Life insurance isn’t usually top of mind for Canadian retirees focused on generating income from their investment portfolios. Yet certain types of life insurance can play an important role in the lives of older Canadians, especially when it comes to leaving money to children or charities.
“People often say, ‘The kids are out of the house. I no longer have a mortgage, and so why would I pay a premium for coverage for life insurance?’” says Christopher Dewdney, a certified financial planner at Dewdney and Company in Toronto. “But that’s a misconception.”
Many Canadians are familiar with term life insurance – which lasts for between one to 50 years depending on the policy – and accounts for about three-quarters of the market, according to a Canadian Life and Health Insurance Association report. In the event of a death, term coverage helps Canadians replace lost income to support growing families.
Term life is often unsuitable for retirees, but permanent life insurance – where the benefit is paid to beneficiaries on death – can often be a good addition to a financial plan, says Daryl Diamond, an adviser with Diamond Retirement Planning in Winnipeg.
“There are really only two reasons to have life insurance: One is to create an estate, and the second is to conserve the estate you’ve created,” says Mr. Diamond, a certified financial planner and author of Retirement for the Record.
With permanent life insurance, people pay a premium and the benefit is paid to beneficiaries when they pass away.
There are three types of permanent insurance: whole, universal and term to 100. Whole life is in place until the insured person’s death, but generally offers access to a portion of the benefit while alive after a certain period based on growth of the invested premiums. Coverage may also be ‘participating,’ in which policyholders receive dividends from the insurance company, or ‘non-participating,’ where dividends are not shared.
Universal has similar characteristics, only with more flexibility on premiums and investment selection, while term to 100 – unlike its name suggests – offers coverage for life, but without an investment aspect.
While there are differences, each has tax and other estate-planning benefits.
“In retirement, life insurance is designed to mitigate taxes at death,” Mr. Diamond says, adding the tax-free death benefit can serve as a gift for beneficiaries, or cover the taxes on assets in the estate.
Despite its potential utility, permanent coverage is underutilized among nearly retired or retired individuals, says Mr. Dewdney. The expense is often a concern.
”A lot of times, people want to cut costs, so they’re looking at premiums and those can be pretty costly,” he says.
While premiums for both term and permanent life insurance increase with age, permanent premiums generally cost significantly more at or near retirement, Mr. Dewdney adds.
Ideally, to save money, permanent life insurance should be purchased when someone is younger, but most people choose the less costly term option to serve their immediate need to replace lost income should they die before retiring. It’s only near or in retirement when the utility of permanent coverage often becomes evident – when premium costs are significantly higher, Mr. Diamond adds.
”You may pay for insurance with money, but you are really buying it with your age and health,” he says.
Retirees with existing term coverage often have the option to convert to a permanent policy “without having to go through the underwriting process again,” says Katrina Lee-Kwen, senior vice-president for non-participating insurance solutions at Canada Life in Winnipeg.
Premiums are still costly, but individuals can tailor a policy to fit their budget with, for example, a benefit of a few thousand dollars for funeral expenses. They can also choose among the different kinds of permanent coverage, which can have differing costs.
Whole life is the most common permanent policy, often with the costliest premiums, but a potentially less costly option is universal insurance, Ms. Lee-Kwen says.
“It has a bit more flexibility in terms of how much money is needed to put into the contract,” she notes, adding that premiums can increase over time to boost its benefit value.
Term to 100 is the least common option, even though it generally has the lowest premiums.
Jim Virtue, chief executive officer of PPI in Calgary, which provides insurance planning support for advisers, says the benefit of term to 100 is that it’s generally paid even if individuals live past age 100.
“But you must keep paying the premium to keep the benefit in place,” he says.
That’s in contrast to whole and universal. After several years of paying premiums, these policies can be paid up, requiring no further premiums. Additionally, these policies invest premiums, leading to an eventual cash value that can be withdrawn by policyholders to fund retirement, Mr. Dewdney says.
Life insurance is “largely a selfless act,” Mr. Dewdney adds. “You’re taking care of others, but with universal and whole, you can flip the script if heirs have enough from the estate. You can pull an income stream from the policy.”
He says strategy likely means paying tax on withdrawals, but retirees can consider alternatives, including borrowing against a policy, getting a tax-free loan with lenders paid back with interest at death.
Considerations are many and generally complex in the context of an overall financial plan, Mr. Virtue adds.
“Do they have a significant estate tax liability upon death of the last surviving spouse to require coverage? Can they afford the premiums? And what policy suits their needs best?”
These questions are all best answered with the help of an adviser, Mr. Virtue says.
“The number one thing for individuals is to work with an insurance professional to ensure they’re getting the right product to meet their needs.”
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