conversion of term life insurance

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demann
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conversion of term life insurance

Post by demann »

I am 58 year old male working full time, with a wife that works part time and 2 adult children. One child in university, the other now into their career. I could retire now but I still have fun working.
I have had term insurance for many years; now my broker wants me to convert this to permenant insurance. The reasoning is for estate planning, to pay taxes due , also as a tax free investment vehicle.
The perm. insurance is more expensive per year now but should be less than the term insurance later on.

Any advice?
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Re: conversion of term life insurance

Post by ockham »

I take a simple view of insurance: buy term and disability insurance as long as you need them, and then stop. Particular circumstances may justify a departure from this simple view, but those are likely to be few and exceptional. Particularly to be avoided, on this humble view, are insurance products sold as enhancements to an investment strategy.

My views are shaped in part by the experience of my in laws who, in retirement, were sold an insurance product ("universal life") as part of a tax avoidance strategy. The product proved to be both complex and toxic. My in laws failed to ask themselves the basic question: why would a retiree need life insurance?? Had they asked it, they might have avoided being lured into this trap.
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Re: conversion of term life insurance

Post by pmj »

ockham wrote:I take a simple view of insurance: buy term and disability insurance as long as you need them, and then stop.
Completely agree. No mortgage? Kids finished education? Enough assets to provide for spouse? Done.
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OnlyMyOpinion
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Re: conversion of term life insurance

Post by OnlyMyOpinion »

Yes - few and exceptional:
i) Do you have significant extra income going into investments beyond your current registered accounts (RRSP, spousal RSP, TSFA’s) that would benefit from being tax-sheltered (particularly interest-earning investments)?

ii) Do you have assets solely in your name that will carry a significant tax liability upon your death (cottage, other capital assets)?

iii) You presumably had term insurance to provide for your family in the event of your death while they were financially dependent on you. That need may be gone now or in the next few years (over age 70 is typically when term insurance gets quite expensive).
So have your insurance needs now changed (for example i or ii above) such that there is a need for an insurance payout beyond your working years at whatever age you die?

We know why your broker wants to sell you permanent insurance – it is profitable to them. But in the absence of your broker, is it material to you or your family for ‘estate planning’, ‘paying taxes due’, or as a ‘tax-free investment vehicle’ – and at what monthly cost?
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kcowan
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Re: conversion of term life insurance

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demann wrote:I have had term insurance for many years; now my broker wants me to convert this to permanent insurance. The reasoning is for estate planning, to pay taxes due , also as a tax free investment vehicle.
I think you need to go through the thought process. If you die suddenly in 2 years, what unexpected expenses will need to be paid? Does you wife have the financial ability to so that without undue hardship? If so, cancel the insurance. If not, continue the term until she does. At some point, the cost of term will become cost prohibitive. But Permanent Insurance will cost more because of sales commissions and profit

Look for investment vehicles that do not include insurance. They just increase costs. The tax savings are more than offset by increased fees.

(You might also benefit from changing brokers.)
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AltaRed
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Re: conversion of term life insurance

Post by AltaRed »

There are only 3 key instances (post-retirement) I could imagine needing to have a life insurance payout at death:
1) spouse needs the additional cash flow as a result of losing the deceased's OAS and the delta between deceased's pension and survivor benefits
2) a trust to facilitate support of a disabled/dependent spouse/prodigy or other close family member
3) to pay CG taxes on a recreational/investment property left to beneficiaries (though why anyone would dump such albatrosses on to especially multiple beneficiaries defies logic to me).

I see mostly a scheme by the broker to make a windfall on commissions selling an unneeded policy. I actually 'surrendered' a small whole life policy bought by my parents many years ago and dropped my term life at retirement.
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demann
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Re: conversion of term life insurance

Post by demann »

Thank you for all of your advice regarding the conversion of term to perm. insurance. As i understand it now, if I don't need the insurance then I don't need to convert, and I can cancel the policy. But the broker tells me :

that by having the perm. policy I can spend more now and not worry about having to save something to leave to my kids. (death benefit - taxes I owe - premiums I pay ) = what the kids would get , which is what I could spend now and not worry about having to save. I want to leave something to the kids anyway so , Does this make financial sense??

This policy will be held by my operating corporation. I have interest bearing investments held by this corp. The broker tells me that sheltering these from taxes would be a huge benefit. Is there any value to the tax free investment portion of a perm. insurance policy??

thanks for your advice
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AltaRed
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Re: conversion of term life insurance

Post by AltaRed »

Just remember your broker has a huge conflict of interest, i.e. a big fat commission, out of getting you to convert. Also remember insurance is meant to cover unforeseen events that could result in material financial loss (beyond ability/desire to absorb, i.e. self-insure), financial distress for your dependents/loved ones, etc, That is why you buy property insurance on an owned property, and at least public liability and property damage on vehicles. Think about life insurance the same way.

Your decision depends on your personal objectives and motivations should you die. Who stands to benefit from your demise and how much would the payout (or lack of payout) matter in their lives? What if such a payout might matter most in the next 10 years to extend your spouse's financial standing or to kick start an adult child's career or down payment on a house? Would it matter if they got anything 10 years from now? If not, why not just convert to a 10 year term insurance policy that will be way more competitive cost wise?

What if you took the premiums you were going to pay and put that same money in a 'stand alone' investment account and invested that amount each year in a broad market ETF like XWD (the world) or an XIC (Canada only)? That could be your legacy investment for your heirs.

My spouse and I are in our late '60s. Neither one of us have life insurance any more*. Neither of us would face financial hardship if the other dies and our children are all in their '30s or early '40s. They are all established in their careers. They don't need anything more and they are likely to inherit some residual from our estates anyway.

* I dropped mine at 57 when I retired and spouse dropped hers when she retired at 65. We only kept it that long because it was cost effective as group life with our employers.
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Re: conversion of term life insurance

Post by brucecohen »

demann wrote: that by having the perm. policy I can spend more now and not worry about having to save something to leave to my kids. (death benefit - taxes I owe - premiums I pay ) = what the kids would get , which is what I could spend now and not worry about having to save. I want to leave something to the kids anyway so , Does this make financial sense??
Probably not. Do you and your wife own a house? Who will inherit it when you both die? Is there a cottage? Same question. You said you own a company. Are your kids in line for shares in it, either now through an estate freeze or when you die? Do you and spouse have sizeable RRSPs? Who will inherit the after-tax balance when you've both died? Same question for TFSAs. You've already provided both kids with an education and one already has a career underway. Just how much more do you want to leave them?
This policy will be held by my operating corporation. I have interest bearing investments held by this corp. The broker tells me that sheltering these from taxes would be a huge benefit. Is there any value to the tax free investment portion of a perm. insurance policy??
Exactly what constitutes a "huge" benefit? While I haven't looked at any numbers, ISTM the current and foreseeable low interest rate environment might well make this a dubious proposition because the extra costs embedded in the policy no doubt offset much or all of the earnings. Also, at what rate are the earnings inside the company now taxed?

ISTM your broker has a solution looking for a problem. BTW, if you really want insurance to fund bequests to your kids check out the cost of Term to 100.
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adrian2
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Re: conversion of term life insurance

Post by adrian2 »

We converted a 10+10 yr term policy to a term to 100, $150k each DW and myself, about 10 years ago (at mid point in the initial policy).

The annual premium is now fixed at 2.3k, and our life expectancy is about 25 years; it works out to an average compounded interest rate of close to 7% (starting now), or 4% (starting at the conversion), tax free for our kids. The first 10 years were a must in having the insurance, from now onwards it's a choice, but why give up the potential of an extra $300k for the offspring, accumulating via a tax free 7% per annum?
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