Purtzki, Johansen + Associates


Permanent Insurance as a Retirement Vehicle

Many insurance agents will try to sell you a permanent life insurance policy as a retirement vehicle. They’ll tell you it’s a great forced savings vehicle that grows with taxes deferred, just like an RRSP, and then offers the option to receive those tax-free funds during your retirement. Sounds good, right?


The concept sounds reasonable too: A portion of the premium is invested in a tax-sheltered investment account inside the insurance policy. But rather than forcing you to withdraw the policy’s cash value, which is subject to tax, the insurance company arranges payments to be made to you from a bank loan secured by the policy. No interest needs to be paid on this loan during your lifetime, and upon death the bank loan, plus accumulated interest, is paid off from the insurance proceeds.


The lure of risk-free, tax-free retirement income is hard to resist for even the most conservative investors. Consequently, some commit to many years of substantial premium payments. However, many policyholders become frustrated by the slow accumulation of funds inside the investment account. For many the projected cash value of the policy never materializes. Investment returns have been low in recent years and that coupled with the fact a substantial portion of the premium is used to pay out the death benefit, means many policyholders end up looking for a way out. This is easier said than done. Most plans have very stiff surrender charges, particularly for the first ten years.


If you are contemplating taking out a permanent life policy, ask yourself: “Do I need — not would I like to have — permanent life insurance coverage?”  Like many doctors, you need a lot of coverage, but usually not past the end of your medical career. There are a small number of doctors who do need long-term coverage, for instance to pay for capital gains taxes so real estate can be transferred to the children without a fire sale, or to secure long-term funding for the care of a disabled child. Most, however, do not need permanent coverage.


Like all insurance, life insurance is there to provide cash to cover a financial loss. It is not an investment per se. This may seem obvious, but many people purchase a permanent policy to access to its tax shelter aspects without any real need for the death benefit. If you have no real need for life insurance coverage, paying premiums into such a policy is a waste of money as a large chunk of the premiums are used to fund the mortality charges.


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