Friday July 25, 2014


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Too good to last: Part 2

$mart Money
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Last week I wrote about how the ultra-low interest rate environment is changing the investment landscape. With interest rates near, or even at, the bottom of an interest rate cycle that has lasted for three decades, by necessity many financial services companies are re-thinking their product offerings. I lamented how the days might be numbered on some of my preferred strategies for providing guaranteed income in retirement.

            The low interest rate environment isn’t just affecting investment products, though. Some insurance options also appear too good to last for much longer. Depending on what you are looking for, you might be well served to do your looking sooner rather than later.

People buy insurance for different reasons, and it’s pretty important that you have the type of coverage that is consistent with your needs.

Term insurance is best used for temporary needs. The most common applications would be to provide funds in the event of a premature death for things like paying off a mortgage or to raise dependent children.

Generally speaking, mortgages will naturally get paid down over time, and kids will eventually grow up and become independent. So if you are only thinking about needing insurance to cover mortgages and kids, you don’t necessarily need a policy to last forever. Term insurance works great for these situations.

The good news is that the low interest rates don’t really affect the pricing of term insurance so much. In fact, term insurance rates have continued to decline with increases in longevity.

But not all insurance needs are temporary. If you are looking to do some estate planning with insurance, you are going to need an insurance policy that will last your lifetime.

There is a well-known phrase in the insurance world. “Buy term and invest the difference.” Frankly, folks, that phrase is nonsense. The problem with the expression “Buy term and invest the difference” is that the math doesn’t work.

Here’s what you need to replace it with. “Buy term if your needs are temporary. Buy permanent if your needs are permanent.” Trying to cover permanent needs by buying term and investing the difference is like trying to bail out a leaky boat with a soup strainer. It’s just not that efficient.

And there are lots and lots of needs that are permanent in nature; including, but not limited to, creating a legacy, the tax efficient transfer of money to the next generation, paying the capital gains tax bill on a rental property, paying the tax bill on your RRIF, and caring for a permanently disabled family member. These are just some of the examples of needs that do not decline over time.

You can even use life insurance to make your charitable donations. I have a number of clients who make sizable charitable donations each year, and I don’t want them to stop doing that.

But what I am encouraging them to do is to complement their spontaneous donations with some planned giving. Here’s a simple example. Currently some of my clients are giving hundreds, even thousands of dollars each month to charity.

            Let’s say that they continue as before, and donate $10,000 per year to their favourite charities. Over 25 years, that’s $250,000 that they will donate. Alternatively, if they were to channel that $10,000 through a life insurance policy, they will be able to magnify the size of their donation, and be able to give more than $500,000 tax free to these same charities. Try doing that with a term policy. It ain’t going to happen.

            These clients are supporting charities like The Canadian Cancer Society and World Vision. Do you think that charities like these could use, and will appreciate, the extra $250,000 that comes from planned giving? Of course they can and will.

These low interest rates have a much bigger impact on the pricing of permanent insurance products. The main reason for this is that permanent insurance usually has a few more features to it than simple term insurance, and one of those features can be an investment component. From the insurance company’s perspective, it’s the investment of those life insurance premiums in this low-interest rate environment that has them re-thinking their life insurance product shelf.

This is a big deal. With these low interest rates, though, what we are looking at is the evolution, and perhaps even the expiration, of some types of permanent insurance policies. So if you have permanent insurance needs, now is the time to get in and see your insurance agent.

            It seems to me that the pricing of some of these products is just too good to last much longer.

The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI.  Brad Brain is a Senior Financial Advisor with Manulife Securities Incorporated, in Fort St John, BC. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund. Brad Brain can be reached at

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