The Truth about Permanent Life Insurance (Canada)

There is no topic in the world of life insurance that is more fiercely debated than permanent life insurance and the validity of it. Whether that's whole life insurance or universal life insurance, you'll find advisors on both sides of the fence that either vehemently oppose it or are 100% for it. And it's the secret of the rich and you need to put your money here. And in today's video, I'm going to be going over the truth about permanent life insurance and whether or not this is going to be the best product for you. What is up, guys? For those of you new to the channel, my name is Philip Seder. I'm the founder and CEO of Affinity Life, where we've helped thousands of Canadians find the right life insurance coverage at the right price, all from the comfort of their own home. If that sounds interesting, I'll put a link in the description below and you can check it out. But without further ado, let's just get right into this video. To start off this video, I'm just going to go over the basics of how permanent life insurance works here in Canada. And then we're going to go through the benefits and the challenges and the sales proposition and why advisors have these, you know, competing points of view and why it's such a heavily debated topic. So let's just get into whole life insurance first. And by the way, I've made like dozens of other videos on my channel and I made two videos in particular that really does a deep dive into these products. So if you want to watch the whole life one, I'll just put it there. But let's talk about whole life insurance first. So whole life insurance is the easiest form of permanent life insurance to understand. Easiest way that I explain it is it's like buying a house. You're paying the mortgage now, which is a considerably higher amount than it would be if you were renting. At least it used to be, you know, rents have gone up so crazy over the last few years. But it's just like paying the mortgage on the house. You can pick a different payment period. So you have your death benefit. You have the cash surrender value, which I'll explain here in a second. And then you have your payment period. Pardon me. So the most common payment period with whole life insurance is a 20 pay. You could do a 10 pay. You do a pay to 65. You do a pay to age 100. 20 pay I find is one of the most common ones. So what does that mean? That means that you pay your premiums for 20 years. And if you pass away in those 20 year period, of course, you're going to get the death benefit or, you know, your beneficiary will. However, after that 20 year period, you're done making the payments and you own that policy. And it continues to be enforced for the rest of your life and eventually being paid whenever you pass away. Now, one of the greatest benefits of whole life insurance is its guaranteed nature. It has a guaranteed payment structure, a guaranteed death benefit and a guaranteed cash surrender value. You know, unequivocally, it's contractually obligated that, OK, I'm going to pay for whatever it is, 10 years or 20 years. At the end of that, I no longer need to pay for it anymore. However, the downside to whole life insurance is that it can be more expensive dollar for dollar than universal life insurance. And I'm going to talk about universal life insurance here in a second, but that's the major downside. Now, let's talk about the cash surrender value, because that's probably what most advisors, and that's not probably, that is what most advisors pitch this whole life insurance or permanent life insurance sales pitch on is the cash surrender value. Now, the cash surrender value within a whole life insurance policy and UL for that matter, can most easily be thought of as like the equity within your home. Just like I kind of explained, whole life is kind of like a house and you're paying the mortgage. The cash surrender value is now like the equity within your home, the equity within your whole life insurance product. Now, of course, you know, if you bought a house and you had some equity in there, you know, maybe you owed $400,000 and you had, let's say, $100,000 of that already paid off. The house was worth $500,000. That's your equity, OK? Now, you can just go to the bank and use a bank card and swipe it and use that equity. Of course, you'd either A, have to sell the house and you'd get that back, or B, you'd have to take a loan against that. So it's the same thing with whole life insurance and the cash surrender value within that. You can do one of three things. You can either partially or wholly surrender your policy, meaning you say, OK, I don't want anymore. Let's say my death benefit is $500,000 and my cash value is $100,000 anymore. Cancel my policy, send me a check. They have to do that, OK? And they'll send you a check for $100,000. Or you can partially surrender it and you say, hey, you know what? I only need 50%. So bring it down to $250,000 and send me a check for $50,000. That's the first option. The second option is you can do a policy loan. Now, policy loan is directly with the insurance company. They give you a loan and you pay interest on that loan or you eventually repay that loan back to the insurance company. But then you can use that loan for whatever you'd like. Now, I made another video talking about the specifics of loans because it can get quite complicated and I'll put that video right there and you can watch it and you can see all about policy loans and collateral loans and how they actually work because there are some complexities with it. Now, the third option you can do to access that equity is a collateral loan. A collateral loan is now with a bank. You go to a third party lending institution and you pledge this cash surrender value as an asset to them and you get a loan. It's very similar. There's some minute differences here and there and it all has to do with taxation, credit worthiness and the minimum amount that you're allowed to borrow. Again, I'll put that video or I already put it there. You can watch more about that if you would like. Now, on the other side of that coin is Universal Life Insurance and this is another hotly debated topic and there's a lot of people that are very for UL and a lot of people are very against UL. Now, Universal Life Insurance is just another tool in the toolbox. It's a misunderstood product and unfortunately, it gets very often sold to the wrong person and incorrectly set up and it has a very bad reputation for that matter. However, Universal Life Insurance works very quickly like this. Instead of having it all as this, you know, shiny little all-in-one box that Whole Life Insurance is, Universal now becomes this unbundled, separate, flexible, customizable product. So you have two main features. One is the cost of insurance and the other one is this investment fund. So let's go over the cost of insurance first. When you start your policy, you can set it up one of two ways. The first way is what's known as level cost, meaning that the cost is going to remain fixed until you die. The second way is known as YRT or yearly renewable turn, meaning that the price, the actual cost of the pure insurance is going to be based on whatever age you are and then the next year, it's going to increase and the next year, it's going to increase and so on and so forth. Now, the other component is this investment fund and it works exactly the same as other investment accounts that you would typically know, such as a mutual fund or stock or bond or GIC, et cetera. Now, within this investment fund, you can choose a number of different investments. You can choose, like I said, you know, stocks, bonds, GICs, equities, the S&P 500, different indexes, whatever you'd like and that is going to get a return similar to any other type of investment. Now, the returns within this account are tax sheltered up to a certain amount and this is one of the main selling features of this type of policy is that, hey, it's tax sheltered, everything grows here tax-free. There are some strings attached, so hold on, don't, you know, get carried away quite yet. The idea of universal life insurance is that you will pay a premium, you will choose a number, you'll pick one, let's say it's $100 and a portion of that, let's say $30 is going to go to the cost of insurance. Now, depending on whether you set it up as YRT or level, it's either going to stay the same or it's going to increase. Obviously, YRT is going to be much cheaper at the beginning, but then increase over time, whereas level is going to be a fixed cost, but it's going to be much higher at the start. Now, the additional amount of the premium that you pay, let's just say it's the other $70, that's going to go into the investment fund and the theory is that after a certain timeframe, maybe 20 years or 25 years, you will pay these premiums, your investment account will earn a return and those returns will be able to replace this cost of insurance. You can stop paying any premiums and your returns now pay for the cost of insurance until you pass away. However, sometimes this is very difficult to achieve because the market goes up and down and the illustration that the advisor initially gives you is going to be based on a specific return and if it doesn't make that return, then their projections are not going to work and in later years, you're going to have to put more money into the policy. There's also very high fees within this investment fund. I just looked at a policy the other day that had a 3% fee within that account and the illustration was illustrated at 7% net. That means that it's actually 10%, meaning that if it did lower than 10% every single year for the next 20 years, he would have to put additional money into the policy. So there's a lot of strings attached with universal life insurance. It's a very complex product and I think it's only really used or needed for a very specific clientele and I made another video on this and I'll put it right there and you can watch it if you want to know more about UL. But in essence, those are the two types of permanent life insurance here in Canada. The number one benefit of permanent life insurance is of course what it sounds like. It's a permanent life insurance. It's coverage that is meant to last until the very end. So if you are looking or know for whatever reason unequivocally, you want to have a coverage that's going to last until the very end, this could be a good product. The other main benefit of permanent life insurance is that fund value or cash surrender value within the policy. And again, it's named some differently, whether it's Whole Life or UL. And I'm not gonna get into the specific which one you should use, but that's the other main benefit. And what is this used for? Well, in my opinion, the two major benefits of this cash value, I'm just gonna call it cash value, is number one, the use of a buffer asset. So buffer asset is essentially a non-correlated market asset that you can use if your other portfolio is in a down position. So what do I mean by that? Well, let's say you still have other investments, registered accounts, RSPs, TFSAs, non-registered account, and you wanna have it in obviously something that's earning a high amount of returns. So usually the investments that have the highest returns also have the highest volatility, meaning that you might get plus 15% one year and negative five the next year. So if you're in a position during retirement, where you need to start pulling from your portfolio to fund your life, you now have a decision to make whether you should keep it in that high volatility investment or lower into something that's safer, but doesn't make as good of a return. Because obviously if you're pulling income from a portfolio that's in a down position, it's gonna take much longer to recover. Where I think life insurance or specifically permanent life insurance has a good place is as the use of a buffer asset. The cash value within whole life, for example, it doesn't go up and down with the market. It just goes up and then it's locked in. You can't lose money within that. So if you're in a position where you stay within a high equity position in your investment account during your portfolio, during retirement with your portfolio, pardon me, you can then in a down position pull from your life insurance policy to fund those years while your portfolio is recovering. Like if we had another 2008 or even a 2020 and it took a few years to recover. Buffer asset with life insurance is a very effective tool. And of course, the other reason you can use that value within your life insurance policy is for the use of business or investments. If you're pulling from your life insurance policy from the cash value, the fund value, and you're using it for the purposes of business or other investments, theoretically you can deduct the interest cost, which is gonna lower your tax bill for the year. And then hopefully whatever asset you're invested into will then be able to repay the loan and you'll double dip between these two different assets that'll both grow in tandem. However, there are some challenges with permanent life insurance. It's definitely not all roses and glory and all things like that. The number one downside to permanent life insurance is it's just incredibly expensive compared to term life insurance. Like I mentioned, it's 20 to 25 times the cost of a corresponding term life insurance product. So if you wanted a million dollars of coverage and term was 100, whole life would be 2000 to $2,500 a month. So if you're using this as the whole thing for your life insurance, it's gonna be incredibly expensive to get the face amount that you want. Another downside to permanent life insurance, as you can see from this video, is it's incredibly complicated. Like there's so many different variables and things to consider, whole life, universal life, fund value, YRT, cash value, policy loan, collateral loan, dah, dah, dah, dah, dah. All of these things are very complicated and trying to design it that fits your needs and work with an advisor that understands all these things to make sure it's structured properly for you can be very difficult. And sometimes it's just easier to opt for a very simple and easy investment. You just put your money in and the stock market goes up. That's relatively easy to understand. It doesn't come with all the complexities of permanent life insurance. And another thing to consider is that the cash value or fund value within your permanent life insurance product is going to compare quite poorly to other traditional investments, specifically like your RRSP and your TFSA. Usually those are gonna give you a much better return on your money than any type of permanent life insurance policy. And the last challenge that I find with permanent life insurance, and it's often sold or marketed by other advisors, is that they will try and replace traditional planning with permanent life insurance. I think permanent life insurance definitely has its place within specific clientele. However, it's not meant to replace everything. You still should go out and get an RRSP and a TFSA and an emergency account and save up for retirement and other different accounts and buy your house and try and pay it off and pay off high interest credit card debt and do all of these other things that's the quote unquote traditional planning and then, yes, this could be a very good supplemental part of your plan, but it's not meant to replace the entire plan altogether. So there's definitely a place for permanent life insurance and I think it fits really well in these three different categories. Number one, high income earners that have already maxed out the other traditional vehicles such as your RRSP or your TFSA and you're looking for some additional place to store some wealth, this could be a good place. Number two, business owners. There's a lot of unique tax advantages that life insurance has within a corporation that can be very effectively used not only during retirement, but also, of course, upon death and I made another video specific about that. I'll put it right there if you want to look at that, look at that, pardon me and the last number third person who should consider this type of policy is people who just value lifelong coverage over cost efficiency and sometimes this just happens. Sometimes people say like, you know what, that's great that I could maybe earn a little bit more in this account if I invested this and I put it in term and yada yada, but at the end of the day, I'm not very disciplined for whatever reason or I don't want to worry about it or I just don't want to think about it. I already know I want to leave, you know, half a million or a million or whatever it is to my family and yes, I could get more over here. However, I just want to set it and forget it. I value the efficiency over the cost. I'd rather put it here and just have it done with. So in conclusion, you can see that permanent life insurance can be very powerful for some individuals. However, it is a specific tool and it shouldn't be used for everyone, but it definitely has its place. So with all that being said, I hope that you guys enjoyed today's video. If you guys have any questions or comments, just drop them below. And if you guys are enjoying this content, please just give me a thumbs up down below in the comments. And with that, I'll see you guys in the next one.