The only things certain in life are death and taxes.
How long ago did you first hear that saying? Since that time you have likely purchased additional life insurance policies on yourself or family members. Industry statistics tell us the average Canadian will purchase life insurance seven times in their lifetime. Throughout your life, insurance was likely needed to supplement group coverage at work, when you were raising young children, taking on debt, such as loans and mortgages, starting a business or wanted to protect against loss of income through premature death. These are all excellent reasons to own insurance.
At or after retirement, it's quite logical for you to question the need to maintain the coverage. You may be debt-free, have no dependent children, or both. Why then would you consider keeping these policies? Should these policies not be needed, what is the most beneficial method of disposing of them?
Remember the death and taxes thing...?
If you are reading this article, then your life insurance hasn't paid a death claim: a fact one assumes you are quite happy about. Not surprisingly, planning your "risk management" strategy must take into consideration your own realistic expectations about the future.
Will your standard of living change? At retirement you will need to take a long, hard look at financial affairs. Even at this time of life there is still time for significant changes to occur:
- Changes in living arrangements such as downsizing to a condo must be considered from a budget perspective;
- Unexpected homecare or healthcare costs may mean there is less disposable income than originally anticipated;
- Demands on your capital possibly by adult children.
These future risks to capital may cause you to think that the very best use of existing insurance policies is to take the cash out and collapse the policies.
You may want to consider that your death may still have considerable financial consequences for your partner, heirs, or other family members.
Consider the potential costs associated with these factors
a. Paying funeral costs;
b. Settling such estate costs such as legal, executor, and probate fees;
c. Paying to Revenue Canada any capital gains tax payable on any deemed dispositions of capital property that are triggered at your death;
d. If you own Registered Retirement Savings plans or Registered Retirement Income Funds you are deemed to have sold them for fair market value (cashed them in) and this amount is included in your income total for the year. This means that the total tax due will amount to about one half of the value of your RRSP's and RRIF's in the year of death;
(Note: Leaving everything to your spouse will postpone taxes until your spouse dies. Should you outlive your spouse, or don't have a spouse, and you DO own a cottage, RRSP, RRIF, investments, or capital property, the tax owing can be a huge amount! Your estate must pay this tax when they file the last income tax return.)
e. A bequest of a financial gift to your favorite charity.
Where will the money come from to pay these bills? Perhaps you have the needed amounts available in cash or near liquid investments. If not, then you might want to maintain any existing insurance in force to be there at your death. You can then think about ways to spend the freed up cash while you're still alive and kicking.
If the costs at death are significant, you may need to consider the consequences this drain of capital will have on your intended plans vis-à-vis amounts you had earmarked to pass on to your family or charitable beneficiaries. Often insurance is purchased at this time because the total cost of the insurance protection is still just a fraction of the full cost of the liabilities.
If you are of the opinion that Revenue Canada has already taken more than they deserve, you may consider this idea: Suggest that your children (the ultimate beneficiaries) pay the cost for the insurance so that the estate will pass intact to them, with the insurance monies being used to pay the tax.
Family Dynamics
As you review your financial priorities in retirement, you may also need to consider the “family dynamics” at play.
Do you feel as though you are you spending your children's inheritance? Worse yet, have they told you that's what you are doing? Having adequate insurance means you can spend your investments guilt-free, knowing that you will be leaving an inheritance through your insurance plan; a benefit that is tax-free, free from creditors claims, probate, and where you decide who gets how much with no public record ever being made.
Do you have one particular asset such as a cottage or business, and more than one intended beneficiary? In both these cases, having sufficient life insurance can equalize the benefits by giving the cottage to one child and insurance proceeds in an equal amount to the other child. This equalizing feature prevents many potential quarrels from ever occurring after you are gone.
Caring For The Caregiver
Another consideration is in the situation of a couple where one is disabled or chronically ill. The other partner (the caregiver) is contributing to the household in a tangible way as well as a financial one. Should the caregiver die, it creates a financial burden relative to the cost to replace that care from outside the home.
The trend is for health-care services to be cut down to the point of providing only the bare necessities for survival in government sponsored plans. Therefore it may make sense to keep your existing insurance policy for this potentiality.
I really don't need this insurance any more.
You may own old insurance policies and after a careful evaluation, you have decided they are not needed. What is the best use of them now?
Most insurance policies having a cash "savings" element are called "whole life" or, "permanent", or even "endowment" plans. The longer you own them, and continue to pay premiums, the larger the cash surrender value becomes.
Many older plans had a "paid-up" feature allowing you to stop paying premiums, but maintain the coverage amount. If you elected this option in the past, then the cash value does not continue to build, as the company is using the investment yield inside the plan to pay the annual costs of maintaining the insurance.
Holding a paid-up policy does not increase its value, so you may consider the options: surrendering the policy to spend, re-investing the cash in your investment savings, or donating the policy to a registered charity.
Should you wish to make a gift of a life policy the procedure is quite straightforward. Ownership is transferred by completing an assignment form that you can obtain from the insurance company.
There is a twofold benefit of this type of donation. The charity benefits from either the death benefit which it will receive tax-free on the death of the life insured, and the donor of the policy will receive a donation receipt for the cash value of the policy (if there is one). Note: if the cash value of an older policy exceeds the amount of premiums paid less dividends, then you will receive a donation receipt for the cash value, but you must report the gain on the policy as income.
An additional thought here would be to look at alternative types of insurance that may more closely reflect your current needs, i.e. the onset of a critical illness or disease.
The case for Critical illness Protection
The simple fact is that it is much more costly to live in retirement with ill health. Even the most thorough retirement income projections typically do not make allowances for the additional costs of living involved when one or both retirees suffer a catastrophic illness such as cancer or coronary heart disease.
A fairly recent development in the insurance industry has been the creation of a new type of insurance product aimed at providing tax-free cash to an insured person who develops or suffers a critical or life threatening illness or disease.
The full list of covered illness is extensive, however some of the major illnesses covered are: heart attack, coronary bypass, life threatening cancer, stroke, multiple sclerosis, paralysis, kidney failure, blindness, deafness, major organ transplant, coma, loss of speech, severe burns, Alzheimer's, and Parkinson's disease.
You are never too young to make a claim. The average age of the people making a claim in the past year was 41. Fully one quarter of all claims at one Canadian life insurer was from individuals under age 35!
As you assess your own situation, comparisons between traditional life insurance with its benefit payable at death must be weighed against the benefits payable at the onset of a critical illness.
Some insurers have made "Living Benefit" payments to victims of particularly serious illnesses. These are essentially advance payments of death benefits amounting to as much as 70 to 80 per cent of the face amount of the policy. They can be applied for where appropriate by making an application in writing to the attention of "The Medical Director' at your life insurance companies head office.
Insurance companies are striving to meet the needs of a more demanding clientele. Many of them have eased up on restrictive limits to making policy changes. Today outdated policies may be changed to different plans, updated, increased (with appropriate medical evidence) or otherwise re-tailored to suit the need of the client.
A thorough evaluation should be performed before any existing insurance is canceled since once done the policy cannot be re-instated without new medical evidence.
