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Life insurance is an important financial instrument in the estate planning of a business owner.

Many issues can be effectively covered by life insurance, including payment of taxes due to capital gains, liquidity concerns, estate equalization issues as well as debt elimination and cash for family security.

Read: World’s wealthy clients are getting poorer

There are, however, many types of life insurance. Some are suited for short-term planning while others are more appropriate for long-term and estate-planning purposes. It’s essential to know what’s available to best meet your family’s needs and plan your wealth.

Term Insurance (Renewable and Convertible)

  • Term insurance is temporary coverage under which premiums are guaranteed and remain level for the term of the policy (e.g., 10 years, 20 years) and increase with each new term.
  • These policies are renewable for additional terms with no medical evidence required, but usually not past age 70 or 75. If renewed, premiums increase with age and at some point higher premium costs may make it difficult or impossible to continue coverage.
  • Coverage typically expires at age 80 or 85.
  • Term policies are initially less expensive than permanent insurance and are suitable for short term insurance needs or specific liabilities like a mortgage or debt elimination.
  • They can be converted to permanent insurance without medical evidence, often up to ages 65 or 70.
  • A disadvantage of term insurance is that if a premium is not paid, the policy terminates after 30 days and may not be reinstated if health is poor.

Read: Keep your wealthy clients

Permanent Insurance

Permanent insurance has a number of policy types, including Universal Life, Whole Life and Term to 100.

Universal Life

  • Universal Life is permanent coverage that unites a term insurance product with a premium/investment account. Because the two are combined in one contract, the investment portion receives the favourable tax treatment afforded to life insurance policies – investment earnings within the policy are exempt from annual taxation.
  • Charges for the term insurance portion are usually level and guaranteed not to increase for the life of the policy, regardless of age or health problems.
  • Premium deposits to the policy may range from the minimum amount needed to cover the monthly cost of insurance and expense charges, to the maximum limits specified in the Income Tax Act.
  • Amounts in excess of the minimum can be invested in guaranteed fixed options or directed to a number of separate accounts that operate like mutual funds and are linked to various stock or bond indices with greater risk and potential reward.
  • The accumulating fund value is added to the death benefit and can be borrowed, used to pre-pay future insurance costs or continue protection if a premium is missed, or withdrawn if the policy is no longer required.
  • Because the initial cost for universal life is higher than term 10 or term 20, it may be most suitable as a means of covering longer term or permanent insurance needs including estate liquidity requirements and capital gains tax payments at death.
  • Coverage is for life.

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JODI WEBER

There are a number of inaccuracies in Mr. Warburton’s article.

Dividends, as he writes, are not a refund of overpaid premiums. In the same way that a shareholder dividend is a distribution of a portion of the earnings generated by a shareholder company, participating policyholder dividends are a distribution of a portion of the earnings of a participating account and are determined by the Board of directors of a company. Dividends are based on three factors – earnings, expenses and mortality. Insurance companies in Canada are governed under the federal Insurance Companies Act (ICA) and the act specifies a maximum, based on assets in the account of how much can be paid out to the shareholders account. Calling them a return of excess premiums is incorrect and misleading. If a dividend is paid to shareholders, then under the Act, a dividend must be paid to policyholders. If a dividend is distributed, there is a maximum that can be paid to the shareholder and the remaining portion must be paid to policyholders. Therefore, when advisors are making recommendations to their clients regarding Whole Life Insurance, they should be concerned with the level of surplus a company holds in the participating accounts as well as their dividend paying histories, amongst other things.

Tuesday, Sep 18, 2012 at 2:39 pm Reply

TIM LANDRY

Why should only LIFE Insurance be purchased by the wealthy? CI and LTCi should be purchased for the same reasons – and in fact they are actually even MORE important!

I agree that disability insurance cannot even be purchased by wealthy clients – as they will not (at least for traditional insurers) meet the maximum net worth and unearned income requirements – but even they can purchase DI through specialty insurers. I REALLY fail to see why wealthy clients – for EXACTLY THE REASONS your article uses in its headline – should not purchase CI or LTC. If they need Life Insurance (and I agree that they do) they also need CI and LTC – for the same reasons. I met a 52 year old with a net worth of $50 million. It took me about two minutes to convince him that he did not NEED LTCi – and less than a minute to convince him that it was the best USE of his money

Friday, Sep 14, 2012 at 11:52 am Reply