April/May 2007: by Dale R. Berg

Needs-based solutions

Life insurance is needed in business for numerous situations. Many of these situations have been profiled in previous articles such as Key man coverage, funding for a buy sell agreement, or collateral loan coverage. Many of these needs can be properly covered by term insurance. Term insurance is definitely the least expensive coverage in the short term, but could also be the most expensive coverage to purchase in the long term, or beyond the initial term period of 10 or 20 years.

If the need that is presented for life insurance is beyond the term period, it may be economically feasible to look at permanent insurance. Permanent insurance stays in force until the day you die, and premiums are normally payable to age 100. There are three main types of permanent insurance contracts sold in the marketplace today, Term to 100, Participating Whole Life, and Universal Life. Term to 100 is the easiest, and least complicated permanent coverage. Premiums are level from the day you buy it, to age 100. The death benefit is paid if you die prior to age 100, and if you are fortunate enough to make it past one century, premiums cease and the benefit will continue to the date of death.

Universal life, on the other hand, can be very confusing, and very complex. Universal life was initially developed to provide the purchaser with choice. Every consumer demands choice when selecting a product or service, however, choice can also create indecision, and confusion. The commutations and permutations on how to establish a universal life contract are currently endless. The investment options for the accumulating cash value funds within these contracts that life insurance companies now offer is also endless. The policy owner decides much of the investment selection, mortality options, and premium flow with assistance from the professional insurance advisor; therefore, much of the risk is placed on the policyholder, and insurance advisor to choose well.

I know personally I have purchased a bad vehicle in the past, or a camera that only worked one month, or worse yet, a Hawaiian flower shirt that my wife will not let me wear. The point is, with choice comes potential additional risk. That leads us to the final Life Insurance option, Participating Whole Life. A product, with the emergence of universal life in the mid 1980's, was basically rarely ever used to fund life insurance needs. But recently, the financial planning industry is beginning to re-evaluate the validity of this once ansestrial life insurance product. Whole Life is very boring, your premium is set at a predetermined amount, you have no choice of your mortality cost, and your investment options are limited to one, the Whole Life Par Fund. What a mundane, sleepy product. But for some business owners, who take risks every day with massive amounts of their wealth, a guaranteed, well-managed conservative product may be very appealing.

Interestingly enough, I recently had a meeting with a representative for a major Canadian Life insurance company, and our discussion was about Whole Life Coverage. He provided me some numbers that I had never seen before, and actually I can now understand the renewed interest in this product. He showed me the composition of the Par Fund at 5% money Market instruments, 45% bonds, 12% private placements, 24% Mortgages, 2% real estate, and 13% Stocks. Quite a nice diversified portfolio with an average 20-year return of 10.08%. Now compare that to other 20-year returns of 5-10 year bonds at 7.13%, the S&P/TSX at 9.62%, and 5 year GIC's average of 6.4%. The conservative approach of this particular life insurance contract actually pays off quite handsomely.

Every client's insurance need is unique, not one product is designed to be the ultimate solution, therefore, solutions to every insurance need is also unique. When deciding how to cover a particular insurance need, please be aware of all your options, and remember to ask many questions. There are many companies, offering many products, and you need to be an informed consumer to make your premium dollars go as far as possible.

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About the author
Dale R. Berg, CFP, CLU, ChFC, is a Senior Financial Advisor with Assante Wealth Management. He can be reached at 1-877-837-3377 or 306-665-3377, or click to email Dale Berg.

Disclaimer
Please contact a professional advisor to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.

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