When an Investment Professional Recognizes the Value of Insurance

Life insurance discussions are often framed as a choice between insurance and investing.

That framing can be too simplistic.

A recent planning conversation involved an adult child speaking on behalf of his parents about an existing life insurance policy and the possibility of converting temporary coverage into permanent insurance. The family was evaluating how to protect the estate, preserve real estate and business assets, and create liquidity for future obligations.

What made the discussion particularly valuable was the perspective of the family representative. He is a CFA and investment advisor. He understands portfolio construction, market risk, liquidity, taxation and long-term investment returns. He was not approaching insurance as a replacement for investing. He was evaluating it as a complement to the family’s broader plan.

After challenging the mechanics, assumptions and projected returns, he reached an important conclusion:

Permanent insurance can serve as a diversifier—particularly when a family already has substantial exposure to businesses, real estate and financial markets.

That does not mean insurance is appropriate for every family. It does mean the discussion should be based on the risk being addressed, rather than on the assumption that investing and insurance are interchangeable.

The family’s starting point

The family already had an existing policy consisting of a permanent base amount and a temporary term rider. The term coverage was approaching an important decision point: continue with potentially increasing premiums, convert some or all of the coverage, or allow the temporary protection to end.

The adult child was advocating for his parents and trying to determine whether converting the coverage made sense as part of their estate plan.

The family’s objectives were different from the business purpose of another policy. One policy was intended to support a business buy-sell arrangement. The Canada Life coverage under discussion was viewed primarily as an estate-planning tool for the parents, their children and future generations.

That distinction is critical. Insurance should be evaluated based on the need it is intended to solve.

Term insurance can be highly effective when the need is temporary. It may be appropriate for debt protection, income replacement, business obligations or periods when dependants require support.

But if the need is expected to continue for life, a policy that expires or becomes increasingly expensive may not provide the desired certainty.

Why permanent insurance entered the conversation

The family was not simply looking for the highest projected return. It was considering how to create liquidity at death without forcing heirs to sell important assets.

For a family with real estate, private businesses and investment accounts, death may trigger tax liabilities and other financial obligations. Those obligations may arise at a time when:

• Real estate cannot be sold quickly

• A business valuation is uncertain

• Markets are declining

• Family members disagree about whether to sell an asset

• A property has sentimental or strategic value

• A buyer is not immediately available

Permanent life insurance can provide a source of liquidity that is not directly dependent on selling those assets.

It does not eliminate all estate-planning risk. It does not guarantee that every asset will retain its value. It does, however, transfer the mortality risk—the risk that death occurs before sufficient capital has been accumulated—to an insurer, subject to the policy contract.

That is fundamentally different from relying solely on a self-insurance strategy.

The investment professional’s perspective

The adult child approached the analysis as an investment professional.

He asked the questions many sophisticated investors ask:

• What is the internal rate of return at different ages?

• How do the guaranteed and non-guaranteed values compare?

• What would happen if the same cash flow were invested in a portfolio?

• How much market risk would be required to achieve a comparable result?

• What happens if the insured dies early?

• How does corporate taxation affect the outcome?

• How much liquidity is available during life?

• Is the premium sustainable?

These questions are essential.

Permanent insurance should not be sold on the basis of a single projected rate of return. Nor should it be described as a guaranteed investment or a substitute for a diversified portfolio.

The more accurate comparison is between different risks and objectives.

An investment portfolio may offer greater flexibility, liquidity and upside potential. It may also experience significant volatility and may not provide a predetermined amount of capital if death occurs early.

Permanent insurance may provide a contractual death benefit and potential cash value, but it involves premiums, policy costs, surrender considerations, insurer terms and non-guaranteed assumptions.

The decision is therefore not simply about which option produces the highest projected number. It is about which combination of assets best serves the family’s objectives.

Participating whole life and universal life

The discussion compared participating whole life, often referred to as PAR, with universal life.

Participating whole life generally includes:

• A guaranteed insurance component

• Guaranteed values defined by the contract

• Potential non-guaranteed dividends

• Cash value

• The option to use dividends to purchase paid-up additions

Paid-up additions can increase the permanent death benefit over time. This can be useful where a family’s estate value and future tax exposure may grow.

Universal life generally provides greater flexibility in premium funding and investment allocation. Depending on the product, policyholders may be able to make additional deposits within applicable tax limits and select from different investment options.

That flexibility can be useful when a corporation has significant surplus capital and a large permanent insurance need. However, it also introduces additional monitoring requirements. Investment performance, fees, policy charges and funding decisions can affect policy sustainability.

A universal life policy is not automatically cheaper in an economically meaningful sense, and a participating policy is not automatically superior. The correct comparison depends on the design, funding level, death-benefit option, guarantees, assumptions and purpose of the policy.

Paid-up additions and a growing death benefit

The family was particularly interested in the ability to use participating policy dividends to purchase paid-up additions.

This feature can create a growing death benefit over time, subject to the policy’s terms and dividend experience. That can be relevant when the family expects its estate obligations to increase.

For example, real estate values may rise. Corporate assets may grow. A future tax liability may be larger than the family originally anticipated.

A growing death benefit may help address that changing need.

The distinction between guaranteed and non-guaranteed values remains essential. The base policy and contractual values should be reviewed separately from values based on the current dividend scale.

Dividends can change. A current dividend scale is not a promise of future performance.

Cash value and access to liquidity

Permanent policies may also accumulate cash value that can potentially be accessed during life.

Access may occur through:

• A policy loan

• A collateral loan from a financial institution

• A partial surrender

• Other contractual options

Each approach has different consequences.

Borrowing against a policy creates interest costs and repayment obligations. If a policy loan becomes excessive or the policy lapses with an outstanding loan, tax consequences may arise. Collateral lending also depends on the lender’s terms and the policy’s recognized value.

The purpose should not be to treat the policy as an unlimited line of credit. Rather, it may provide another source of liquidity when selling other assets would be undesirable.

That flexibility can be particularly valuable during a market downturn, when a family may want to avoid selling investments at depressed prices.

Insurance as a complement to investment risk

The investment professional’s conclusion was not that markets should be avoided.

The family would continue to have exposure to investments and other assets. The point was that the family already had meaningful exposure to market and business risk.

A portfolio may include:

• Public equities

• Fixed income

• Real estate

• Private companies

• Corporate investments

• Operating-business risk

Permanent insurance can introduce a different type of financial exposure. Its primary purpose is contractual insurance protection, supported by the insurer’s financial strength and the terms of the policy. It is not designed to behave like an equity portfolio.

This can make insurance a useful complement to—not a replacement for—a diversified investment strategy.

A family may accept equity risk in its portfolio while choosing to transfer mortality risk through insurance. It may hold real estate for long-term growth while using insurance to create liquidity for taxes. It may retain a family business while using insurance to help reduce pressure on heirs to sell.

Diversification is not limited to holding different investment securities. It can also mean diversifying the sources of liquidity and the risks affecting the family balance sheet.

Personal and corporate ownership

Ownership is another important consideration.

Personally owned insurance may be appropriate when the primary objective is personal estate liquidity or providing funds to beneficiaries.

Corporate ownership may be considered where the policy supports:

• Business succession

• A shareholder agreement

• Key-person planning

• Corporate liquidity

• A corporate estate plan

Canadian tax rules can be complex. For a corporation receiving life insurance proceeds, the Capital Dividend Account may be relevant. The amount of the credit generally reflects the proceeds received, less the policy’s adjusted cost basis immediately before death, subject to the applicable rules.

The adjusted cost basis is not static. It can be affected by premiums, policy values, loans, prior transactions and other factors.

The tax result should therefore be confirmed with the family’s accountant or tax advisor rather than estimated from a simple rule of thumb.

Future transfer to a holding company

The family was also considering whether the policy might initially be paid personally and later transferred to a new holding company after a broader restructuring.

That type of transition requires careful planning.

A transfer may be treated as a disposition at fair market value. The policy’s value may require actuarial or other professional input. The transaction should be documented, and the tax and shareholder-loan consequences should be reviewed before proceeding.

Questions may include:

• What is the policy’s fair market value?

• What is its adjusted cost basis?

• Who is paying the premiums?

• What consideration will the corporation provide?

• Will an amount owing to the shareholder arise?

• How will that amount be recorded and repaid?

• What will happen to the Capital Dividend Account at death?

• Is corporate ownership consistent with the estate plan?

The concept may be workable, but it is not an automatic tax-free transfer.

Affordability and decision-making

Even when permanent insurance is appropriate, the premium must be sustainable.

The family considered starting with the full desired coverage and then reducing the amount if the premium exceeded the parents’ comfort level. This is a practical way to frame the decision.

The questions should include:

• Can the family sustain the premium for life?

• What happens if business income declines?

• Will the premiums compromise retirement or investment goals?

• Is a smaller policy sufficient to address the core estate need?

• Should the policy prioritize early cash value or long-term death-benefit growth?

• How would the policy respond if premiums were reduced or stopped?

The best policy is not necessarily the largest policy available. It is the policy that addresses a meaningful need and can be maintained.

A more balanced conclusion

The conversation reinforced an important principle: insurance and investing do not have to be competing philosophies.

A CFA or investment advisor may reasonably prefer diversified portfolios for growth, flexibility and liquidity while also recognizing that permanent insurance can address risks the portfolio cannot efficiently solve.

The value of insurance may be greatest when:

• The need is permanent

• The family wants to preserve assets for heirs

• A future tax liability is expected

• The estate includes illiquid business or real estate assets

• The family wants to transfer mortality risk

• The premiums are affordable and sustainable

• The policy is properly designed and reviewed

Permanent insurance is not risk-free, and projected values are not guaranteed. It is not a replacement for investing, nor is it appropriate for every family.

But for families with substantial business, real estate and investment exposure, it can be a meaningful additional planning bucket—one that complements the portfolio and helps create liquidity when it may be most needed.

The key question is not:

“Should we invest or buy insurance?”

It is:

“Which risks should remain with the family, and which risks should be transferred to an insurer as part of the broader plan?”