Are you benefiting from insurance solutions?
You may think of insurance as a backstop against ill health or as security for your family. However, insurance solutions can also provide stable investment options to help reduce risk in today’s ever changing markets.
Insurance solutions offer the potential to boost your long-term returns, while also guaranteeing your capital. The security of guaranteed principal, and in some cases guaranteed returns, can make insurance investments a strategic choice in uncertain times.
In addition, the favourable tax treatment accorded to insurance proceeds can enhance your estate-planning strategy. In most cases, life insurance benefits are tax-free.
Confidence in Canada
Recent problems with American insurers may have raised concerns about the stability of insurance investments in Canada.
Canadian insurance companies are strictly regulated, with robust capital requirements and industry-funded, government-endorsed plans to protect policy holders in case of the failure of a Canadian insurance company.
Your options
Depending on your goals, time frame, and risk tolerance, we can help you decide which insurance strategy is right for you. Here are some of the ways that you can use insurance solutions in your portfolio.
Get potentially higher returns with insured annuities. If you are a risk-averse investor, you may hold some or all of your fixed-income allocation in Guaranteed Investment Certificates (GICs) for assured returns. But the modest returns of GICs may not meet your needs, and they are fully taxable at your marginal tax rate when held in a non-registered account. The Insured Annuity strategy involves purchasing a Life Annuity, which generates a tax-advantaged income stream, along with a permanent life insurance policy. The returns generated are often significantly higher than other fixed-income investments.
Safeguard your capital with segregated funds (“seg funds”). These funds are sponsored by insurance companies and offer a low-risk way to participate in the stock markets while safeguarding your capital against volatility.
Seg funds are similar to mutual funds and offer growth aligned to the underlying equity investments. However, they are also insurance contracts that guarantee 75% to 100% of your original investment after a predetermined time period — typically 10 years — and at death.
Some segregated funds have a “reset” feature allowing you to lock in market gains on certain dates, increasing the amount of capital guaranteed. As well, the assets can be distributed directly to your beneficiaries upon your death, avoiding probate fees and delays.
Guaranteed Minimum Withdrawal Benefit (GMWB) products. These investments are segregated funds that are designed to provide guaranteed, potentially increasing, retirement income.
The income stream is initially based on a percentage of your original deposit. However, GMWB products usually offer an annual (non-compounding) bonus, for a predetermined number of years when withdrawals are not made. There is also the potential to increase your annual income and death benefit guarantees through periodic resets.
Enhance your estate plan with tax-exempt life insurance policies. One way to enhance your estate plan is to shift some assets from fully taxable investments such as bonds and GICs into a permanent insurance policy (Universal Life). The investment value grows on a tax-exempt basis inside the policy, and is paid to your beneficiaries tax-free at death.
With this type of policy, you can invest the assets conservatively or more aggressively, depending on your personal risk profile, with the option of choosing investments with contractual guarantees. You benefit from continuing insurance protection, a reduction in ongoing tax liabilities, and typically a much larger estate for your heirs.
Contact us to discuss whether an insurance solution could work as part of your diversified portfolio.