How life insurance can help Canadians build and protect wealth

This is a strong financial mechanism against "a slow and silent killer"

How life insurance can help Canadians build and protect wealth

Life & Health

By Bethan Moorcraft

Inflation is “a slow and silent killer” in how it erodes the value of money. That’s how Michael Aziz (pictured), chief distribution officer at Canada Protection Plan (CPP), a Foresters Financial Company, described the impact of the current economic squeeze on Canadians.

A recent LIMRA study found that nearly one third of US retirees report their basic living expenses are more costly today than they had anticipated, with eight in 10 respondents blaming inflation for this discrepancy. The situation is similar for ageing citizen and retirees in Canada, where inflation hit 8% in June, a record since 1983.

“Your dollar doesn’t go as far as it used to, so you have to protect your portfolio and try to get growth out of your investments and your savings in order to match or exceed the inflation rate,” said Aziz. “Portfolio diversification is critical. You can put all your eggs in one basket, and if that basket performs well – congratulations – but we know that different asset classes react differently to external and internal factors in the economy.”

Some options available to Canadian retirees, or those nearing retirement, that may help mitigate the impact of inflation and provide a certain degree of insulation include: inflation-protected government bonds, such as real return bonds (RRBs); life, term-certain and variable annuities; delaying onset of social security to maximize inflation-adjusted income; and investments in rental property and real estate investment trusts (REITs).

Life insurance is another beneficial financial mechanism, particularly during inflationary periods. While the primary purpose of life insurance is to protect beneficiaries from a financial loss – covering substantial expenses like mortgage payments, debts, and final expenses – if the primary financial contributor dies unexpectedly, some life insurance products can also be used to help Canadians build and protect their wealth.

Universal life (UL) insurance, for example, typically contains two portions: an insurance portion and a savings or investment portion. Any financial gains inside the policy, whether they come from investments within the policy or dividends, are tax-sheltered, allowing policyholders to accumulate wealth tax-free. In a similar vein, participating life insurance provides a combination of permanent life insurance protection and an opportunity for tax-preferred cash value growth.

While equity returns obtained through life insurance often outperform inflation, higher inflation increases the amount of insurance needed, making it crucial for individuals to re-evaluate their existing policies to ensure the amount of insurance in place aligns with their realities.

“Life insurance is not static. Your investment portfolio is not static. These are living strategies that you should review constantly to ensure they’re adequate and they meet your needs,” Aziz commented. “If you own any property – including an investment property or a cottage – those assets are growing in value [due to inflation], so you should review if the growth in your UL or participating life policy will be sufficient to cover any estate planning issues.

“There are also instances where you may want to decrease your insurance or change the mix of coverage. For example, if you pay off your mortgage, you might not want as much term life insurance, but now you own an asset that might require more permanent life insurance coverage. Depending on the product, there is some flexibility in life insurance. I would encourage people to work with a good financial advisor who can help manage your short- and long-term goals.”

In challenging economic times, it is incumbent on advisors to be proactive in reaching out to clients and reviewing their portfolios, Aziz stressed. He said that when people experience big life changes – they have a child, or they buy a new house – they don’t necessarily rush to inform their insurer. It is for advisors to “access and respond to those trigger points,” he added, which is why regular communication is key.

“Advisors should ensure they’re educated on the current market conditions,” Aziz told Insurance Business. “They should get the proper training and partner up with the right companies that can help, like Foresters Financial and Canada Protection Plan. Communication with clients is key in these challenging times. I’ve seen that the successful advisors are those that are continually in front of their clients letting them know what’s going on, whether that’s in person, in a newsletter, over the phone and so on. Understanding your clients’ needs is really the key.”

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