Permanent life insurance 101

You are probably familiar with term life insurance, which provides coverage for a specified period such as 10 or 20 years. Odds are that you’ll cancel or outlive your term-life policy and a benefit will never be paid. In contrast, permanent life insurance covers you for life and is guaranteed to pay a benefit.

There are two main types of permanent life insurance: universal life and whole life insurance. Both are fueled by deposits that are divided into a basic life insurance component and an investment component (cash value). The main difference lies in whether you or the insurance company manage how the cash value is invested.

A universal life policy allows you to choose your investments, which range from guaranteed interest options (similar to GICs) to mutual fund–like account options. If your funds are invested in a nonguaranteed account option, you may benefit from market upswings, but you may also feel the pinch from market downturns.

Whole life insurance offers an individual a participating account investment option, which is typically a mix of fixed income and equities, and is managed by actuaries and expert portfolio managers. With whole life, the returns are returned to policyholders as dividends. The growth from investments can be added to the death benefit payable to your beneficiaries. As well, the growth within the policy is tax free. While living, you may access the cash values through direct withdrawals (there may be some tax implications) or by taking a loan against the policy. 

Like all life insurance, permanent life insurance pays a tax-free death benefit to your named beneficiaries and bypasses the estate and probate taxes.

Retirement assets
Physicians often use permanent life coverage as an alternative tax-advantaged investment asset within their corporation. An ideal candidate for permanent life is someone with annual excess discretionary cash flow after other tax-efficient investment vehicles like RRSPs and tax-free savings accounts are maximized. You can often use the cash values in the policy to supplement your retirement or help finance your long-term care costs.

An estate-planning tool
A permanent life policy can be used for estate planning. If you have a spouse, you can reduce your premiums substantially with a joint-last-to-die policy where the death benefit is only paid upon the last person passing away, which is when the terminal tax liabilities typically come due. If you have an estate that is not easily divisible among your beneficiaries, you may use permanent life insurance to help equalize the estate by providing a cash payment to a beneficiary.

For children
Having insurance on children isn’t about expectations of early death. Some children may encounter health issues that may make it difficult for them to get insurance coverage as adults. By purchasing a permanent life policy for a child, you guarantee an amount of coverage that can be carried forward as an adult. As well, because permanent life has tax-advantaged cash value growth, this is another investment asset that you can contribute toward your child.

If you are interested in learning whether permanent life insurance is appropriate for your situation, I encourage you to seek expert advice from your MD financial advisor* or your Doctors of BC insurance advisor.
—Julie Kwan
Business Development Manager of Insurance, Doctors of BC

*As a CMA member, you have access to MD Financial Management, which provides comprehensive financial planning, including insurance, to help you protect valuable assets and build wealth.

Julie Kwan, BBA, CFP, CLU, GBA. Permanent life insurance 101. BCMJ, Vol. 57, No. 4, May, 2015, Page(s) 153 - News.

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