Estate Planning & Life Insurance

[Norbert Schlenker]

Insurance is a just a tool, it has its uses but it's certainly not a panacea and it's definitely not an estate plan.

Maybe Beav and Norbert would both agree that this is a fair statement and we can drop it?

Can't speak for the Beav. I'll agree.

[adrian2]

Insurance is a just a tool, it has its uses but it's certainly not a panacea and it's definitely not an estate plan.

Maybe Beav and Norbert would both agree that this is a fair statement and we can drop it?

Don't think Beav will agree. His position is that life insurance is needed by 95%+ of the population at all times.

My position (and I suspect Norbert's too) is that life insurance may be needed in some cases until death, but it's not the be-all and end-all for everybody. In most cases life insurance is not an efficient tool for estate planning and most Canadians do not need life insurance until the day they die.

[beaverlodge]

From Fee Only

Specifically, establishing a Family Trust in conjunction with an Estate Freeze is a very common and tax-efficient example of an "actual" inter-generational estate planning strategy. It is also an estate planning strategy that requires no insurance products what-so-ever.

There are many other estate planning strategies that use various Trust formats to transfer wealth tax-efficiently from generation to generation. None of these strategies require that you use insurance products for them to be effective or tax efficient.

Wrong and you are fee for service?
Maybe disservice?
Get back to your books or talk to your managers.

[beaverlodge]

Can't speak for the Beav. I'll agree.

And the other satisfactory alternatives are..........................not forthcoming?

I push nothing.

From Adrian:

My position (and I suspect Norbert's too) is that life insurance may be needed in some cases until death, but it's not the be-all and end-all for everybody. In most cases life insurance is not an efficient tool for estate planning and most Canadians do not need life insurance until the day they die.

Of course it is needed until death. That is what it is for.
Of course it is not the be all and end all for everybody. It sure works.
Not an efficient tool in most cases? It just the reverse.
Don't need life insurance until the day they die? That is why they get it. It fills the need for that event.

[adrian2]

From Adrian:

My position (and I suspect Norbert's too) is that life insurance may be needed in some cases until death, but it's not the be-all and end-all for everybody. In most cases life insurance is not an efficient tool for estate planning and most Canadians do not need life insurance until the day they die.

Of course it is needed until death. That is what it is for.

No it's not. In most cases, life insurance is needed if you have dependents who will not be able to maintain their standard of living should you die prematurely. Most people do not die prematurely. At the time of their death, most people do not have dependents.

Of course it is not the be all and end all for everybody. It sure works.

Of course it works in some cases. But is it needed for 95%+ of Canadians until they die? Aren't they better, on average, keeping the premiums for themselves?

Not an efficient tool in most cases? It just the reverse.

Proof, please. Compare tax efficient investing of insurance premiums with the case of using insurance.

Don't need life insurance until the day they die? That is why they get it. It fills the need for that event.

An intelligent person gets life insurance for the reasons I've written above. In most cases, past a certain age (50? 60?) there is no need for life insurance. Most estates do not need life insurance and the deceased would have been better investing the premiums. How hard is it to understand that there are two parties in an insurance contract, you and the company. You are basically hedging your risk. It's not possible for both to win. Yes, risk mitigation is a valuable goal and by pooling various contracts the company is able to offer you this, but on average policy holders are financing the insurance companies' profits, and not the other way around.

[Rip]

And many of you are confirming what most professionals in the business think of DIYers.

I'm not actually a DIYer in case you were refering to me. But in this case I agree with them that this "just trust me" thing that Beav is using is really a little much.

I happen to believe in life insurance. Just not the typical 50k whole life with 150k term rider crap that London Life uses to underinsure just about every young family that they can get their mitts on.

I carry a 500k R&C 10 year term policy the purpose of which is to create/supplement my estate (to provide for my family) should I die prematurely. As soon as I don't need the coverage (because my estate is large enough on it's own) I will cancel it in the same way that I canceled my boat insurance when I no longer had need for it.

My experience with most agents is that they view virtually all Canadians as needing some permanent coverage. I'm guessing that about 5% of Canadians are well served by permanent coverage (for estate planning reasons) but the rest would be better off carrying adequate amounts of lower cost term coverage.

[jiHymas]

That jogs my memory. I think the back-to-back needs non-registered funds for tax arbitrage on a prescribed annuity. IIRC, somebody linked a paper by Milevsky.

Correct

How nice. One word, a link, no hand-waving, no bullshit. Sometimes, not always but sometimes, it's very easy to tell the knowledgable from the ... er ... not so knowledgable.

I've just finished reading the paper - very interesting indeed. It seems that yes, there is [or was in 1999 when the paper was written] a good opportunity to squeeze anywhere between basically 0 [50-year-old, tax rate 25%] to 450bp [80-year-old, tax rate 50%] on an investment in such a product combination relative to a corporate bond with a term equal to the investor's estimated term (more, of course, relative to a bank deposit, which they do most of their benchmarking against).

All tax driven. It depends entirely on Canadian tax rules regarding distribution of expected mortality (far more spread out than what the insurance companies use) and the value of the expected mortality (the CCRA uses [used?] tables prepared in 1971 ... insurance companies are a bit more up to date). It is indeed nice to know that the life insurance industry is getting something for its political contributions beyond simple protection from the banks.

Mind you, I am a little bit skeptical of the authors' use of the term "arbitrage" to describe this strategy. As they say (Section 3.5)

Note also that this tax arbitrage exists only in an "expected" sense. It is possible that a posteriori, a mortality swap turns out to be worse than a bank deposit. This will happen if a dramatic rise in interest rates occurs shortly after the swap was constructed.

Even if the 'fairest' comparator is used to benchmark this strategy, a corporate bond maturing in the expected year of death, there is still significant interest rate risk if the annuitant should exceed his life expectancy in a time of higher interest rates. Better if rates are lower, of course, but it makes the hedge less perfect.

The authors point out that if tax rules become more reflective of reality and existing investments are not grandfathered, you've got some problems. So there's a certain amount of political risk.

Another risk not priced in by the authors is liquidity risk. Once you're in the strategy, you're IN ... you can't sell it off as easily as a corporate bond. The term of the strategy is, as far as the investor is concerned, infinite.

And as well, the numerical calculations performed in the article assume that the annuitant/insured will get the lowest rate possible on the insurance part ... pass the medical exam or forget it!

And ... oh yeah ... the funds have to be after tax. Doing this out of RRSP funds means everything's taxed and you don't get the benefit of the funny tax treatment.

Anyway, Adrian2, thanks again. Nice to find one nugget of information amidst 80 posts.

[beaverlodge]

Anyway, Adrian2, thanks again. Nice to find one nugget of information amidst 80 posts.

And it took 33 pages.
That makes my point.
There are plenty of cases out there that show the effective use of life insurance without misinformation around the elements that exist in the product.

[novice]

Steves, you are right, the bar is not that high in the Mr. & Mrs. Able example. Their current investment strategy is apparently very estate friendly. I mistakenly plugged the gross income figure into the net income box of the Monte Carlo calculator. When I repeated this particular Monte Carlo run with this correction it produced an average final balance at age 90 of $1,073,964 (today's dollars). This is close to your figure, but it does not include the real estate. Either way it seems we don't need to worry about insurance/annuity mortality swaps for this couple! Actually I was a bit surprised by this outcome... I thought a 60K aftertax income would impose a much bigger drag on their portfolio.

Perhaps I should order your software... is it guaranteed to protect the user against brain farts and senior moments?????????????

N

[steves]

The program doesn't jump up and sit in your lap, but with a bit of persistence, most DIY-ers seem to get good results. As for the insurance vs not debate, my take is that the laws of compound interest, taxation, inflation etc apply to the insurance guys in the same way they apply to the non-insurance guys.

Most of the hooks and handles are in place to enable you to model (even montecarlo) some fairly sophisticated/intricate planning scenarios.

Most professionals can only spare a limited amount of time to model this stuff on your behalf. You, on the other hand, can 'what-if' to your heart's content.

[adrian2]

Anyway, Adrian2, thanks again. Nice to find one nugget of information amidst 80 posts.

You're welcome. I can assure you I'm finding plenty of nuggets in your posts, for which I'm thankful, too.

Moshe Milevsky is one of the top profs at Schulich School of Business. I've enjoyed two of his books, Insurance Logic and Money Logic. The back-to-back annuities example was in the former, I believe.

[Shakespeare]

The back-to-back annuities example was in the former, I believe.

That book I didn't read, since I had already concluded I didn't need insurance.

But I knew there were certain circumstances in which a back-to-back worked.

[kcowan]

As I mentioned in another thread, I am posting the details of my current life insurance coverage here for advice as to what I should do now that I am:
a) More experienced as an investor, and
b) Able to access FWF on a regular basis (retired).

Subject: Whole Life Participating Policy
In May 1985, I decided to increase my life insurance coverage. I chose an $80,000 policy that required $73.20 monthly for 8 years, then $68.89 monthly. It was chosen because, along with term insurance, it would pay off the mortgage. Cash value was $22,157 last May and will likely be $24,000 this May.

So I have paid a total of $17,774 so far to have $80,000 in insurance for 21 years and I can borrow on collateral of $24,000.

Any suggestions? Thanks.

[kcowan]

In addition to the above $80,000, I have $25,000 from a company benefit (which drops to $12,500 at age 65) and $25,000 of straight term to age 75 from the Canadian Council of Professional Engineers for level $134.40/yr.

Any thoughts on these expenditures? Thanks.

[boib22]

Any thoughts on these expenditures? Thanks.

You asked for thoughts here goes

Who is the life insurance for?

Sounds to me like you have too many wives.

Who benifits when you go? From the little you have told us about your lifestyle, your life insurance sounds like it would cover about a years living expences once they dispose of the body. Funerals can be expensive.

As an investment I'd say with your experience you can find a better one.

I had a lot(Thru the company) while I was working but now that I'm retired, got things paid for, my pension goes to the wife and all investments are in joint accounts I only carry enough to have a decent wake.

The amount you can borrow is limited to cash surrender value. And you do pay interest, you might even get a better rate at your bank. I don’t know.

Anything someone is selling you, they are taking a cut so your returns might be diminished.

[kcowan]

Good food for thought Bob. Thanks.

As far as number of wives, just one too many!

All proceeds go to my current wife and avoid probate.

I will run some numbers and post for your feedback.

[Bylo Selhi]

Insurance on your terms

For many years, his annual premium with a major life insurance company was $2,000 for $750,000 coverage on a 10-year term-insurance policy. His coverage likely wouldn't have changed if it weren't for a broker from Term Canada in Burlington, Ont., who five years ago offered him $1.5-million coverage for the same premium. Term life insurance, generally available for periods of five, 10 or 15 years, pays out coverage if the insured dies during that period. It is a $13-billion market in Canada, and represents about 70% of life insurance policies sold.

But unbeknownst to many customers, the cost of term life insurance is plummeting. Several American insurance companies, such as CNA Life, began offering life insurance in Canada about five years ago, triggering a price war. Chris Funnel, principal owner of Term Canada, says rates dropped about 40% on average.

So, why do people cling to pricier policies they purchased years ago? "Your broker isn't going to call you up and tell you about a lower rate, so many people continue paying their coverage at the same premium rates. And life insurance is still somewhat of a taboo subject, so word doesn't spread," says Mr. Funnell.

However, keep in mind this caveat from another thread:

Make sure you qualify medically for the new insurance before you cancel the old policy.

[sydney2]

A question: If someone cashes in a paid up life policy are the proceeds taxable.

[sydney2]

More info. The policy was taken out by a Mother on her Daughter, the Mother has been gone for years, so paid up value is sitting doing nothing and as the policy now belongs to the Daughter and her Husband the beneficiary feels they should cash it in. I don't know the value. But they have held back because they think they will have to pay tax on the total amount.

[SLeazebag]

More info. The policy was taken out by a Mother on her Daughter, the Mother has been gone for years, so paid up value is sitting doing nothing and as the policy now belongs to the Daughter and her Husband the beneficiary feels they should cash it in. I don't know the value. But they have held back because they think they will have to pay tax on the total amount.

The paid-up value might be static but the policy's cash surrender value (CSV) would still be increasing. If the policy is cashed in, the taxable gain would be the excess of the proceeds (the CSV realized) over the policy's adjusted cost base (ACB). While the determination of the policy's ACB can be quite complicated, in the simplist case, the ACB is basically the total premiums paid into the policy to date minus the total of the net costs of pure insurance (NCPI) provided by the insurer to date. Over a long period of time, the NCPI could eventually grind the ACB to zero. In that case, the full amount of the proceeds would be taxable.

Generally only the insurer can determine a policy's ACB due to the necessary NCPI calculations. The Daughter could always contact the insurer and ask for a quote on what the taxable gain would be if the policy were to be surrendered for its current CSV.

[kcowan]

Generally only the insurer can determine a policy's ACB due to the necessary NCPI calculations. The Daughter could always contact the insurer and ask for a quote on what the taxable gain would be if the policy were to be surrendered for its current CSV.

Would the insurer have to report to CSV to CRA when it is cashed in?

[yielder]

Generally only the insurer can determine a policy's ACB due to the necessary NCPI calculations. The Daughter could always contact the insurer and ask for a quote on what the taxable gain would be if the policy were to be surrendered for its current CSV.

Would the insurer have to report to CSV to CRA when it is cashed in?

Yep, you get a T slip.

[iluvnascar]

My preference would always be to leave it unless the money is really needed.

If the money is really needed......it might be worthwhile to look at a partial withdrawal structured to utilize the lowest tax bracket for the individual receiving the money........or, if lifetime RRSP contribution room is available, look at contributing some of the proceeds to earn the tax refund.......or look at other tax avoidance possibilities (consult a tax advisor).