Mortality Experience

In Canada, the mortality experience is identical to that in every other country in the world. One death per lifetime. In other words, death is certain. A death benefit under a life insurance policy is then not probabilistic, it too is certain.

That clear, but obscured, fact can help you put life insurance in a somewhat different context. In exchange for a premium, you will be certain to get something back. If the amount you get back is worth more than you put in, then it is a good investment. Albeit not one you can use easily.

How can it be a good investment, the client cries? Insurance companies did not get big by being altruistic. If they make a lot of money then I must be the loser. There is no one else in the game. I lose what they win.

Partly true, but there are more than two players. There are also governments and there are investment managers and their custodial and transaction costs. If you keep the money and invest yourself, both the government and the managers will get more than if you let a life insurer do it for you.

Insurance companies pay less tax on their investment income than you do. Think about income splitting as a valid tax reduction tactic. Given the choice, let the low rate taxpayer pay the taxes. With life insurance, you can create the low cost taxpayer.

Similarly, the cost to buy, store and administer a $1,000,000 bond is pretty much the same as for a $10,000 bond. Use the low cost provider.

Because of these and a few other efficiencies, whole life insurance pays a higher rate of return, after taxes, at death than any other investment you can make that has a similar risk profile. Quite a bit more.

On the downside, I have noticed that there are few people who are prepared to die to enhance the rate of return on their investments. I have also noticed, as recited above, that none live forever. Since dying is negative, why not make it a little more palatable by using the inevitability to improve the investment yield on the part of your portfolio that is intended to be in your estate?

Any time you find a way to use an inevitable negative event to your benefit, you should at least consider it.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

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