Be very careful when it comes to buying life insurance as an investment . . . if it looks too good to be true, it likely is!
A broker can make a policy illustration look really good, potentially better than what you should actually expect. Unfortunately, based on this article, (Ontario’s insurance regulator orders Greatway Financial to overhaul training of advisers – The Globe and Mail) it seems that some advisors were being trained to sell this way and may not even realize the implications themselves. Here are some things you should know/understand before committing to an overfunded Universal Life Policy, often known as an Insured Retirement Plan.
Rate of Return:
Did they disclose that this illustrated rate is NET of fees? We have often seen an advisor show their clients the highest rate of return the software allows, which means it’s the most aggressive assumption. You need to understand the fees and what happens to your policy if it doesn’t perform as illustrated. Ask for an illustration using a lower expected rate of return and compare those numbers, you may be very surprised how much of a difference this can make.
Cost of Insurance:
Many times, these policies have a “Yearly Renewable Term” cost structure. This means that the actual cost of coverage increases each year, which can cause significant concerns in the future. Ask to see the actual cost of insurance in the later years, you may be very surprised on how high that cost will be. What happens if your funds didn’t perform as illustrated or you took money out? Well, you may be asked to pay more money to keep the coverage or you will lose the policy due to non-payment.
Surrender Charges:
If you decided that this was a mistake and wanted to cancel the coverage sometime in the first several years, will you be able to get your money back out or would you lose it due to the surrender charges? Many times, the investment account will drop to $0 due to surrender charges if you had a change in plans early on.
To access your cash on a tax-free basis you will typically need to set up a 3rd party loan, using your policy as collateral. Are you comfortable with having debt? Are you comfortable paying the interest on that debt? If you withdrew the investments, are you aware of the tax implications?
However, Cash Value Life Insurance is great for those who are high income and already maxing out their TFSA/RRSP’s. They are looking for additional tax-deferral growth and/or have estate tax liabilities. This can help them transfer wealth from one generation to another in a very tax-efficient manner by shifting their taxable investments into a sheltered account. They may want to look at a contract that provides certain guarantees to prevent any unpleasant surprises in the future.