Can Life Insurance Also Be
An Attractive Fixed Income Investment?
Posted on April 14th, 2021 by Don Anderson
An Attractive Fixed Income Investment?
Posted on April 14th, 2021 by Don Anderson
Question Posed By A Financial Advisor:
|
As she looks towards retirement, my client Lindsay has a significant investment portfolio with her husband that has been allocated 60% to stocks and 40% to fixed income. Their financial needs are being met now and for the future. Lindsay is wondering if she can use part of her fixed income allocation on life insurance in order to have an alternative fixed income product with added benefits like insurance.
|
|
Lindsay is now 57 years old and married. She has a convertible, term life insurance policy with a $2 million death benefit which became very important recently as she went through and survived a major health challenge.
I have been trying to understand if their overall financial picture could be improved by shifting a portion of their 40% fixed income position into a permanent life insurance policy, as you and I have discussed before. You mentioned something about the slow-but-sure growth of the insurance policy value giving a reasonable rate of return plus she could gain a significant boost to her legacy and charitable plans through the life insurance add-on.
Perhaps I could ask you for some further explanation and guidance?
Jennifer
Investment Advisor
==================
I have been trying to understand if their overall financial picture could be improved by shifting a portion of their 40% fixed income position into a permanent life insurance policy, as you and I have discussed before. You mentioned something about the slow-but-sure growth of the insurance policy value giving a reasonable rate of return plus she could gain a significant boost to her legacy and charitable plans through the life insurance add-on.
Perhaps I could ask you for some further explanation and guidance?
Jennifer
Investment Advisor
==================
Answer from Legato
First off, congratulations to Lindsay on overcoming her major health issue. That must be a big relief to her husband and close family members.
Secondly, yes. It’s very likely that her financial strategy could be improved by including a Legato3 (PAR) plan. This permanent life insurance plan combines a tax-exempt, conservative investment like an unlimited TFSA that grows steadily in value throughout her lifetime with an extra bonus added when the insurance policy eventually pays out to the beneficiary upon her passing.
Across Canada, life insurance is generally “bought” to protect dependents and partners. It’s main goal being to replace the income of the person being insured so that their survivors have immediate money on which to live, buy food, pay rent or a mortgage, cover tuition and so on. Yet, there is so much more available. By learning more about the investment, tax-minimization, and legacy potential of life insurance, most people in their 50s and 60s could strongly enhance their financial future.
In this case, Lindsay has the option to convert some or all of that term life insurance coverage she has into a new Legato3 policy. The true benefit of the “conversion” option of a term policy is that the new insurance would be priced without any impact or consideration of her battle with that major health issue i.e. at her original health rating.
Converting life insurance from one type to another is typically achieved with the submission of a single form to request the change. By contrast, the process of obtaining new coverage typically takes 5-10 hours of time to consider the options, make a decision, and complete the application review. Healthy applicants under the age of 60 are often not required to have a visit from the nurse for samples or obtain a medical report from their doctor, which can take weeks or even months.
It’s important also to note that the policy conversion comes with considerable flexibility for the policy owner. The decision with respect to the premium amounts and payment durations of X can be made to suit their financial planning, retirement dreams, and legacy goals. Over time, the cash value can be used as collateral for retirement or an investment loan as well, or it can be left in the policy to buy more coverage and increase the death benefit to keep up with or ahead of inflation, automatically. The policy generally becomes fully paid up and self-sustaining after ten annual premium deposits have been transferred, but that time line can be customized, too.
Another point to consider on the Legato3 side. This policy type also gives the investor a chance to pool their money with some of Canada's oldest, most profitable companies: Manulife, Canada Life, and Sun Life. As such, the yield of the investment inside a Legato3 policy comes from their pool of investments made by the selected life insurance carrier for their PAR policies that includes real estate investments, mortgage investments and corporate bonds. In 2021, this yield currently runs at 5-6%, paid annually. This setup frees Lindsay and you from having to make decisions related to the investment side of her Legato3 policy, though she’ll still need to manage the remaining fixed income investments and stock portfolio with your guidance.
If Lindsay decides to increase the amount of her Legato3 life insurance premiums for the first ten years to prepay the policy for life, she’ll be spending more than currently allocated to her term insurance. If the stock markets stop their bull run during this same time, then the combination of higher withdrawals to pay the premiums plus the declining stock valuations could drastically diminish her portfolio. That being said, the value of her Legato3 policy would have slowly but surely been growing over this period of time, providing some stability to her portfolio and perhaps collateral for an emergency situation or retirement loan.
To earn a higher return for the portfolio, Lindsay could increase her exposure to risk assets like stocks and reduce her exposure to lower-yielding bonds. However, if her asset allocation moves higher to 80% or 100% stocks instead of 60%, she’ll have increased risk and volatility as a result. She may not be comfortable with the more extreme ups and downs of her investments in a more aggressive portfolio, so knowing that she has added a life insurance policy with a guaranteed, slowly growing cash value due to the annual policy yield of 5-6% could be quite comforting, in balance.
While waiting a few years before making this decision remains an option, on the understanding that the conversion terms of her policy allow that delay, the premium costs will increase each year as they are defined by her age when she triggers the policy conversion. Waiting months or years can increase the premium costs substantially compared to today’s prices as she heads into her 60s. .
The addition of a Legato3 “forever life insurance” plan could create higher performance for her fixed income investments while leaving a better situation for her husband, should he survive her. Lindsay’s health seems to be stable now. I hope she’ll enjoy a long life.
First off, congratulations to Lindsay on overcoming her major health issue. That must be a big relief to her husband and close family members.
Secondly, yes. It’s very likely that her financial strategy could be improved by including a Legato3 (PAR) plan. This permanent life insurance plan combines a tax-exempt, conservative investment like an unlimited TFSA that grows steadily in value throughout her lifetime with an extra bonus added when the insurance policy eventually pays out to the beneficiary upon her passing.
Across Canada, life insurance is generally “bought” to protect dependents and partners. It’s main goal being to replace the income of the person being insured so that their survivors have immediate money on which to live, buy food, pay rent or a mortgage, cover tuition and so on. Yet, there is so much more available. By learning more about the investment, tax-minimization, and legacy potential of life insurance, most people in their 50s and 60s could strongly enhance their financial future.
In this case, Lindsay has the option to convert some or all of that term life insurance coverage she has into a new Legato3 policy. The true benefit of the “conversion” option of a term policy is that the new insurance would be priced without any impact or consideration of her battle with that major health issue i.e. at her original health rating.
Converting life insurance from one type to another is typically achieved with the submission of a single form to request the change. By contrast, the process of obtaining new coverage typically takes 5-10 hours of time to consider the options, make a decision, and complete the application review. Healthy applicants under the age of 60 are often not required to have a visit from the nurse for samples or obtain a medical report from their doctor, which can take weeks or even months.
It’s important also to note that the policy conversion comes with considerable flexibility for the policy owner. The decision with respect to the premium amounts and payment durations of X can be made to suit their financial planning, retirement dreams, and legacy goals. Over time, the cash value can be used as collateral for retirement or an investment loan as well, or it can be left in the policy to buy more coverage and increase the death benefit to keep up with or ahead of inflation, automatically. The policy generally becomes fully paid up and self-sustaining after ten annual premium deposits have been transferred, but that time line can be customized, too.
Another point to consider on the Legato3 side. This policy type also gives the investor a chance to pool their money with some of Canada's oldest, most profitable companies: Manulife, Canada Life, and Sun Life. As such, the yield of the investment inside a Legato3 policy comes from their pool of investments made by the selected life insurance carrier for their PAR policies that includes real estate investments, mortgage investments and corporate bonds. In 2021, this yield currently runs at 5-6%, paid annually. This setup frees Lindsay and you from having to make decisions related to the investment side of her Legato3 policy, though she’ll still need to manage the remaining fixed income investments and stock portfolio with your guidance.
If Lindsay decides to increase the amount of her Legato3 life insurance premiums for the first ten years to prepay the policy for life, she’ll be spending more than currently allocated to her term insurance. If the stock markets stop their bull run during this same time, then the combination of higher withdrawals to pay the premiums plus the declining stock valuations could drastically diminish her portfolio. That being said, the value of her Legato3 policy would have slowly but surely been growing over this period of time, providing some stability to her portfolio and perhaps collateral for an emergency situation or retirement loan.
To earn a higher return for the portfolio, Lindsay could increase her exposure to risk assets like stocks and reduce her exposure to lower-yielding bonds. However, if her asset allocation moves higher to 80% or 100% stocks instead of 60%, she’ll have increased risk and volatility as a result. She may not be comfortable with the more extreme ups and downs of her investments in a more aggressive portfolio, so knowing that she has added a life insurance policy with a guaranteed, slowly growing cash value due to the annual policy yield of 5-6% could be quite comforting, in balance.
While waiting a few years before making this decision remains an option, on the understanding that the conversion terms of her policy allow that delay, the premium costs will increase each year as they are defined by her age when she triggers the policy conversion. Waiting months or years can increase the premium costs substantially compared to today’s prices as she heads into her 60s. .
The addition of a Legato3 “forever life insurance” plan could create higher performance for her fixed income investments while leaving a better situation for her husband, should he survive her. Lindsay’s health seems to be stable now. I hope she’ll enjoy a long life.
Don Anderson
Legato
========
Legato
========
Photo credit to Angiola Harry on Unsplash