As explained by Michael Godsoe, CEO of Langhaus Financial, life insurance is not just a "death benefit." It's an important tool that can help save money and transfer wealth, particularly for individuals with high net worth.
Throughout his 30-year career, Godsoe has observed some common misconceptions about life insurance products. For many, life insurance is merely a reliable, long-term way to make sure their loved ones are financially safe after they pass. While this is true, for wealthier individuals, there's a lot more that life insurance can do.
Godsoe suggests that smart advisors are beginning to understand life insurance differently. It's more than just the death benefit - it's a tool that can provide a secure return on investment, useful for estate planning and even allows easy access to cash. In a time when Canada is experiencing low returns on investment and high taxes, life insurance has become an essential part of preserving and transferring wealth.
This versatility comes from the different ways life insurance policies can be financed, and how they steadily grow in value over time. Importantly, using these strategies doesn't jeopardize the original purpose of life insurance - making sure your loved ones are financially safe after you're gone.
Understanding how life insurance can play a bigger role in your financial plan means understanding the types of products available. Permanent life insurance, unlike term life insurance, is more than just coverage. It also includes investment features. The payments made into a permanent life insurance policy help build an asset pool, which can later be used to cover insurance costs. This means policy owners often only need to make payments for 10 to 20 years.
There are two types of permanent life insurance: universal life policies and whole life policies.
Universal life policies involve investments chosen by the policy owner, meaning they can vary widely and have a potential for volatility. Whole life policies offer more certainty and are based on solid guarantees. They are supported by a single, highly-rated asset pool, and focus on high-quality, fixed-income securities across various sectors.
Godsoe advises that a discussion with an insurance and tax advisor can provide a complete picture of the benefits of various policies.
Permanent insurance has three notable qualities, according to Godsoe.
It's beneficial for tax planning, provides liquidity, and can be an alternative to fixed-income investing. Permanent life insurance grows in a tax-preferred way and can be used to declare tax-free dividends if owned by a corporation. However, these policies can also be expensive, which is where financing comes in. With support from major life insurance companies, alternative lenders are making financing insurance policies almost as routine as getting a home mortgage.
From a borrower's perspective, the tax planning benefits and death benefit of the policy are maintained, and the annual premium cost is reduced. From a lender's perspective, permanent whole life insurance represents attractive collateral, backed by large pools of high-quality assets.
Finally, Godsoe says that life insurance can be viewed as an investable asset with attributes more attractive than traditional fixed-income investments. It offers predictable returns over a defined period, grows on a tax-efficient basis, and includes the death benefit protection.
Given the high-tax environment in Canada, Godsoe recommends re-examining insurance as an increasingly essential tool, particularly as markets and tax laws remain unpredictable. Speak with an advisor to explore how insurance can help fortify your financial plan.
Footnotes:
1 Adapted from source: Offices, Michael Godsoe for Canadian Family. "Life insurance offers untapped potential in high-net-worth planning." canadianfamilyoffices, 13 July 2021, canadianfamilyoffices.com/commentary/life-insurance-offers-untapped-potential-in-high-net-worth-planning.
