Q&A: Insurance for the Future

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A reader’s parents are considering using life insurance as a means of transferring family wealth to their son. Good idea?


Q – I would like to get advice from you regarding the whole life insurance policy as part of financial planning. My 25-year-old son just finished his education and has contract work as junior consultant/project coordinator. He makes about $40,000/year and lives at home. Besides a little student loan, he has no other major expense. I would like to know when would be the best time to consider whole like insurance as part of his financial planning for his future.

As I understand it, the older you are the more expensive and more complicated it becomes to buy life insurance products. I always have had term life insurance, for “just in case”. However, as I get older, my premium goes up every five years and it soon may be too expensive. My husband and I are in our late 50s and early 60s. If we want to leave something for our children we may not have the option of a life insurance policy in place to cover the tax bill.

This makes me wonder if my son should do something differently. We could finance him to purchase whole life insurance until he can stand on his feet and he would have no need worry about his policy getting more expensive by the time he in his 50s. Also he will have some dividends accumulated over the years, which he can borrow against if he needs to. Can this be part of our wealth transfer? We are not rich, but want to try hard to stretch every dollar. We believe we should leave something.

He does not have an RRSP, although has accumulated RRSP room over the years. He has about $2,000 in his TFSA. – Nancy W.

A – The main reason for life insurance is to protect dependents in the event of someone’s early demise. I have always felt that the best way to do that is with term insurance – it provides the most coverage for the least cost. There are many kinds of term policies; for more details go here.

Combining life insurance with savings in a universal life policy is generally regarded as an expensive way to invest. I suggest you separate the two. Decide what type of term life insurance policy, at what price, will best suit your son’s needs (keeping in mind he currently has no dependents) and then look at his savings/investment program.

If you want to transfer some wealth to your son, you can simply give him cash gifts. There is no gift tax in Canada. For example, you could give him the money to allow him to top up his TFSA to the contribution limit. If you want to do more, give him money to invest in the RRSP. Both these options would be less expensive than using a life insurance policy for investing purposes. – G.P.

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