Young, healthy, wealthy: Investing in life insurance

Money Saved

Being young and being relatively healthy has its perks. Investing while being young and using the benefits of having time to build up wealth, can create a stable and assured life.

How can someone save $100 a month and become a millionaire? If they save $100 month from the age of 12, invested over 43 years, with the right investment advice, could possibly grow their money up to $1 million or more by the age of 65.

Kim Barr is a specialist in life insurance, segregated fund investments and group benefit plans. She helps people build their future, their children’s futures or their grandchildren’s futures through careful planning. I spoke to Kim about the benefits of life insurance and good financial planning, and why it is helpful to invest.

Q: Let’s start with this: how can purchasing a life insurance plan be a good investment compared to other means of investing?

A: First of all, this is a contract owned by the insurance company, which will give you a guarantee of at least 75 per cent of your death benefit, even in a down-turn of the economy. This means that you have complete assurance that you will always be covered and your beneficiary will receive money that is tax-free. This is the difference between purchasing an insurance policy with participating investments versus a savings account.

Q: How does having a life insurance policy make you rich?

A: By having an investment portfolio inside of a life insurance policy, your funds are more likely to have a better rate of return than a savings account. The owner of an insurance policy can and most times will transfer the ownership of a policy with a huge cash value in it to his child or children for their children and their children’s children, thus creating a continued growth of family wealth.

Q: What role does financial planning play in this?

A: Financial planning is really, in essence, to bring to life a person’s dreams and goals through actively listening to them to create a plan that not only benefits them but also leaves a legacy. When I put together a plan, I am not only taking into account the needs of my client, but I am also helping them to look into their future. They are creating a way for their future generations to build and sustain wealth and an overall better quality of life.

Q: How does life insurance tie into the world of financial planning?

A: Well, first of all, money makes the world go ’round. Life insurance is one of the ways that you can tell your family that you love them. By making sure that if the unforeseen happens to you, you will know that your family is taken care of even after you’ve passed away. You know that they will have a comfortable life. Your loved ones can keep the same house, keep the family memories that you’ve shared. You can know that your kids will be able to go to college. Insurance is not how it used to be 50 years ago. Today, there are more and better options to choose from and the returns are greater than ever.

Q: How is purchasing life insurance better than it was 50 years ago?

A: Well I’ll put it this way, 50 years ago, insurance was comparable to a one-size-fits-all stance. Today, insurance has many different components. You can say that life insurance is the steak, and the many options to choose from (or add-ons) are the vegetables, such as critical illness insurance. In those days, many insurance policies were not as flexible, many did not offer any return of investments where today, you can purchase life insurance and take money out of it for a down payment of a house, or a car, or even a vacation. This is what we call a policy loan.

Q: Please expand on policy loans and how they work?

A: They are a percentage of the cash value build up within your life insurance policy that you are able to withdraw from your policy. The conditions concerning policy loans are, when you withdraw on the policy, you must eventually put back or it will come out of what the beneficiary [the person who is named to receive the face-value amount of the policy, tax-free] receives. Another condition is that you cannot take out all of the cash value that you’ve built up in the policy, otherwise the life insurance policy will be void.

Q: For a beginner, how would one go about purchasing life insurance? What are the steps and processes that you take?

A: When I first meet with a client, we sit down and go through their dreams and goals in life. We create a budget. We look at where they are now and where they want to be in the future. Then, we look at how to make their money work for them to get there. We present them with options to suit their needs. They are generally required to complete a medical history questionnaire. Based on the results of the questionnaire, they might need to have a series of paramedical tests. In terms of a client wanting a policy with an investment component attached, we gather knowledge as to what type of investor they are, do they want to take a risk or are they on the conservative side. From that point, we would take a look at where they want to invest, whether in Canada, the U.S. or internationally, and what type of investments they want to make. My client will pay a monthly premium and that money will be invested in the ways that they choose, while still continuing to grow wealth returns as guaranteed.

Q: Can you give an example of this process in simpler terms?

A: Ok. Jane Doe gives me $100; she is a conservative investor and wants to invest in Canadian energy companies. She has picked a portfolio fund that has shown, over the past 10 years, an average [growth] of 4.5 per cent a year. She realizes that there is no guarantee on how the fund will do in the market, but after comparing investing in a life insurance policy versus a regular savings account, she realized that the return with a life insurance policy is three times higher than the return she would get with a regular savings account.

Q: Going back to the medical assessments that are put in place, please explain what paramedical tests are and why one of your clients might need to take one?

A: They consist of your height, weight, blood pressure, heart rate, a blood sample and a urine sample. We put these paramedical test in place when the client has stated their age, gender and the amount of coverage they are looking for. In most cases, if a client is generally in good health, then they do not need to go through the paramedical testing. That is why it is incredibly beneficial for younger people to open life insurance policies at a younger age, as they are healthier and have more working years in time to save their money.

Q: Is there anything else that you’d like to add?

A: I do have one parting word of advice, especially to young people. Opening up a life insurance policy while you are young is one of the best and smartest investments that you can do for your future. It builds up over time, which is on your side at this point, and it will give you more options for where to spend you money in the future. If you want to have kids, it will give them a stable future and give you a great capacity for financial freedom.