“What’s your greatest asset?” When an advisor talks to you about insurance, they’ll likely start with that seemingly simple question. In response, Clients often talk about their homes or their investment portfolios. But advisors are looking for a different response and that’s: your income.
“The reality is, your greatest asset is your ability to earn an income,” says advisor Simon Tanner of Dynamic Planning Partners. “When you’re looking at insurance, what you need to protect is that asset.”
Why do you need insurance?
Insurance is an important tool that can help protect and build what you’ve worked for.
For many, the challenge is figuring out what types of insurance to buy.
Some Canadians, especially those with high net worth, don’t think they need additional insurance. Not until they understand the benefits like efficient tax planning and easy asset transfer to their estate.
“Insurance isn’t designed to be an investment. But it’s often applauded as one,” says Mark Arruda, Assistant Vice-President of Insurance Product Management at Sun Life.
There are three key areas of insurance to consider for both protecting and building your wealth:
How can life insurance help build and protect your wealth?
When it comes to both protecting and building your wealth with life insurance, you have a few options.
Permanent insurance, as the name suggests, is for a lifetime. In addition to providing a death benefit,* permanent insurance can be used for tax planning. Or, to clear up any remaining liabilities at death, says Arruda. “As long as you pay your premium, that death benefit is in force until you die,” he says.
Universal life insurance provides an all-in-one way to get both:
- the protection you need with permanent life insurance protection – for lifelong peace of mind, and
- the ability to build your savings, with investment account options – for tax-preferred savings growth.*
Participating life insurance provides a combination of permanent life insurance protection and the opportunity for tax-preferred cash value growth. You may also receive dividend payments* which you can use in a few ways:
- To buy more coverage.
- Reduce your annual premium.*
- Let the dividends earn interest.
- Take them in cash.
How can health insurance help protect your wealth?
It’s important to consider your health care needs in an overall plan. Arruda recommends not waiting until retirement to consider how you’ll pay for the rising costs of health care. That way, you have options if you develop a chronic health condition.
Health insurance, sometimes called living benefits because they provide benefits while you’re living, includes 3 distinct types:
- Disability insurance. This covers you if an illness or injury leaves you unable to work. It replaces a portion of your lost income while you recover.
- Critical illness insurance. This covers a range of illnesses, depending on the policy, such as cancer, heart attack or stroke. You can receive a lump-sum payment that can give you more financial flexibility so you can focus on recovery.
- Long-term care insurance. This coverage is particularly helpful later in life when you may become dependent on others for care. You can use the regular benefit payments to pay for care in your home or a care facility of your choice.
Read more: Do you need critical illness insurance?
Arruda also recommends buying insurance coverage beyond what you may have from your employer. This will help reduce the risk of not having enough or losing coverage.
There’s a big risk in relying on your employer-provided benefits. “What happens if you no longer work for that employer? Those benefits disappear,” he says.
This is particularly important since we tend to change jobs more often today than in the past. When you change jobs, you may go to an employer providing less coverage or decide to become self-employed.
At that point, “you might be at an age where it becomes more difficult to get the coverage that you need,” Arruda says.
How can insured investments help build your wealth?
When it comes to your investments, insurance companies can offer different types of insured investments that have unique features. All insured investments have certain traits in common because they’re insurance contracts, allowing you to:
- bypass probate through named beneficiaries,
- have potential creditor protection, and
- get protection under Assuris (visit assuris.ca for details).
There are three main insured investment products to consider:
Insurance GICs, also known as accumulation annuities, are like GICs issued by banks, but offer different benefits:
- They may appeal to risk averse investors with a guaranteed rate of return that isn’t exposed to market fluctuations.
- Flexible terms with maturities that can be aligned with various life stages and important purchases.
Payout annuities can be a popular home for RRSP funds when you reach your 71st birthday. (You must convert your registered savings into some form of income by the end of the year you turn age 71). Payout annuities offer many benefits, including:
- Income that can increase each year to help offset inflation.
- Preferential tax treatment for non-registered funds.
- Guaranteed income, ideal for covering day-to-day expenses and that is protected from potentially volatile markets.
- A choice of receiving income over a set period or for life.
Segregated fund products have some similarities to mutual funds, including the potential for growth with exposure to different asset classes. But they also provide the benefits of an insurance contract.
Segregated fund contracts offer maturity and death benefit guarantees. Either of these guarantees may be 75 or 100% of the deposits made or the market value in the investment – whichever is greater.
Arruda says these products are a good choice if you’re concerned about needing:
- flexibility, and
- guaranteed income.
“Like many insurance products, segregated fund products can help you protect the assets you have worked so hard for,” he says.
Some have criticized segregated funds in the past for having high fees. However, they’re more competitive today. “I think the insurance industry has done a great job of bringing those costs down,” says Tanner. “[For investors] it might be worth it to bypass probate, and the costs associated with it, or to have the peace of mind of the guarantees.”
How can you decide which insurance products and insured investments are right for you?
Tanner says it’s an advisor’s role to educate clients about:
- what insurance products are available and
- which ones best suit their personal and investment goals.
“I believe insurance is a values-based proposition,” he says. “What are your personal values? What do you want this money to do? How do you want to distribute it to charities or to the next generation?”
He says when you’re buying insurance, you need to figure out three things:
- The right type of insurance to buy.
- Over what period you want protection.
- How much you’re willing to pay for it.
“I have never delivered a claim cheque where someone asked what type of insurance it was,” Tanner says. “The questions at the time of death, illness or disability are: Is this enough money? Did we have enough coverage? Is my family going to be okay?”
Ultimately, he adds, you need to figure out your priorities. That way “you’ll have a good idea of the type of insurance that fits your needs.”
Insuring your life and a portion of your investments is one of the wisest and most unselfish moves you can make. For help understanding all the implications when considering your options, talk to an advisor.
*Definition of terms:
A death benefit is the money an insurance company pays your beneficiaries when you die.
Premiums are the annual or monthly fees you pay for having insurance. Most permanent products come with premiums that stay the same, guaranteed. But please note that some permanent products are adjustable. That means their premiums may change over time.
Dividends aren’t guaranteed. They may be credited to policies when the experience in the Sun Life Participating Account is better than the assumptions we made for factors like: investment returns, death benefits and expenses to support the guaranteed values in policies. If the Board of Directors determines there’s a surplus, a portion of this may be credited to policies in the form of policy owner dividends.
Tax-preferred means that any growth within the policy is tax-free. You may be taxed if you cancel your policy, borrow from your policy over a certain amount, or cancel part of your coverage.
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.