The Best Guaranteed Investment Policy In Canada: Limited Pay Universal Life
The Best Guaranteed Investment Policy In Canada: Limited Pay Universal Life
It doesn't matter if you live in Calgary, Alberta or anywhere in Canada, getting a good deal is something all Canadians love. If the house you bought was well below market price, or the used car you got was a real gem for a low price, we all love to get a bargain. The same should be true of our financial products, like investments and life insurance.
OK, say you're looking to buy a house that is worth $500,000. What if your realtor called you up and said they had the deal of a lifetime. That house worth $500,000 is being sold for only $96,050!! But that isn't all. They will give you title to the house immediately, but you can pay for it over the next 10 years with equal monthly payments of $800.42 per month. After that time you will own the house entirely.
There is just one catch. "It's too good to be true", you say, "so there must be a catch". The catch is you can never sell the house during your life. Even if it goes up in value, you can only gift the property to a loved one or an organization you support, like a charity or your business. Would it still be a good deal? Would you still invest 19 cents on the dollar to buy the property to form part of your estate?
Limited Pay Universal Life: a guaranteed investment policy for your life
Enter Limited Pay Universal Life insurance. This contract acts exactly like the example above. It provides you with a tangible asset that forms part of your estate, and provides you with immediate insurance protection in case something happens today. The payments for the plan are minimal compared to the actual insurance asset you will own. Also, there is a guaranteed cash value inside the plan representing the growth of your long-term invested dollars, so if you did choose to exit the policy before you die, the cash value is yours.
A limited pay universal life policy can be paid for either in 10, 15 or 20 years. The quicker you pay up the policy, the cheaper the policy actually is. Let's look at an example of a 45 year old Calgary man investing in a limited pay universal life insurance policy. He needs to buy $500,000 of coverage. If he buys a 10 year pay policy it will cost him $800.42 per month. If he bought a 15 year pay policy it would cost $617.50 per month, and if he paid it off in 20 years it would be $524.58 per month[1]. Even thought the month premiums are more manageable for a longer term the total payments add up. A 10 year policy requires $96,050 of capital, a 15 year policy costs $111,150 and a 20 year plan is $125,899. As you can see, paying it off in 10 years can save this Calgary man $29,849 vs. a 20 year plan for exactly the same benefit.
Once payments are completed, the policy is owned outright, and the benefit it will pay out is locked in for the rest of your life. Now more premiums are due to keep the life insurance in force, and this is a guarantee in writing inside the contract. A guarantee the insurance company can never break.
The big BONUS for investors
So, now you own a limited pay universal life insurance contract and are paying it off over 10, 15 or 20 years. Is it just that simple or is there more to it? The answer is both. It can be that simple, OR you can choose to add some additional complexity.
Because it is a Universal Life Insurance contract, you can also invest additional money into the tax sheltered policy fund. This policy fund is very much like your own mutual fund investments. You can choose from a basket of investment choices, from guaranteed investment options (like GICs), secure bond funds, higher risk equities and managed portfolios. You can change these investments over time, much like a self directed RRSP account. The interest and growth earned on your money inside a limited pay universal life insurance policy will grow in the tax sheltered account (policy fund) so long as the money remains inside the policy. At death, the entire amount of investment that has accumulated and grown tax sheltered will convert into a tax free death benefit converting your tax sheltered investments into tax free dollars for your beneficiaries. This is one of the most powerful advantages of universal life insurance, making this type of policy one of the most effective investment plans in Canada today.
There are also two other ways you can access your investment dollars inside a limited pay universal life insurance policy during your life. Either you can make a straight withdrawal, or you can borrow the money from the policy. If you withdraw money, 100% of the growth of that money is taxable by the Canadian Revenue Agency (CRA) as income. Not very nice. If you borrow out the money, there is no taxation on borrowed funds. There is, however, an interest rate charged by the bank or the insurance company lending you the money, and that interest rate will compound every year. You are not required to make payments on this loan, as the ultimate death benefit will pay off the loan and all interest accrued. If you borrow the money out, the investment account or policy fund is actually never touched. It remains invested and continuing to grow over time, and the compound interest of this investment policy fund will remain tax sheltered. Leveraging an insurance policy in this way is often referred to as an Insured Retirement Plan, and is a long-term insurance and income strategy many people in Calgary and Canada use today.
If you would like to know how you could protect your estate, create tax free capital for your beneficiaries, and buy it all for cents on the dollar, feel free to contact us here at Life Guard Insurance.
[1] All based on Equitable Life rates as of 6 October 2010, being the best rates in Canada according to LifeGuide.
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