Is term life insurance worth the cost?

Term life insurance protects your family from an unexpected calamity

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by

From the June 2014 issue of the magazine.

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Q: My wife and I are 66 and we’re in good health. Does it make sense to take out term life insurance carrying an annual premium of $6,000 to cover the tax on our substantial registered investments when we die?—Jim Semple, Regina

A: Insurance is a crucial part of a financial plan. While it can be a tool in estate planning, its best use in my opinion is to protect your family from an unexpected calamity. The latter doesn’t seem to apply to you because your investments are substantial. Besides, upon the death of either you or your wife your RRIF assets will roll over without tax to the other. As an estate planning strategy it may be an expensive way to shield your beneficiaries from tax.

Matthew Ardrey, a financial planner with fee-based firm T.E. Wealth, suggests comparing the “return” on the insurance policy with what you’d be able to save in a TFSA. “If they both live until age 90, that will be 25 years of premiums or $150,000. If they took that same $6,000 per year and saved it in a TFSA with a rate of return of 5%, they would have about $300,000 at age 90 payable to the other beneficiaries without tax.” Does the death benefit on the policy exceed the return on the TFSA? If it’s $400,000, then yes. But if it is $200,000, then no.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal question? Write to Bruce at ask@moneysense.ca

3 comments on “Is term life insurance worth the cost?

  1. There seems a lots of facts missing here.

    One is taxes. What rate are they?

    Does any one know when one is going to die? Age 90, really?

    What about an annuity at current rates they are around 7% for a 66 year old male guaranteed.
    Will they downsize their house in the future? RRIF means more taxes as one gets older.

    Reply

  2. Bruce, I wanted to add a few more thoughts for you readers to consider.

    Assuming the couple are 66 and in good health a permanent policy for $6,000 per year would get them $260,000.

    This of course seems poor vs a TFSA.

    If they were both killed in a car accident the second year the internal rate of return would be over 500%… $12,000 in premiums death benefit = $260,000.

    Over the years this internal rate of return (the rate of return net after taxes at death…in this case I assumed 30%) drops.

    By age 86 (20 years later) this goes to 7%. ( the death benefit is at $265,000).

    At age 90 this is now 4%.

    We don’t know two things, One is when are they going to die and two what will taxes be like in the future. I am sure taxes will not be a lot lower (based on history) one may recall ( many years ago) there was no capital gains taxes or even no taxes on interest earned for money in a bank account!

    Here is a bit of history of taxes I pulled from the warmuseum.ca (about bonds/taxes, etc.)

    In 1919, personal and corporate taxes combined accounted for only 3.4 per cent of total federal revenues. Most Canadians paid no tax at all, and those who did pay, paid very little. (see) http://www.warmuseum.ca/cwm/exhibitions/guerre/finance-prod-e.aspx

    Reply

  3. Term insurance should not be used for estate planning. However a joint last to die participating whole life policy will outperform the TFSA example. Using the same $6,000 annual premium based on today’s low interest dividend scale. At age 90 the tax free benefit to the estate is projected to be $514,000. And since no one can predict when one will pass away, even as early as age 77 the death benefit is projected at over $300,000. For those whole life skeptics, even if the dividend scale is reduced by 2% today, the death benefit by age 80 is approx. $300,000 and at age 90 it is $378,911. Whole Life insurance is a beautiful thing when structured properly.

    Reply

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