Understanding Life Insurance

Understanding Life Insurance

Appendix D: Life Insurance as an Investment

No. You should not purchase life insurance as an investment. Stick to using life insurance for insurance purposes, to cover loss.

Life insurance as an investment is actually a good idea in some situations. Unfortunately those situations are not applicable to most Canadians. The insurance industry markets these investments by showing the benefits (which are real) but fail to provide comparison of alternative choices – in particular, RRSP’s, TFSA’s, and other tax sheltered investments.

When compared to a readily available tax sheltered investment such as an RRSP or TFSA, a life insurance policy will not yield nearly as great of returns. Life insurance policies have an insurance cost which acts as a drag on the returns and they generally have much higher fee structures than would be found in other investments. Life insurance policies are also less flexible than other investment choices.

Once you have exhausted all your tax sheltered investment choices, i.e. your RRSP’s and TFSA’s are fully maxed out, then a small portion of your remaining assets can very sensibly be invested into life insurance policies. At that point, life insurance can become a very attractive investment. But until then, you have better choices available to you.

Appendix E: Life Insurance for Smokers (Tobacco and Marijuana)

Smokers will end up paying roughly double the premiums compared to non-smokers. And it’s not that the life insurance companies are raking it in with this – the higher premiums are there because you’re likely to die earlier. We all know that. Is there any way to mitigate these higher premiums though? Well, maybe.

First, the definition of a smoker is anyone who’s had one or more cigarettes in the past year. There’s no getting around that (if you smoke MJ, pipe, or cigars, then you need to consult with your broker, as different companies have different definitions).

So, you’re defined as a smoker. How do we get cheaper rates?

Well, if you have no plans on quitting, then there is no fix. Purchase the correct type, and pay the associated premiums – there’s no way around it.

However, most smokers have an expectation that they’re going to quit. If that’s your premise, then we actually have two ways to get nonsmoker rates for a couple of years, until you quit.

First, if you’re considering a whole life policy, then Foresters Financial specifically has a smoking incentive plan. They offer you nonsmoking premiums for the first two years of the policy after which you can confirm that you’re now a nonsmoker and have the nonsmoker premiums continue, or at that time they’ll increase the premiums to smoking premiums at that time. Either way, you saved substantially for the first two years. These plans were available on term insurance a long time ago but I’m not aware of any company currently offering this.

Secondly, there’s a combination of term policy classes and the exchange attribute we can take advantage of in order to save money until you quit smoking.

It works like this; you take the shortest term policy you can find (typically a term 10) that has exchange. Keep the term 10 until you have stopped smoking for the a full year. Request a switch to nonsmoking premiums at that time,and then exchange to a longer term once the nonsmoking status is approved. An example would help (using fictional numbers)

Term 10 Sm.Term 20 Non SmTerm 20 Sm.Exchange Strategy (term 10->term 20)
$50$50$100$50 (term 10 smoker)
$50$50$100$50 (term 10 smoker)

Now we request non-smoker premiums and exchange to a term 20.

Term 10 Sm.Term 20 Non SmTerm 20 Sm.Exchange Strategy (term 10->term 20)
$50$50$100$50 (term 10 smoker)
$50$50$100$50 (term 10 smoker)
$50$50$100$50 (now a term 20 NS)

You can see that the exchange strategy gives you the benefits of a term 20 policy, but with the premiums of a non-smoking policy until you quit smoking.

For marijuana smokers, yes, in some cases you can get non-smoking premiums. When this is possible depends on how much you use and the company. For many recreational smokers, 1-2 times a week, some companies will offer non-smoking premiums. Specific companies change their policies over time so you need to have your broker shop companies when you purchase.

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