I had someone reach out to me wondering what the monthly cost is for Permanent Life Insurance for a healthy 35-year-old. They were thinking they preferred Permanent Insurance as opposed to Term.
There are so many options when it comes to Permanent Life Insurance, and the cost can change substantially.
- There is Term 100, Universal Life and Whole Life.
- There are limited pay options, where you can pay for only 10 or 20 years and the policy will then be paid up forever.
- There are guarantees; some policies have guarantees and others do not.
- Some policies have a cost structure that remains level, others have a cost structure where the internal pricing increases each year, which may force you to increase how much you deposit into the plan.
- There is also the option to overfund certain policies, allowing you to deposit additional money into the policy, over and above the actual cost of insurance.
A question to ask yourself is: What are you hoping to accomplish with such product/investment?
The main purpose of the coverage should be for the death benefit itself. The investment component can be beneficial for some. However, this typically is best after you have already maxed out your TFSA and RRSP contributions and are looking for additional tax-deferred growth on your investments.
Do you have a significant amount of corporate surplus, invested in non-registered investments that you are paying tax on? That may be another opportunity to integrate permanent life insurance into your planning, especially if you are planning to leave that wealth behind to your children or charity. Insurance can help move money out of your corporation on a tax-free basis upon death, allowing you to pay less tax and leave more behind to your loved ones.
I would be cautious of any advisor trying to sell you such products as your primary investment vehicle since things can get ugly very quick. There are tax considerations, such as tax on the withdrawal. Sure, you can get a 3rd party loan and use your policy as collateral to access money on a tax-free basis, however you will need to pay interest on that loan and there is obviously risk to any type of leveraged strategy.
To answer the initial question, there isn’t an average cost. The individual who should be purchasing this coverage would be doing so from surplus income or surplus assets (moving money from their non-reg investments into an insurance policy as an example). In my opinion, it’s not about the “cost”, it’s more about the tax-savings on transferring wealth and funding tax liabilities upon death.
To give you an idea on the pricing . . .
- A $250,000 T100, with guarantees could cost around $2,000 per year – payable for life.
- A $250,000 Guaranteed 20 Pay Universal Life would cost around $4,000 per year – however that’s not factoring in additional contributions towards the investment. That amount is over and above the cost of insurance and you can choose how much you want to deposit (up to a certain maximum based on tax rules). If you don’t overfund, the coverage remains relatively the same and doesn’t increase much over time.
- A Guaranteed 20 Pay Whole Life with maximum deposit option would cost $13,000 per year. This policy is designed where the death benefit will increase each year.
All three policies are $250,000 Permanent policies, however the cost varies significantly as the internal structure of the product is different. The best product will be determined based on what your goals are and what you are hoping to accomplish with the product.
Then there are products that are less expensive, that don’t have guarantees. This means that if the market doesn’t perform as illustrated, you will need to dump in a substantial amount of money into the policy or simply let it lapse (and you don’t get anything back from what you put in).
If you are hoping to access the cash value, one product may be better than the other as well. For example, lenders are more liberal with their lending on Whole Life given the guarantees (the cash value is guaranteed never to decrease). This means that you may be able to get a loan for up to 90% of the cash value if needed. Whereas, Universal Life is invested in the markets (typically), which can fluctuate in value. This means lenders may only let you borrow up to 50%, and that will depend on your creditworthiness. Yes, you can elect to transfer the investment into guaranteed funds to obtain a higher loan, however the guaranteed funds may not be very attractive as an investment.
Keep in mind, $250,000 of coverage will very likely not be enough for your family if something happened today. And how much will $250,000 actually be worth in 50+ years? You need to factor in inflation. We know that $250,000 in 1975 had much more purchasing power than it does today.
Lastly, Term Insurance is inexpensive . . . $1MM of Term 20 would cost $600 per year. This is $1,400 lower than the T100. If you invested $1,400 annually in your TFSA, how much would that be worth at life expectancy? Well, at 6% it would be worth $430,858 at Age 85 . . . which is much better than the $250,000. This is why Buy Term and Invest is a very smart strategy for most.
This type of insurance becomes attractive when you are moving your investments from a taxable environment (non-registered investments) as the tax will erode the value of your investment for your loved ones.