Depending on your circumstances, life insurance as an investment is either a really really bad financial decision, or an astoundingly great one – there’s little middle ground about this.

Life insurance offers two potential benefits in general – insurance for insurance purposes, and insurance for investment puproses. The general rule of thumb is to not comingle the two – doing so results in bad outcomes (less money, improper life insurance). So when looking at life insurance as a possible investment option, treat it fairly strictly as just an investment. We will mostly ignore the insurance aspect.

 When to use life insurance as an investment

Life insurance as an investment tends to provide fairly mediocre investment returns. However life insurance also has preferential tax treatment, and it’s this tax treatment that can make life insurance a good investment.

I mentioned above that life insurance as an investment is either a really good idea, or a really bad one. Here’s the line between the two. If you have access to RRSP’s, TFSA’s, and RESP’s, then life insurance is not a good investment. Those three other tax-preferred investment options will absolutely smoke a life insurance policy when it comes to investments. Until all three of those are maximized, use those vehicles instead of life insurance.

However, once those three vehicles are maximized, any other investment choice you have is going to be taxed in some fashion. At this point, the tax advantages of a life insurance policy can not only beat your other choices for investments, but beat them by a wide margin. Life insurance goes from being a poor investment choice, to one where you might say ‘I can’t believe nobody’s told me about this yet’.  

The tax advantages of a life insurance policy are inherent in the payment of the death benefit (death benefits are paid tax free) and in the growth in the cash surrender value (cash surrender values are not taxed unless withdrawn from the policy, so growth is tax sheltered). Combining these two advantages in various ways is how we get different advantageous strategies. Here are two common ones:

•  Insured Retirement Plan: Treating the annual premiums as retirement savings, this strategy can far outpace the fixed asset portion of your investments (i.e.compared to bonds). So you may consider switching the portion of your investments that are allocated to bonds, into a life insurance policy. In general, life insurance used this way will approach but not exceed the benefits of a more aggressive asset class like index funds and comes with some drawbacks, but it will far exceed the income produced from bond investments – and provide for a ‘free’ life insurance policy on top of that
•  Estate Bond: Similiar to the insured retirement plan, we are comparing returns of a life insurance policy to investments in bonds. With this strategy however we are just looking at maximizing your estate value – leaving as much money behind as possible. Life insurance has a high probability of providing a greater return at your passing than investments in things like bonds, and with similiar or better guarantees. The basic mantra is that a life insurance company can save to an amount at your passing better than you can. So if you have investments that you don’t expect to use during your lifetime, and want to maximize your estate value to your beneficiaries, life insurance is a very attractive choice.

 One final note, you may consider universal life insurance instead of whole life insurance for use as an investment. We advise against this. Whole life insurance comes with a baseline of guarantees that allow us to compare it to asset classes like fixed income and make a suitable comparison. Universal life insurance removes those guarantees which means not only have you lost the guarantees (which can impact the viability of the insurance and your investments) but the investments in universal life insurance come with very high fees. Those two things together mean that when compared to other investments available to you, the other investment choices should be noticeably better.

 If you have any questions about your life insurance coverages, please contact The Term Guy at (416) 642-6820.