Life Insurance

Whole Life: A Whole New Investment Class

 

The recent developments in investment markets and the poor performance that has resulted have brought about a new appeal to an old workhorse.  For investors looking for a diversification in their investment portfolio and a more tax efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.

 

Whole Life is a permanent insurance contract with level lifetime guaranteed premiums and tax advantaged cash value growth.  If the contract also pays the policyholder annual dividends the Whole Life contract is referred to as participating.  These dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax advantaged growth is “paid-up additions”.  Paid up additions are blocks of single premium life insurance which also pay an annual dividend so these blocks contribute to the building of both significant cash value and estate value (death benefit).  In a participating policy all policy owner premiums are pooled under a “participating account”.  From this pool certain expenses and taxes are deducted along with death benefits paid to beneficiaries.  In addition to the annual premiums of policyholders, investment gains and other income (such as policy loan interest) are credited to the participating pool.  The assets of the participating pool are professionally managed and largely in fixed income investments.  Management fees are extremely low (one company charges 0.072% management fee) and the funds have very little volatility.  This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred and, if paid to the beneficiary as a consequence of death, tax-free. 

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The Stability of the Life Insurance Industry in Canada

Given the problems encountered by some large financial institutions in the United States, how concerned should we be about the state of the life insurance industry in Canada? It is a fact that over the past decade the number of life insurance companies operating in Canada has decreased dramatically. This decrease is mainly due to the mergers and acquisitions of the existing companies. For example, those individuals who maintained policies issued by Maritime Life, Commercial Union, North American Life, or Aetna Life, now find themselves insured by Manulife Financial. Today, insurance is one of the most closely regulated industries in Canada. Unlike the United States, in Canada, there is a government organization that supervises all of the federally incorporated and foreign insurers to ensure that these companies operate in a prudent manner. This organization is the Office of the Superintendent of Financial Institutions (OSFI). For those companies that are provincially chartered their oversight is provided by the province in which they do business. The major life insurance companies are federally regulated by OSFI.

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Five Financial Products You Should Own

By Brenda Spiering, Editor, BrighterLife.ca

You don’t need to be born with a silver spoon in your mouth to build wealth. With the right products, you can grow and protect a healthy nest egg.

Here are five key financial products that should be part of your plan:

1. Registered Retirement Savings Plan (RRSP)
As soon as you begin your working life, you should have a registered retirement savings plan (RRSP). It’s one of the most tax effective ways to save for retirement. You’re allowed to contribute up to 18% of your earned income from the previous year to a maximum of $22,450 for 2011. (If you’re a member of a group pension plan, your contribution room is reduced by your “pension adjustment,” an amount you’ll find listed on your T4.)

Contributions are tax deductible, meaning you can net a tidy tax refund while building your savings. Plus, you can turbo charge your RRSP savings by putting that tax refund back into your RRSP as soon as you receive your cheque.

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Protect Your Children’s Standard of Living

Raising a family means taking on a lot of responsibility.  You need to think about protecting your financial futures as well as those of your children. That means insuring your lives, protecting your income and covering your debt so that your children can continue the standard of living that you have established for them.
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