Life Insurance as an Investment
By: Glenn Cooke
The financial triangle has a variety of stages – cash flow, insurance, retirement savings, estate and tax planning, and speculative investing. Using life insurance as an investment falls squarely in the upper estate and tax planning level. That means that you should only start looking at using life insurance as an investment AFTER you have cash flow, insurance, and retirement savings all looked after. At that time, life insurance is a very useful (i.e. financially astute) estate and tax planning tool. Prior to that time it’s a poor investment choice.
Life Insurance As an Investment – Pros
Life insurance policies have a number of strong benefits that center around taxes and estate planning. They are:
- Investments inside a life insurance policy grow on a tax sheltered basis (similiar to an RRSP or TFSA).
- Death benefits are paid tax free (so if you’re comparing death benefit funds, compare them to other investment choices after tax), including any investments and growth inside the policy.
- Life insurance policies will accumulate premiums to a larger death benefit upon your passing faster than investing the premiums in a comparable investment choice.
- In some policies, death benefits and investment amounts can be guaranteed.
The insurance industry generates specific strategies that combine and take advantage of these attributes of life insurance policies to generate tax efficient outcomes. We’ll go through three common investment strategies in this ebook. Each of the strategies will combine the above benefits in some fashion.
Life Insurance As An Investment – Cons
There are a number of drawbacks to using life insurance as an investment, they are:
- The policy, and in general the investments, are illiquid. They are not suitable if you ever need fast cash from the policy. Compare this to an RRSP or TFSA where if you had an emergency you could access the funds fairly quickly.
- Being a life insurance policy, there is an insurance cost. This can act as a drag on returns, particularly if using a strategy that is primarily dependent on the investments and not the death benefit.
- RRSP’s, TFSA’s, RESP’s and other tax sheltering choices will generally perform better than a comparable life insurance investment policy.