Alright, disclaimer right from the get-go. This is an investment concept, an idea. There’s a lot of ideas. Tax Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), traditional savings accounts, under your mattress – they are all valid and all apply in different circumstances.
Under your mattress is perfect for a post-apocalyptic world, like in the Walking Dead, assuming we didn’t revert to the gold standard. You get the point. If you’re buying a house in the next 5 to 10 years, an RRSP may be the better option, etcetera, etcetera. Have a look at our investment page for more information about that.
For this case, we’re going to assume the following: we have a healthy, 35 year-old, non-smoking male client, earning $70,000 annually with much lower living costs, leaving some room to invest in a few different vehicles. And, we’re going to consider a hybrid universal whole life policy. There’s many ways to do this, this is one of them.
What’s the cost of this hybrid universal whole life insurance policy?
Invested over the course of 15 years this policy would cost $100,152 or broken down, $6,677 per year. All contributions are guaranteed to stop after 15 years, the policy is paid up and that is guaranteed too.
For some additional context, the cost of the insurance, if purchased in a term insurance policy (temporary insurance) lasting 40 years would cost $618 per year and that is payable for the full 40 years or when you decide to stop, at which point, it would cancel. The total cost of carrying that for 40 years is roughly $24,720.
We use a term insurance policy to compare, rather than a whole life insurance policy (which would be more appropriate) because we’re looking at insurance as an investment in this article, and the old adage buy term and invest the difference is applicable here.
What’s the benefit of this hybrid universal whole life insurance policy?
There’s many benefits to purchasing a hybrid universal whole life insurance policy. The insurance portion (which we will not go in to, in depth) is always a plus, as in, you’re mitigating the financial risk of untimely death on your benefactors and as always, guaranteeing your insurability.
Further, a hybrid universal whole life policy has a unique feature attached to it. The investment returns in such a policy are vested, meaning they can never be taken away and it can never give a negative return, offering higher cash values and a stable collateral for the times one would want to borrow against ones own policy.
Finally, there are contractually guaranteed returns – yes, they are minimal – and they are comparable to most other guaranteed investments, and certainly far outweigh the returns of money sitting in a high interest savings account.
What’s the return of this hybrid universal whole life insurance policy?
Your $100,152 investment will yield $354,358.21 at age 80, that’s net of taxes and management expense ratios (and it’s at a conservative 5.5% return – which is not guaranteed). The contractually guaranteed return at age 80 is $165,178. That is a big swing – and that’s the ground floor, in writing.
Consider your $100,152 investment over 15 years, this investment (along with providing you a healthy death benefit immediately) will grow as any investment should. See the chart below for the percentage returns based on the bar graph above.
|Age||Year||Rate of Return (Death)|
|Rate of Return (Surrender)|
|Weighted Average Yield|
(net of MER)
The real takeaway here is the guaranteed nature of what we’ll call, the ground floor. And that’s where this investment option shines. It’s literally all upside and there is no limit to that, but there is a limit to the downside and herein lies the true value.
What if we invested in different options instead?
Comparatively speaking, investing in a non-registered account would yeild similar results once you factor in taxes. And, as always, there’s market exposure. We’re not out to deter anyone from being in the market! We must be cognizant of market exposure, however. We used a 5.5% return assumption, as we did for the life insurance policy.
The Tax Free Savings Account produced a better return compared to the hybrid universal whole life policy. The question here is, what are we trading off? Simply, it’s predictability, stability, risk-mitigation and guarantees. And that may be appropriate for some of us – in reality though, these are very different strategies meeting distinct needs.
As you can see, there are a lot of positives to this particular plan – and while it may look like the TFSA with a term insurance policy would garner the best results, we must factor; the unpredictability of the markets, the volatility of the markets (distinct from the unpredictability re: 2008) and, the guaranteed and vested nature of this insurance policy. And, all those points are moot if you’ve maxed your contribution room – then, all signs point to insurance.
For more concepts and opinions, explore our related posts below.
What you need to know:
- The concepts offered are based on information available at the time of writing, it is subject to change.
- Coverage is not guaranteed for everyone – this coverage is underwritten and based on an applicants age, sex, smoking status, family history, medical history and a slew of other pertinent information.
- As always, seek advice from your financial professional, accountant and tax lawyer.
- For more information regarding the different ways to implement an insurance policy as an investment, reach out to our office – we are elated at the opportunity to offer a no obligation consultation.
The information in this article is derived from various sources. We do our best to ensure the sources are both accurate and reliable and – information changes. As such, we make no guarantee or warranty to the completeness of the information presented here or it’s application to your personal circumstances. The rates presented in the case study as well as the concepts in this article are for informational purposes only. Before acting on any of the above concepts, reach out and get a personalized look at the applicability of this and other insurance strategies for your unique personal or corporate circumstances.