# Save and Invest, or Life Insurance



## dadaswell (Jan 6, 2016)

Something that came up in a discussion today with a few retired friends of mine. We are all in our late 50's, and this idea came from one of the ladies. When thinking about passing something extra on to the future generation, what makes more sense, saving an amount each month, or buying a life insurance policy with it? (As I have mentioned before, I have just about zero knowledge when it comes to investing etc.)
Anyhow, these are the general amounts my friend mentioned, therefore, I don't know how accurate the life insurance quote is. 
Would it make more sense to invest $575 month, or buy a Term to 100 life insurance policy with a $400,000 payout? When I look at the calculators I can find, it seems that the life insurance policy may be the better bet. It is my understanding that the payout would also be tax free. However, that also seems too simple. What am I missing?
I know it depends on how long a person lives, and what the growth of an investment would be.
Any thoughts in general (other than the you earned it, why don't you spend it...LOL)???


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## OptsyEagle (Nov 29, 2009)

The life insurance will win most times. On a guaranteed basis the life insurance wins every time.

The life insurance has 3 important features that cannot be obtained anywhere else. 

1) *It guarantees the money up front*, whereas every other monthly savings plan requires you to live many, many months to ensure the money is actually saved up.
2) Life insurance proceeds are *completely tax free at death*. It is simple and it is what it is.
3) Permanent Term like the Term 100 plan you mentioned has another feature that adds a lot of money to its final rate of return, that other savings plans don't have. The feature is called* "lapse subsidy".* This is how it works. Think of 1000 people buying the exact same insurance plan. How many of them do you actually think will keep the plan till they die. For many it will seem like a good idea when the insurance agent sold it to them, but given time they start to only see the premium cost. You are probably the only person I know that sees it for what it is, a monthly savings plan. Most will see it as an expense and look to see if they can get rid of it, like any high monthly expenses they can justify doing without. Soooo, what this means is a lot of people will buy this insurance, keep it for 5 or 10 or more years and then cancel it. As you know, Term 100 insurance has no cash value upon cancelation. Obviously the insurance company was putting their premiums away in a reserve to ensure they had the death benefit amount to pay out when the time came. So what happens to this money that was set aside by the insurance company, when a customer cancels their policy? If the insurance companies had their way, they would keep it, but because we live in a competitive insurance world, they use it to REDUCE the true cost of everyone's death benefits. They lower the true cost of the premium. So in other words, not only could you not turn $575 per month into $400,000 in your lifetime. The insurance company could not do it either. The true cost of $400,000 on the day you die is probably at least a few hundred a month more. The insurance company deals with this with their "lapse subsidy". As some of the policies issued lapse or are cancelled, they use those people's reserve (the money saved up for their death that they don't need now because the policy is being cancelled) to subsidize the cost of your policy.

I think they estimate around 50% of all permanent term policies issued will lapse before the insured's death. This does not matter to you because as long as you don't cancel yours, you win from all of this.

The last thing I will say is this. Life insurance is probably the most effective way to leave someone else money. It is one of the most unselfish acts one can do, because with life insurance you can guarantee to make anyone financially secure, that you want with only one catch, you can't financially benefit yourself. Amazing how that one catch kiboshes this great idea for most people.


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## Beaver101 (Nov 14, 2011)

^ I won't debate on the merits of what OE stated, particularly,


> The life insurance will win most times. On a guaranteed basis the life insurance wins every time. ...


But can the OP (at late 50s) be able to get $400K of life insurance easily, even with the affordability to pay $575/month and for how long?

Plus keeping the agent's commissions out of the picture.


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## ian (Jun 18, 2016)

I always had lot of term insurance when my children were young. It was easy and very affordable to get 8X my earnings on my employer's group plan offering. Same with disability insurance.

Retired at 58. Children gone, married, whatever. The only insurance we have is a $10K policy on me from my DB plan. Our financial situation is such that my spouse will be very secure, with or without me breathing.

It is a choice and that choice really depends on one's financial situation and on one's personal desires. We never opted for whole life insurance. Approaching retirement as my increased age translated into higher premiums I reduced the coverage/premium because the need was no longer there.

Just beware of these life insurance sales people spewing out the usual 'do you love your children' or 'do you love your spouse' nonsense in order to close the deal. Go out to the market and get quotes from multiple firms. Eliminate the emotion and stick with the actual reason for the insurance and the financial analysis of the various options.


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## Mukhang pera (Feb 26, 2016)

OptsyEagle said:


> The last thing I will say is this. Life insurance is probably the most effective way to leave someone else money. It is one of the most unselfish acts one can do, because with life insurance you can guarantee to make anyone financially secure, that you want with only one catch, you can't financially benefit yourself. Amazing how that one catch kiboshes this great idea for most people.


The "guarantee" of payment is not, in my view, absolute. Life insurance is a form of contract. Contracts can be breached or may fail to be effective for a variety of reasons. The larger the policy, the more microscopic the scrutiny to which it will be subjected before the insurer will agree to pay out. If a way can be found to avoid liability, the insurer will find it. Then, the beneficiary accepts that decision or hires a lawyer and heads to court. That does not come at a bargain price nor does it result in swift justice. Or a certainty of outcome, for that matter.

Anything can happen. Like this:

_Valentyne Estate_ v. _Canada Life Assurance Co_., 2017 BCSC 1444

INSURANCE — Life insurance — Interpretation of policy • Exclusions — V. obtaining mortgage life insurance from defendant — V., a known mid-level cocaine and heroin dealer, seen entering a house on January 7, 2013 but not coming out — Police later finding his blood in the premises and believing he was murdered by drug rivals — In 2013 master declaring V. a missing person, and in 2014 declaring he was presumed to have died on January 7, 2013 — Defendant insurer denying liability to pay insurance proceeds to his estate, relying on clause excluding liability if "your death is a result of or while you were committing criminal offence" — Court interpreting exclusion clause as operating in either of 2 scenarios: when death is a result of a criminal offence or when death occurs while insured was committing a criminal offence — Since the only rational conclusion was that V. was murdered as a result of his involvement in drug trafficking, a criminal offence, exclusion applying and insurer not liable.

https://www.bccourts.ca/jdb-txt/sc/17/14/2017BCSC1444.htm


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## OptsyEagle (Nov 29, 2009)

I am not commenting on whether it is a good idea or bad idea, I am just commenting on which method of creating money for heirs, is most effective. In my opinion, the life insurance will win most times and every time where only guaranteed investments are desired. 

The money we are talking about here is the extra income that one is currently earning but not spending. Instead of putting it into investments, when many times it is obvious that you will not ever need it in your lifetime (when you review all your other investments), would it work better put inside a life insurance policy for the people who will inevitably inherit it anyway. If you don't spend it, they will be next up to do so. That reality cannot be avoided. Even if you want to use current investment or the interest on current investments to fund the plan, I always think of the money at the bottom of your pile. Most think of taking it from the top. Obviously there is no bottom or top, it is just a different way of looking at the same money. The money at the bottom of your pile would be the last money you ever spend. Most people will probably never, ever spend their last dollar, because to do so, would see them broke, immediately after. So why not take that money, from the bottom of the pile and magnify it tremendously with life insurance. In some instances, once the estate is looked after, it can sometimes get people to more easily spend more of the remaining money.

Even if you are worried you might someday need this money, you can change from acquiring a "term 100" policy to a "level cost universal life" policy. The level cost UL policy is a Term 100 policy that allows for extra funding into a tax sheltered side fund. When you die all the money in the side fund gets added to the life insurance death benefit, but you can fund it so that the interest on the money pays the monthly cost of the life insurance.

So for example, lets say you can get 3% guaranteed term deposit inside the UL policy. You could transfer $230,000 of your current investments to this policy. If you died the next day the heirs would get $630,000 in death benefit, which is the $400,000 life policy plus the $230,000 in the side fund. If you don't die, you know that side fund will pay out $575 every month to pay the premium cost on the life insurance. If you later decide you need this cash, you can simply withdraw it and use it. It is cash value available to you and is completely separate from the policy. The other good news is the 3% interest is tax free as well because it is sheltered inside the policy. So if this is the money you don't think you need, you can create an immediate tax shelter for it, guarantee that all future premiums are paid and turn $230,000 into $630,000 after tax, guaranteed in your lifetime. Try and beat that.

Now for the disclaimers. There are usually surrender fees on cash value that decline to zero over time. So take a close look at those. Most likely you will never withdraw this money. It would be like taking money out of your tax free savings account when you have the same amount of money in a taxable account. Why would you use tax shelter money when you have other money with less tax benefits to spend.

Sure, one might be able to make more then 3% on that $230,000 elsewhere, but it would not be a guaranteed rate of return. 2ndly, it would be fully taxable at some time before your heirs get it. Lastly the UL policies also have those non-guaranteed investments available. The fees can be a little high but they are there all the same.

Lastly, I am not trying to sell you anything. I have no idea who you are and you have no idea who I am and I have absolutely no intention of telling you who I am so I think you can take what I say as educated unbiased advice. I will also add that most of the life agents I have known in my life, sell what I am suggesting but may not understand it quite as well. I am not trying to brag, just that I have always wanted to know how these things actually worked and I of course I wanted to know what the commissions were. I suppose the other agents found it as confusing as many here will and decided that perhaps all they really needed to know was the commissions. By the way, the commissions are built into the premiums so they are already factored in, so to speak.


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## Beaver101 (Nov 14, 2011)

^ Okay, I get that you're not commenting about buying life insurance being a good or a bad idea. 

But I don't think you can even think of "insurance" as an "investment" as the industry seems to be swelling our brains toward to. Insurance is for "protection", isn't it?

In your e.g. whereby you transfer $230K to earn interest to pay for the premiums, and get a death payout of $630K eventually, isn't that still the use of your own money, even with the idea of earning a whopping "3%" is "guaranteed". 


Also, in your eg. stated:


> ... *The other good news is the 3% interest is tax free as well because it is sheltered inside the policy.* ...


 and then


> ... *2ndly, it would be fully taxable at some time before your heirs get it.* ....


 .... which is it? Tax-free or not?



And


> By the way, the commissions are built into the premiums so they are already factored in, so to speak.


 ... factored-in of course, hidden ... I think my eyes would pop if the commissions factor is transparent ... 20%, 30%? or is it 50%? Look no further than seg funds -payout for the agent that is before your heirs get it, all paid by you. 
Deal or no deal?


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## Beaver101 (Nov 14, 2011)

Mukhang pera said:


> ... post #5


 ... LOL, yep, the back-end exclusions would null the guarantee. 

I think most CMFrs who can post such question are pretty well-rounded so as not to go around committing a criminal offence.


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## Mukhang pera (Feb 26, 2016)

Beaver101 said:


> ... LOL, yep, the back-end exclusions would null the guarantee.
> 
> I think most CMFrs who can post such question are pretty well-rounded so as not to go around committing a criminal offence.


Well, okay. But would they be so well-rounded as to apprehend the niceties of "common carrier" as opposed to "charter carrier" in an insurance policy?

_McLean_ v. _Canadian Premier Life Insurance Co_., 2012 BCSC 163:

INSURANCE — Life insurance — Interpretation of policy • Defendant issuing policy providing $1 million accidental death benefit in respect of plaintiff’s husband if his death resulted from a "collision, crash or sinking of a duly licensed Common Carrier while riding as a fare paying passenger inside such Common Carrier" — While going to work on a plane chartered by his employer, plaintiff’s husband dying in a crash of an airplane licensed to operate as a "domestic air carrier" — Court interpreting the words "common carrier" to mean a public conveyance such as an aircraft, which at the time of the accident was operating on a regular scheduled passenger service between defined points and available to members of the public — As the aircraft, being chartered, was not operating as a "common carrier", court finding the tragic loss did not occur within the terms of the accidental death benefit rider — Action dismissed.

https://www.bccourts.ca/jdb-txt/SC/12/01/2012BCSC0163cor1.htm

But, returning to the "criminal offence" exclusion for a moment, is there no CMFr who has ever driven a motor vehicle with a blood alcohol level just a smidge above .08? Death in that circumstance, even if not at fault, would avoid the policy. Or how about a CMFr dying of a heart attack while filling out an income tax return that contains a misrepresentation? (Drawing a long bow there, but you get the idea.)


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## Mukhang pera (Feb 26, 2016)

And don't tell fibs about smoking:

_Dyck_ v. _National Life Assurance Co. of Canada_ S.C., Harvey J., Vancouver C950190, February 14, 1997 , 9pp

INSURANCE — Defences — Fraud • Insured, a heavy smoker, representing himself to be a non-smoker in obtaining life insurance — Court rescinding policy on ground of fraud.

https://www.bccourts.ca/jdb-txt/sc/97/02/s97-0251.txt


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## Mukhang pera (Feb 26, 2016)

And even innocent misrepresentation can leave you out in the cold:

_548810 B.C. Inc._ v. _Toronto Dominion Life Insurance Co. et al._, 2000 BCSC 1700

DUTIES & LIABILITY OF INSURED — Disclosure • Insured failing to give accurate answers on application for life insurance — Insured's material misrepresentation allowing insurer to avoid coverage where death occurring within 2 years of issuance of policy. • PRACTICE — Evidence — Similar facts — Defendant insurer seeking to avoid liability under life insurance policy — Court declining to permit defendant to introduce other insurance applications as similar fact evidence.

Interesting (to me, at least) fact pattern in this one, so I'll add a bit more:

The plaintiff company obtained life insurance on its principals, including S. In completing the application to the defendant insurer, S. denied having received treatment, including counselling within five years for, inter alia, high blood pressure, any conditions related to blood, glands and various internal organs, or for any condition relating to his joints. S. died within two years of issuance of the policy. A medical examiner concluded that the death resulted from "sudden cardiac death without known prior symptomatology" and he attributed it to "3 vessel coronary artherosclerosis with risk factor of obesity." The defendant discovered that S. had, within five years prior to the insurance application, been investigated and treated for "significant back complaints" and for blood in his urine, and had been told to lose weight and take steps to reduce his cholesterol levels. It denied coverage. The plaintiff sued on the policy. Held, action dismissed. Because S. died within two years of the policy being issued, the relevant Insurance Act provisions allowed the defendant to avoid liability if it proved only innocent misrepresentation. Fraud did not need to be proved. The defendant was not entitled to introduce evidence of other life insurance applications made by S. as similar fact evidence. The evidence was not so similar to the defendant's evidence that it could be said to tend to prove some fact essential to the defendant's case. The questions posed on the other application forms were not so strikingly similar to the questions asked on the defendant's application as to meet that threshold requirement. On the merits of the case, S. should have answered "Yes" to the questions relating to treatment for various conditions set out in the application form in light of his counselling and treatment for back pain and high cholesterol. Had he done so, he would have been required to answer further questions which would have revealed that he had been referred for testing for traces of blood found in his urine. He had not completed that testing and, on the evidence, he would have been denied insurance until the matter had been investigated. The application form therefore contained a material misrepresentation entitling the defendant to avoid coverage.

https://www.bccourts.ca/jdb-txt/sc/00/17/s00-1700.htm

I could come up with a few hundred more, but I'll quit, lest I find myself excommunicated from the hallowed halls of CMF for being tedious and failing to stick to financial issues, with the topic at hand being only obliquely related.


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## OptsyEagle (Nov 29, 2009)

Beaver101 said:


> ^ Okay, I get that you're not commenting about buying life insurance being a good or a bad idea.
> 
> But I don't think you can even think of "insurance" as an "investment" as the industry seems to be swelling our brains toward to. Insurance is for "protection", isn't it?
> 
> ...


Life Insurance WAS designed solely for protection but since it takes a premium investment and turns it into a lump sum, it can certainly look like an investment. The initial question was if $575 per month in life insurance would create a larger lump sum to the heirs then $575 to an investment. I don't really care what one wants to call that endeavour but the larger, after tax lump sum would be created by the life insurance, almost all the time.

The $230K is your own money. BUT, if you are probably never going to spend it, you could argue it is the heirs future money. Where would they see the best bang for their future buck. Life insurance. Plus, the reason I gave that $230K example was to show, like a savings plan, if you changed your mind or later found that you needed the money, you could withdraw it. Obviously the life insurance plan would fall apart if the premium money for it disappeared, but one always loses the future benefits of any money, that they decide to spend today.

You have gotten confused between the life insurance suggestion and the savings plan alternative. The 3% guaranteed rate inside the life insurance policy would be fully guaranteed and tax free. I then said that even if you could get 3% guaranteed rate on an alternative investment, it would be taxable, either each year, along the way or when you die. The life insurance plan is never taxable as long as you don't forget to die.

When I say that the commissions are factored in, it is to say that the premium of $575 per month includes the commissions. They are not added to it. Obviously the insurance might be cheaper if no commissions were paid, but it should not change the way you look at it. Even if you could get this policy, without commissions, and you probably can, it does not guarantee the premium would be cheaper. If that company thought you would die when you are 83 and another thinks it will be 86, the later will end up being far cheaper then the former, even if they pay commissions. Also, these policies are rarely bought, they are sold. If a company waited by the phone for a customer to call up and ask for a policy like this, they would be more bored then the Maytag repair man. This type of insurance needs a broker agent who can scour the marketplace and find the lowest premium and ensure it has the right features to meet its need. That service would far outstrip what is paid for it.

By the way, commissions on these policies would be around 150% of the 1st year premium for the term 100 and almost 200% of 1st year premium for the UL. That would go to the dealer company. The agent rarely gets all of it. That would vary from around 1/4 of it to probably 2/3rds for the majority of policies sold. As I said, that should not change how one looks at it (but it usually does anyway) but should only help you understand where your agent's bias might be.


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## OptsyEagle (Nov 29, 2009)

Mukhang pera said:


> The "guarantee" of payment is not, in my view, absolute. Life insurance is a form of contract. Contracts can be breached or may fail to be effective for a variety of reasons. The larger the policy, the more microscopic the scrutiny to which it will be subjected before the insurer will agree to pay out. If a way can be found to avoid liability, the insurer will find it. Then, the beneficiary accepts that decision or hires a lawyer and heads to court. That does not come at a bargain price nor does it result in swift justice. Or a certainty of outcome, for that matter.
> 
> Anything can happen. Like this:
> 
> ...


For the most part, if death occurs more then 2 years after the policy is put into force, the likelihood of the insurance company paying out what they promised is extremely high. I have seen it done, like clockwork, many times.

The problem usually comes from the 1st two years. All life policies have a "contestability" clause. This clause is not there to allow insurance companies to sidestep their obligations. It is there to protect the industry. What it says, is that if you have a pre-existing condition, that you knew about, even if you underestimated its materiality, you must disclose it to the insurance company, on the application. Failure to do so WILL see the policy voided.

The reason that is there should be quite obvious. If I could have worked the intensive care floor of any municipal hospital, selling life and disability insurance, I could have made so much money as an agent, I would have been retired in 2 years, max. Just about everyone in there, wishes they had or had more life and/or disability insurance. Since those policy would have an almost guaranteed loss associated with their issuance, the other people out there. The ones that are healthy, looking to protect their families, their mortgage, their incomes, would have to foot that enormous bill. This would be unsustainable and the insurance industry would soon fail. This clause is there to keep people honest. Keep the industry strong. It is essential. Insurance companies are not their to provide charitable support. They provide premium paid protection.

I can remember hundreds of instances where someone tells me about their friend Dave. Just diagnosed with stage 4 lung cancer. Has a wife, 3 children and a mortgage. No group insurance and therefore no insurance at all. They would ask me if he could get life insurance. Obviously I shook my head no, in a concerned manner. Wayyyy, too late. Do you really think a guy like that would not risk a little itsy bitsy lie on a life application to save his family from absolute financial hardship?

The next issue is fraud. The 2 year clause is for innocent mis-representations. All others are known as fraud. If the insurance company suspects fraud, you can be darn sure they are going to investigate the daylights out of it. If they can PROVE that you lied on purpose to get your policy, that is fraud. That they can and will contest and it has no time limits...and yes, I have seen that done a few times as well, and in each time I saw it, my best guess was the insurance company was probably right. Most people have no idea how easy it might be to find out something a person thinks no one will ever find out.

Other then that, the claimant submits a claim form. Usually a doctors report goes with it and a death certificate and the insurance company issues a cheque within a few weeks.


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## Beaver101 (Nov 14, 2011)

^ MP's posts identifies the aftermath (legal aspects) of a sold policy but in the OP's case (late 50s), I don't think should she would get anywhere near $400K (maybe$200K) without being medically poked, assessed, and/or health-history dissected to the tilts. 

But then since the policy is such a great investment, then it's most likely she would be sold the policy first, premiums collected, with the death claim eventually worried later.


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## Beaver101 (Nov 14, 2011)

OptsyEagle said:


> ...


 ... of course, there is no such thing as a free-lunch otherwise what is the agent gonna eat? (Air is still free I supposed). 

Plus, I don't think the 3% interest "investment" is tax-free, tax-sheltered=yes, tax-free=no.


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## OptsyEagle (Nov 29, 2009)

In the life policy, it is indeed tax free at death. If the owner withdraws the money before they die, taxes will start to kick in, but as long as the owner never takes out any money from this policy and dies, it is absolutely tax free in Canada.

Yes. Expect a medical. That is usually a blood test and blood pressure. Definitely expect them to ask every possible medical question that could ever be asked. They will not be shy to intrude in personal areas. If one is hoping they don't ask that health question that pertains to .....?. Stop that kind of thinking right now. They will ask it. Sometimes they ask it 2 or 3 times in different ways. The application will ask it. The person taking the blood and blood pressure will ask it and sometimes they ask your doctor as well.

I mean common. $400,000 dollars for $575 dollars. They kind of need to restack those odds back a little into their favour...and they do.


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## OnlyMyOpinion (Sep 1, 2013)

I still carry $300k of term insurance through my professional group but don't really need it. I'll revisit the next premium schedule when I hit 65 and consider dropping it. In the back of mind are friends/family who died in their late 60's. I recall looking at the premiums when I retired and it seemed that it was age 70 that premiums really took off. 
What I find interesting is that for the past 2 or 3 years I've been sent a 'loyalty bonus' cheque refunding 25% of my premium. Made me wonder if they send that out to those most likely to be cancelling in an effort to get a few morre years out of them. It seems to have worked in my case


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## Beaver101 (Nov 14, 2011)

^ Hello, that's $575 per "month" = $5,900 per "year" for how many years? Provided you pass the medicals first ... baaa baaa


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