Buing Life Insurance

I want to get right into it and show everyone some cool tricks for how you could use insurance, but before I do, I need to make sure you understand the idea of whole life insurance.

It’s Like It Sounds

You basically have two types of life insurance. First you have the type that everyone knows about: term insurance. As the name suggests, it lasts for a term. They typically come in 5, 10 and 20 year chunks. It’s really cheap and, in a pinch, you can make sure that survivors don’t get screwed over financially. Once the term is over, the insurance is gone. Since the cost of all insurance is based on risk, the more likely you are to die, the more expensive it’ll be. So once your term ends, you can get another one so long as you’re still healthy, except that it’ll be more expensive.

Its big brother is, as I mentioned, called whole life insurance. And it lasts for your whole life. What the insurance carrier does is takes the average cost of insurance over your lifetime and squishes it into one flat premium that you pay for until you’re 100 years old. Basically you’re paying way more in the beginning and you’re paying way less toward the end. So what the insurance company does is takes that extra money in the beginning and invests it. This is called a cash reserve. It grows tax sheltered like an RRSP or a TFSA. Pretty cool huh?

Some Life Insurance Tricks

One thing I tell my clients to do is to buy a really small policy right off the bat. It’s the cheapest it’ll ever be for them since we’re only getting older. The idea is that you have that cash reserve growing inside of the policy. With it you can get something called supplementary insurance, which is a chunk of term insurance. So, by getting the smallest whole life policy you can, you’ve effectively given yourself a way to get term insurance whenever you need it.

Some other tricks you might consider:

  • One of the ways you can access your cash value is to borrow it. The insurance carrier will lend you the money, which you’ll pay back at 8% (as it stands now). You’ve basically made your own credit card with an interest rate that kills any credit card.
  • Something parents like to do is to buy a policy for their kids. This is much like the first trick, except instead of using the cash value to get term insurance, you let it grow. For pennies, you’ve effectively given your child free life insurance for the rest of their lives.
  • Say you’ve maxed out your RRSP and TFSA contribution room and you need somewhere to stash your cash. Whole life insurance, depending on the type you get, can get jammed full of money. This allows you to fund it almost exactly the same way you did with your RRSP and TFSA.
  • You can stop paying premiums for your whole life insurance and have the cash value pay for it. You have to have enough cash value built up in order to sustain itself, but once you do, you’re basically giving yourself free life insurance forever.

Let’s Get Into The Meat Of It

Those were just samples of the things that whole life insurance can do. There’s a reason that millionaires and billionaires buy a ton of this stuff. Warren Buffett once said in an interview that he owned $2 billion in whole life insurance, which is that maximum you can get in the US. That’s the same as Bill Gates and almost every other billionaire in the world. Why is that you ask? Simply owning a life insurance policy gives you an incredible amount of leverage. And leverage can equate to really cool things! But that’s for next week!