Can life insurance be equivalent to a pre-tax return of 12%¹ on a non-registered investment?

Have you considered life insurance as an asset class?

Take a look at the case of a healthy retired couple, both aged 70.

Nathan and Naomi, both healthy 70-year old non-smokers, are looking for lower risk investment opportunities for $800,000 in non-registered savings. They foresee no need for the cash during their lifetimes and want to enhance their legacies for their children and grandchildren using funds currently held in GICs and bond portfolios.

Instead of investing $100,000 per year for 8 years in a low risk fixed-income investment for the purpose of leaving a legacy for their loved ones, they could use the funds as annual premiums for a Joint Last to Die Optimax Wealth® 8-Pay participating life insurance policy with Enhanced Coverage dividend option.

An alternative strategy using life insurance

For the case of Nathan and Naomi:

• Empire Life Optimax Wealth permanent participating life insurance
• 8-Pay option
• Enhanced Coverage (with Lifetime Guarantee) dividend option
• Joint Last-to-Die (with legacy going to named children/grandchildren as beneficiaries)

Annual premium: $100,000 (guaranteed and payable for 8 years)
First year coverage amount:  $1,252,479 ($1,079,724 base coverage + $172,755 Enhanced Coverage)

Competitive internal rate of return (IRR) for the life insurance death benefit
For Nathan & Naomi's Optimax Wealth policy

Tax-equivalent IRR (‘Tax Eq IRR’)

Don’t forget, life insurance death benefits are not subject to income tax. It is important to compare the life insurance death benefit IRR values to fixed income investment amounts on a tax-equivalent basis.

Assuming Nathan and Naomi's marginal tax rate on income realized with the fixed income investment opportunity would be 45%.

Can the tax-equivalent IRR of 12% be achieved with life insurance?

For Nathan and Naomi, if the last life insured dies in year 10, after having paid the 8 annual premiums of $100,000 as required and meeting all conditions* for the Lifetime Guarantee, their beneficiaries would receive the death benefit of $1,252,479 based on the current dividend scale.

If they make the same deposits over 8 years into a low risk fixed-income investment and the investment is left as a legacy when the last life insured dies in year 10, their investment would have had to generate a 12.64% rate of return on a pre-tax basis to achieve the same amount as the life insurance provides!

* The conditions for the Lifetime Guarantee are: 1) the coverage remains in force; 2) the dividend option does not change; 3) the owner has not taken any policy loans or surrendered any or all of the Paid-Up Additions for cash or to pay premiums; 4) the PAR coverage amount has not changed; 5) the conversion option for the Enhanced coverage amount has not been exercised; and 6) the dividend option of the policy has not been changed to the paid-up addition option.

Empire Life participating life insurance with great Cash Surrender Values

Our permanent participating life insurance policies also offer competitive cash surrender values in case funds are needed urgently. For Nathan and Naomi's Joint Last to Die Optimax Wealth plan with Enhanced Coverage dividend option:

Life Insurance as an asset class:

An alternative to fixed-income investments

Do you have clients who have non-registered funds and:

• are uncertain or uneasy about investing in a volatile stock market
• want to enhance the legacies they plan to leave to their loved ones using
• their non-registered funds which otherwise would be invested in a low
• risk fixed-income investment
• want an easy-to-manage asset that can avoid probate

Consider introducing life insurance as an alternative financial strategy.

Download the supporting document from Empire Life for more information.

1. Based on a tax equivalent Internal Rate of Return of the Death Benefit at end of policy years indicated for Empire Life Optimax Wealth 8-Pay Joint Last to Die policy with Enhanced Coverage dividend option for total coverage amount of $1,252,479 (base amount + Enhanced Coverage amount) issued on June 24, 2024, for healthy, non-smoking male and female life insureds, both aged 70 at issue, who both pass away by end of policy year indicated. The tax equivalent Internal Rate of Return of the Death Benefit is calculated assuming the fixed income investment amount at the end of the year indicated would be taxed at a marginal tax rate of 45%.

2. Death benefits and total cash surrender values shown are as of June 24, 2024 based on the life insured and product indicated for the use case. They assume premiums are paid in full when due, no changes are made to the policy and, for all years, annual dividends are calculated using the current dividend scale or a reduction of 1% applied to the interest rate factor used in determining current dividend scale. Annual dividends are not guaranteed. The two scenarios are used to demonstrate how a change in dividend performance can impact the overall performance of the life insurance coverage and values in the plan. Actual results may be more or less favourable than those shown.

3. The 2 top (highest) 10-year non-redeemable GIC rates published on https://www.ratehub.ca/gics/best-gic-rates @June 24, 2024 Company A is Bank of Montreal – rate is for non-registered funds with minimum investment of $1,000. Company B is Equitable Bank – rate is for non-registered funds with minimum investment of $100.