Hello all,

I trust this finds you well and relaxed after a well-deserved holiday break. I don’t think many people would argue with the statement that 2020 was one of the most challenging years in a long time and for some of your younger ones the most challenging of all time. However, we are all adapting to the “new realities” of a Covid world and I personally think we will make great strides this year.

Since we are entering a new year, I felt it might be useful in this blog to go back to basics as to what life insurance really is and where is it most appropriately used. Now for all the old warhorses like me who have been in the business for years, much of the next two blogs may be repetitious but hopefully, you will all take something new away from my thoughts.

Whenever I am asked about what exactly life insurance is, I state the following:

Life insurance at its core is a financial tool that creates a pool of capital during an individual’s lifetime or when an individual passes away, that can be accessed by the policy owner, or that is passed on to another individual or individuals (beneficiaries). The pool of capital created on the death of the insured may be used to retire debt for the survivor, or create an income stream for survivors, or perhaps pay final expenses to keep existing assets intact.

The “individual” (beneficiary) receiving the funds could also be a corporation. The funds created on death may be used to retire corporate debt or to create a supply of capital required to allow the business to continue operations. The capital may be used for key man purposes where funds are needed to replace an important individual in the firm and insurance proceeds can help fund buy/sell requirements and allow for the smooth continuation of a business.

The bottom line is, insurance is largely used to replace much needed capital that is required on the death of the insured. Many people think life insurance is a financial instrument that benefits the beneficiaries only on the death of the insured and that the insured receives no value from a life policy during his/her lifetime. There are, however, in addition to the above benefits other very important reasons for using life insurance as a valuable planning tool that can benefit the owner of the policy, whether an individual or Corporation. For example, a permanent life policy with Cash Surrender Value (CSV) could be used as collateral for a series of personal bank loans where the loan proceeds are used to supplement retirement income. Along the same lines, the CSV of a policy could also be used as collateral for a series of business bank loans so the corporation can purchase much-needed life coverage but still have the use of the cash paid for premiums to allow the continuation of regular business activities. Further, by placing money into the CSV of a policy, a corporation will reduce its passive investment income which in turn means the corporation does not suffer the loss of some or all of its small business limit and its lower tax rate.

I have touched on many, but certainly not all, of the potential uses of life insurance and the fact that many of the benefits of insurance can be enjoyed by the policy owner and not just the beneficiaries.

The next question, when a need is uncovered, becomes how large the need is, how long will the need last for, and what the appropriate life insurance policy to fulfill this need. I begin to answer these questions and more in the next blog.

Keep well and stay safe.


Regards,

Ian Tod, B.A.(Econ), MBA, CFP, CLU
National Advanced Case Specialist
[email protected]