Should I Choose Investments Over Life Insurance in Canada?

“Isn’t investing a better strategy than getting a life insurance coverage?”, asked by one of my clients

I replied:  “Well, that really depends”

Client got curious: “Depends on what?”

I answered, “When will you die and make the  claim”

 

Whenever there is a life insurance discussion, I often end up having the above conversation with my clients. When we are comparing investments to life insurance, there are many factors we should consider, for example the cost of premium,  the expected rate of investment return, and the duration.

Let’s look at the case of investing versus getting universal life insurance in Canada:

Suppose a 30 years old, non-smoker male, obtains a $300,000 universal life insurance coverage, and he chooses the guaranteed paid up option of 20 years, his standard rated premium will be $216.08/month. (Quotation got from Canada Life on May 08, 2013, and it is subjected to change.) Since this is a permanent coverage, the $300,000 will be paid out regardless of when he passes away, while he only has to pay premiums for 20 years.

Alternatively, if he does not obtain this life insurance coverage, he could direct his $216.08/month toward other investments.

• Suppose the investment he chooses has an annualized rate of return of 5%,  at the 20th year, the investment amount will be accumulated to roughly $88,043.
• If he stops making further contribution, and just lets the money to sit for another 20 years, the balance would grow to around $233,604.
• If he leaves the money to stay invested for another 5 years, the balance will be approximately $298,145 which comes close to the death benefits. Therefore, in this scenario, it takes 45 years for the investments to break even with the death benefits. At that time, this person will be aged 75.

 

In this scenario, it takes 45 years for the investments to break even with the death benefits. At that time, this person will be aged 75.

Furthermore, investment returns are not guaranteed, while the death benefits and premium are guaranteed by contract. There could be potential tax implication on the investments, while insurance death benefits are paid out tax-free. Should the insured passes away, his beneficiary will be left with the investments rather than the death benefits. This is really a self-insured strategy. (Where an individual assumes all the risk rather than the insurance company.)

If that’s the case, why would someone not consider getting a life insurance? One advantage of having investments over life insurance is that it is relatively easier to pull out the money. Although, some permanent life insurance has cash value where one could access to, the majority of the funding are still accessible upon the death of the insured. In other words, most of the fundings are left to the beneficiary rather than the insured. For people who do not have or do not plan to have any dependants, investments might be a more suitable option for them.

 

For people who do not have or do not plan to have any dependants, investments might be a more suitable option for them.

 

However, the emphasis of the post is not to promote which strategy is definitely better than the other, but to layout some of the different aspects of these two strategies. In fact, many of my clients have both investments and life insurance coverage, they could go hand in hand rather than as a replacement to each other. It is important to understand your needs and your opportunity cost before making any financial decisions.