and still be able to take advantage of the Universal Life tax benefits.

Question #2. The same tax treatment is available with the corporate class funds but in the end you have no lump sum insurance payout.

Universal Life investments include GICs. These types of investment appeal to the older individual and pay much higher interest rates than the corporate class money market account. GIC’s are not available in the corporate class funds.

There are probably other ways to defer your tax but it is beyond the scope of this article.

4. Fees: Some insurance companies charge the same MER on funds you would to sell to your clients. Is there a choice of 4,000 funds, no, usually 50 funds or more. Some “fee only advisors” could get some of these funds cheaper, but would of course charge a fee for their advice.

regards,

Brian