Whole Life Insurance is Excellent Hedge against Stock Markets

September 22nd, 2011 | Author: Mitch Reynolds

Hedge Against Stock Market Risk with Whole Life Insurance

Protect against violent stock market swings with whole life insurance

Whole life insurance - hedge against stock market risk With another bloodletting day on world stock markets I have begun to wonder why the average Canadian doesn’t own and invest more into traditional whole life insurance. Wait stop! What did I say? Invest into whole life insurance? Don’t laugh. You can actually use life insurance as an excellent investment tool. It’s true – I swear!

How, you might wonder, does “investing” into a whole life insurance policy give investors protection from the carnage that is the world stock markets? It is all a matter of diversification into alternative asset classes. Whole life insurance is a solution to many an investors’ economic woes:

Moving money out of risky assets into more secure long term investments
Avoid violent market swings
Bear more fruit than traditional interest rate linked accounts, like GICs

Long term stable returns from whole life insurance

Whole life insurance is one of Canada’s oldest and best performing financial products. This type of life insurance has been in existence in Canada for over 140 years in some form or another. Canadian life insurance companies pride themselves of NEVER missing a dividend payment on their whole life insurance products. Some of the oldest and best performing whole life insurance plans in Canada boast paying out an annualized dividend payment of over 7.5% annually (averaged) for the last 50 years!

So why isn’t whole life insurance more popular in Canada? Well, it actually is. Whole life insurance tends to sell more when stock markets drop and there is economic uncertainty. Since 2008, when the economic crisis started, whole life insurance sales have grown by an average of 11% per year. People are getting the message – this is a great plan!

Whole life insurance - risk protection When the economy is in full growth mode, and everyone is making well over 10% annual growth rates in the stock markets, sales of universal life insurance go up. Universal life has investment accounts linked to market performance (equities). So, universal life policy holders are seeing their life insurance cash values drop, prompting many to move to whole life insurance.

Whole life insurance is not exciting. It is stable with guaranteed cash values. It pays a dividend which takes many years to grow as the dividend is linked to the maturity of the policy. Cash values are small in the early years and take decades to grow to something sizable. And, there are limits on how much you can invest based on the size of the life insurance’s death benefit. But, maybe, investors are looking for something that is a little more boring, slow, steady and stable. I don’t know about you, but I’ve had enough excitement in the stock markets recently to make me think twice about investing more money in that pit.

Tax advantaged status of whole life insurance

In case you were not aware, life insurance policies in Canada have specialized tax status. Whole life insurance has both a cash value and the original death benefit. Upon death, the entire death benefit PLUS all additional insurance added from growth are paid out to beneficiaries tax-free!

There are very few tax exempt products left in Canada. Your home (primary residence) is one of them. Life insurance is another. RRSPs are tax delay, as they are fully taxed as income when drawn out in retirement or at death. You can’t tax deduct the initial premiums for your life insurance, but the death benefit and all cash accumulations and dividends which grow your policy, non-taxable when paid out as a death claim. Only if you cancelled the policy and took out all your cash would you ever experience a taxable gain (and why cancel the policy and lose all the premiums that went towards buying the ultimate death benefit?).

Creating a growing life insurance policy

All whole life insurance policies pay out dividends. These dividends represent the good management of the life insurance company of their whole life insurance fund, as they make more gains than originally expected when the policies were sold to Canadians. Gains come from many sources – wise investment choices, increased longevity of policy holders, the reducing costs of doing business, etc.

One of the most popular ways to use these dividends as they pay out is to buy additional chunks of permanent life insurance, added onto the original whole life insurance policy. The cash value of your policy also goes up as each of these chunks represents a certain cash value too. So, your life insurance grows as your dividends increase, and so does your cash value.

Leveraging whole life insurance for income

One of the most common questions about whole life insurance is how can someone use the cash values of the policy while still alive. Everyone thinks the policy is only for the beneficiaries, and has no value for the owner while alive.

Well, every life insurance company has a loans department where they can grant tax free loans, typically at prime +1%, on the existing whole life insurance policy. It is like a secured loan, as the life insurance company is guaranteed to have the loan repaid ultimately at death when the loan and all accrued interest is paid back to the life insurance company, and the remaining death benefit goes to the beneficiaries.

If planned correctly, this is an excellent way to get tax free income into the hands of policy owners. They don’t have to pay back the loan while alive as the final death benefit will take care of this. The whole life policy is still intact and growing, keeping ahead of the loan and interest accrued (planning prevents over-leveraging the policy).

Leaving a legacy through life insurance

Now, after saving, earning dividends, building cash values, and loaning against your policy for income needs, you can still leave a sizable inheritance to the next generation. Even after repaying the loan and interest to the life insurance company, there is usually a very large death benefit paid out. Remember, the death benefits from life insurance policies in Canada are paid out tax free, and can go directly to named beneficiaries, thus avoiding probate and legal fees.

So, your whole life insurance policy can play the role of estate planning and leave a legacy to the next generation. You should need the ultimate death benefit from the whole life insurance, so the premium going into the policy over time is not lost on a useless death claim being paid out. Luckily most people can benefit from owning life insurance, even later in life. Final expenses, estate taxes and gifts to loved ones are something most aging Canadians would like to take care of.

Lower your risk with whole life insurance – ask us how

At Life Guard Insurance we have many professional life insurance brokers across Canada who are skilled in setting up whole life insurance policies. Please contact us to see how a whole life insurance policy might hedge your risks from the stock market and give you peace of mind.

The article was written by Mitch Reynolds+. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article about using whole life insurance to hedge stock market risks would be very much appreciated.