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Cash Value Life Insurance vs. TFSA vs. RRSP

Over the weekend an article titled, "The great TFSA vs. RRSP debate" caught my attention.  Upon reading the article, my instant comment was, "Why does no one except me include Permanent Cash Value Whole Life Insurance into the debate?"  Although the article makes the key statement "Would you rather pay taxes at your current rate or at a potentially higher, unknown rate?" There are a few factors that also need to be considered.

It is true, that RRSP's are the most selfish product ever created.  They are sold on the premise that you will get an instant up front tax deduction on contribution and that your money will grow tax deferred, but very few people talk about the potential tax bill when you go to take the money out and one of the hardest conversations to have with a 70 year old is to try and explain why they are paying more tax in retirement than they ever paid while working.

A owner of a manufacturing plant once said to me, "Kevin what does RRSP stand for?"  After replying Registered Retirement Savings Plan he immediately said, "And who is it registered to?"  It was that statement that left me perplexed at the wisdom that this man shared with me that has led me on a path of listening to what the government does and promotes but to be skeptical at the same time.

From the Government of Canada website, they define Tax-Free Savings accounts as a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs.  It is still registered to the government.  I am not discounting the validity of the product, but the key issue that most Canadian fail to understand is what classifies "Investment Income".  If you hold bonds, cash or GIC's inside you TFSA, the small amount it grows by is free of tax.  If you decide to hold Mutual Funds or Stocks you need to ensure that those assets do not produce a dividend as that is not tax free and how many average investors understand the difference?

Permanent Cash Value Whole Life Insurance was the original Tax-Free Savings Account.  It has been in existence globally since the early 1800's and has been in Canada for almost 150 years.  It has survived world wars, the great depression, and many stock market corrections and crashes and no Canadian has ever lost a cent.  When you invest in whole life insurance it is like becoming your own bank.   The policy accumulate cash value that earns untaxed interest. 

This is not the life insurance that only pays when you die. This is the kind of insurance people owned in the good old days before the stock market began to boom in the 1980s and 1990s. Whole life policies have been an essential part of my financial planning practice for many years and I am always astonished at how few of the many investment advisers I meet understand how they work, or don’t offer them to because they aren’t sexy or new.

Unlike traditional term insurance, the premiums you pay for your whole life policy are registered to you and no one else in the form of the accumulated “cash value” of your policy. On top of that, the cash value of the accumulated premiums earns interest at a rate set once each year. In 2008, London Life paid a record 7.3% dividend interest, and those earnings are untaxed.  Considering that the Toronto Stock Exchange declined almost 34% in the same year and the fact that a 5-year GIC paid 3% that same year even during times of economic change, the London Life dividend interest rate has been relatively stable, compared with other financial instruments and indexes.

Every product has its place, but if you are looking for long term tax deferral along with the guarantees provided for your retirement nest egg look towards a permanent Cash Value Life Insurance policy first.   Even Ben Bernanke the current chairman of the Federal Reserve, the central bank of the United States according to annual reports, has the bulk of his investable assets invested in this wonderful instrument. In addition to his own experience and intellect, Bernanke has instant access to extremely experienced and competent financial advisors and yet he still chooses what some have referred to as the Investment Bomb Shelter for scary times, a true testament to the products long term strength and stability.

Check out the video for this blog HERE

Kevin Cahill Guelph