Canadian Whole Life Insurance Question - Canada
- Posted Thu, Apr 12th, 2007 by Monty Loree Post a reply

Next question - What would be more useful to an 80 year old? A largepile of investments or an insurance policy? I know I'd rather havethe cash. He'd have to die to make use of the Whole Life insurance,or surrender it early.

The Life Insurance contract is NOT designed for the INSUREDbut rather for the beneficiaries. The INCOME TAX FREEbenefit of a Life Insurance Policy just might turn out to be morevaluable than that "pile of investments"....

Case A: I have $1,000,000 cash.Case B: I have a Whole Life insurance policy, no cash.

If you're 90 years old and hungry, guess which you'd rather have?Unless you can sell your future death benefit to somebody for amillion bucks, the cash! The security of your beneficiary when youdie at 99 won't pay the rent today now will it?

Some of those 90 yr. old's just might have a Federal EstateTax problem though.

I can't really speak for US taxes, but in Canada I've looked every wayfrom Sunday how to use insurance to beat taxes, and it just doesn'twork. Certainly the death benefit is tax free, but the premiums arepaid with after tax dollars. That means the insurance is essentiallytaxed at the beginning instead of the end. The only way for it towork is for one to outsmart the insurance company actuaries whopredict the cost of insuring you (not bloody likely) or (this onedoesn't appeal to me) die quite prematurely.

But how about the investment portion of Whole Life then? It can't beused to beat the taxman either. I asked Revenue Canada differentscenarios of how insurance can be used to avoid tax. Unfortunatelythey are not stupid. They have a formula that works out any gains ina whole life policy and assesses you tax on those.

In a universal life policy they have worked out sort of a movingcomputed balance line between the insurance component and theinvestment part of a universal life contract and it is watched veryclosely. If your investment portion grows, you must buy more and moreof the insurance component to offset it or else pay tax. So when Iturn 70 and have absolutely no need for life insurance, I have twooptions: - tax the investment out and cough up some heavy taxes - buy more insurance (that I don't need and is very costly)

Maybe in the US there are more favorable tax provisions than here,dunno. Here we have quite favorable tax benefits for retirementinvestments, not for insurance. That could explain our differentframes of reference.

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