Reduce your risks and improve your returns Part 1 By Perrii Muthuraman

A few days ago, I was reviewing the investment portfolio of an investor that mainly consisted of residential rental properties. Based on my review, she felt the usefulness of my insurance advice and suggested to me to include more on the “nitty gritty” on the opportunities for investors with Insurance and the importance of having it (insurance) for children also. She further said, “I think a lot of people sign up for insurance without really understanding how it works or the advantages that are available with regards to getting the principal back, or contributions compounding. I think people sign up and don’t think about it again and have peace of mind just thinking they are covered, (actually not knowing what is covered)”. So accepting her suggestion, I am going to present a series of ideas on Insurance.

Here’s Part 1

When you regularly save some money with your bank, what does bank offer you in return? If you prefer the safety of your investment, you might pick a GIC from your bank. GICs are safe and offer a very low rate of return.

Here are the 5 banks’ 5 year and 10-year GIC rates (in percentage).

Commit Period 5 years (Rate per annum) 10 years
RBC 1.6% 2.0%
BMO 1.25%
TD 0.5451% (Minimum)
CIBC 1.55%
Scotia Not mentioned on Site  —

(Source: websites of the banks)

Treating the life insurance policy premiums paid as a recurring investment, I calculated the returns on an Insurance policy called the participating insurance. I calculated the return based on the expected cash value of the insurance policy. Participating insurance allows you to borrow a portion of the cash value of the policy after an initial period. I discovered that the returns are higher than bank GICs and well comparable with or even better than the Banks’ conservative mutual funds like bond funds or mortgage funds or balanced income funds, with much more benefits. That’s the discussion for part 2. Contrary to what many think, insurance need not necessarily give money only to death. After a certain commitment period, you will be able to withdraw the money you deposited in a strategic way if you want (will be explained in part 3 of this series).

Now compare what participating insurance offers, say for a committed period of 20 years. Here are the benefits:

  • Safety
  • Better rate of return on your premiums for the committed period or more. In select companies, it often ranges between 3.5 to 5.0%
  • Huge Insurance Money (when death occurs). In fact, it is a great bonus and not included in the above rate of return.
  • Tax Benefits

Generally, in such type of insurance policies, there are 2 components: Guaranteed and Non-Guaranteed.

  • A Certain Death benefit is guaranteed.
  • Certain Cash Value is guaranteed every year.
  • A portion of cash value that comes from “dividends” is not guaranteed. However, there are companies that have consistently declared good dividends every single year without break. Although the future dividend rate is not guaranteed, you can expect it to continue when there is an excellent track record in the past. (Note: Dividend rate and rate of return are not the same. Dividend rate declared by the companies I mentioned above have generally been higher than 5%. Again this does not represent the rate of return.)

My calculation of the rate of return is based on the fixed insurance policy premium payable for the committed period, say 20 years or less and the expected cash value of the policy. If you chose to pay for 20 years, usually 15th or 16th year, the cash value will surpass the total premiums paid in most cases. Then it keeps accumulating till death. If we include the death benefit also, sometimes the rate of return can be several thousand in percentage.

How can the insurance companies offer this type of return or benefits? Here’s the most simplified explanation:

The premium money collected is invested in various assets by the insurance company to earn a better rate of return and are maintained in the participating account. Those assets include bonds, equity, private placements, mortgages and real estate. Every year, the earnings in the participating accounts are shared with you through “dividends” Dividends, when declared, becomes your share.

Insurance company ensures that there is always enough money in the participating account to meet the death claims, expenses and guarantees.

Thus few of the reputed Canadian insurance companies offer a policy with the better return.

“A growing number of investors are now looking at life insurance as an attractive way to improve returns and reduce risk in their portfolios, ” said columnist David Pett (The Financial Post dated Jan 10, 2013).

Such insurance policies are also effective alternatives to bonds, equities, and preferred shares. Or you can include them in your portfolio as part of your diversification of assets. That’s the discussion for Part 2. Insurance thus can help you build wealth in addition to providing you the “Peace of Mind” in the wealth building process.

Actionable Ideas:

  1. Review your investment portfolio
  2. Ensure adequate rate of return with proper risk protection measures.
  3. your goals and timeline need to be in conformity.
  4. Get the second opinion, if necessary.
  5. Rebalance or add new assets in the light of the review.

To know more or to review your current portfolio without any obligation or simply just to have a second opinion, you can contact the author at 416 473 6100 or email:


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