Q. My wife and I have had a 20-year pay life insurance plan with London Life for several years. The plan has been paid for by dividends after 20 years of premiums. We are both 60 years old now, with two adult children ages 24 and 27, and both have their own careers. The plans are both worth $60,000 each as life insurance and they both have a cash value of $30,000 each.
Would it be better to take out the cash portion and invest it—or to leave the plans as is? We both have pretty much maxed out our RRSP and TFSA plans. My wife is retiring this year, and I am still working, double dipping from a previous 25-year career.
– Thank you sincerely, Neil
A. Neil, I have to tell you, I have a whole life policy myself, and for me, it’s about knowing that if my wife and I screw up, my kids will at least get the value of my life insurance.
If your goal is to make as much money as possible then surrendering the policy and taking the cash is probably the way to go, but is that your goal? You’ve maxed your RRSPs and TFSAs, and my guess is you’re well prepared for retirement.
Heck, you probably don’t need the insurance benefit because of several factors: you have lots of money, you’ll likely spend most of your RRIF in retirement so there won’t be much tax on the estate, and you’re maximizing your TFSAs and they’ll pass tax-free to your kids. Why keep the insurance?
First, here’s a quick overview of some of the details of whole life insurances:
- It’s an insurance policy you’ll have your whole life, and the premiums never increase.
- The insurance earns dividends and there is a cash value that accumulates over time.
- There are a number of different dividend options to choose from and the most popular choice today is PUA, or paid up additions. This means the dividends do two things: add to the cash value and at the same time purchase more life insurance.
- Although there’s a death benefit and a cash value (which you can borrow from or against), you only get one or the other. You don’t get both.
- The death benefit is tax-free and a portion of the cash value is taxable.
So why wouldn’t everyone buy a whole life policy? The cost. A 30-year-old female can purchase a $500,000 10-year term policy for about $19/month and a whole life policy for $250/month. A male would pay $25/month and $300/month, respectively. When you’re young, with children and debts, the total death benefit is more important than the bells and whistles.
My simple definition of a whole life policy is a GIC with free life insurance if you hold it long enough—roughly 15 years or more. So how you can use this policy now?
Consider the policy as part of the cash or bond holdings in your investment portfolio so you can have a larger tilt toward equities and possibly earn a higher return.
As you get older use the insurance to protect your estate against a market drop. A drop of $120,000 will be covered by the insurance.
Manulife has a program where you can borrow against your whole life policy and invest.
If you decide to surrender the policy, confirm the taxable amount of the cash value. I’m guessing about 50% will be taxable, meaning you’ll both need to add $15,000 to your taxable income. You can offset that with a $15,000 RRSP contribution if you have the room.
I’ve assumed this policy has a paid-up-additions (PUA) dividend option. If the dividend option is dividends on deposit, then you don’t have to surrender the policy to get the cash value. You’ll be paying tax on the dividend growth each year and in this case, it may make sense to withdraw the dividends and invest elsewhere.
Insurance can be a funny product. On paper, you can construct a financial plan that will beat it almost every time. In real life, stuff happens and you never know how, or when, you’ll use the policy. It is an older policy so the premiums are relatively low. If the premiums aren’t a big deal, I’d keep the insurance.
Allan Norman, M.Sc., CFP, CIM, Atlantis Financial/IPC Investment Corp.
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