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January/February 2009

Commentary - Hans H. Mathisen

Insurance is a lousy investment. Or is it? - The "worst-case" scenario is for the person who lives a long life. 6% guaranteed return on one's money isn't bad over a long period of time. Die sooner, and the yield is much better. This according to LIFE LETTER for January, 2009.?

How you can benefit from this flexible life insurance - The February issue of LIFE LETTER delves into the complicated, but tax efficient, area of Universal Life Insurance. I'd be delighted to meet with you and explain how a Universal Life Insurance plan may be of benefit to you.

LIFE LETTER MATURE - continues with Alzheimer 's - Part 2 and Choose Wisely, -the importance of selecting the right executor in your will.

THE STOCK MARKETS - 2008 goes down as the worst year in more than half a century for the major stock indexes. As a December 31, 2008, the S&P TSX composite index was down 35.03%; the Dow Jones fell 33.84%; S&P 500 declined 38.49%;and NASDAQ lost 40.54%. In Europe, the situation was just as bad: Germany's DAX shed 40.37%; France's CAC 40 lost 42.68%;and England's FTSE 100 was down 31.33%. Asian markets fared even worse, as Japan's NIKKEI fell 42.12%; Hong Kong's Hang Seng Index declined 48.27%; and India's SENSEX Index plumeted 52.48%.

So, what should investors do? If history is a guide, we should sit where we are. Every decline in the markets has been followed by a market surge that's been larger than the decline. As this is being written, U.S. Congress has approved President Obama's "financial rescue program" of almost $900 billion. President Obama and his team are aiming at cleaning up the mess which caused the severe decline in the world's stock markets. So, we can't do anything but wait and see what happens.

Hans Mathisen





Insurance is a lousy investment. Or is it?

By definition, insurance is an indemnification for a loss. The principles of insurance can be traced back to ancient times. Fanners would divide their crops into several portions, spread those portions over several boats, and each farmer would float a boat to market. If a boat sank, only a portion of a crop would be lost rather than all of it. Today, insurance companies manage the spreading of risk for us.

Ron and Kathy, both age 35, recently bought life insurance to provide replacement income for the survivor in the event of death during their working years. They realize that life insurance can be used for different reasons as they age. For example, in retirement, the proceeds can be used to pay income taxes that would be due on tax-deferred investments. Ron and Kathy know that life insurance is protection first, but also want to know what the potential return on their premium dollars is.

Let's say Ron is a non-smoker and can get a $500,000 level premium policy to age 100 for $2,500 per year. If he dies at age 40, the $500,000 death benefit (tax-free under current legislation) represents a 245% compound annual return on the $2,500 yearly premium. If he dies at age 50, the return is 32% and the return is still 11% at age 65. At Ron's life expectancy of age 79, the return is 6%.

If Ron is a smoker and the same $500,000 policy has a premium of $3,750 per year, the returns would be 208% at age 40; 27% at age 50; and, almost 9% at age 65. As a smoker, his life expectancy would only be age 74 with almost a 6% return on his premiums.

Let's say Kathy also gets a $500,000 level premium policy to age 100, and as a non-smoker her annual premium is $1,900. If she dies at age 40, the death benefit would represent a 272% compound annual return on her premium. Death at age 50 would mean a 35% return and the return at age 65 would be about 12%. With a life expectancy of age 83, the return if death occurs then is still a little over 6%.

Now, if Kathy were a smoker and the premium is $2,750 per year, the returns at age 40 would be 236%; almost 31 at age 50%; and, over 10% at age 65. Her life expectancy as a smoker is only about age 78. If death occurs then, the return on premium is still about 6%.

If we add 10 years to each life expectancy, the very long term potential returns are still between 3.7% and 4.5%. If you think that's a lousy investment, wouldn't you rather use it to pay the taxman than a good one?

Average life expectancy simply means that 50% of any selected age group will die by that age and the remaining 50% will die after. So, it stands to reason that Ron and Kathy have a 50-50 chance of getting at least a 6% or better compound annual return on their premiums when paid out as a death benefit.

The assumptions and calculations above are for illustration purposes only and do not reflect actual premiums currently available. Please see your insurance professional for personalized figures for your situation.

Want help with your insurance planning ?

Call Hans Mathisen today at (306)242-7042.
or email -


Copyright © 2008 Life Letter. All rights reserved

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How can you benefit from this flexible life insurance?

Glenn had thought of his life insurance as a purely protection plan. The anti-avoidance rules, risks and general restriction of tax benefits applicable to most shelters prompted him to take a new look at his life insurance for tax deferral as well.

A type of policy, called Universal Life, separates the cost of insurance and the "savings" element of your premium. You know how much of it is being invested and how much interest it's earning. Premiums are flexible, so you can choose how much goes into savings, within certain limits. The big bonus is that it receives more favorable tax treatment than a similar outside investment.

Universal life policies have three major tax advantage features. They can allow your savings to accumulate tax-deferred; the interest can be used to pay for the insurance costs, tax-free; and, the untaxed accumulation can be paid out tax-free at death.

After the cost of insurance is taken from the premium, the balance is invested at current interest rates. The interest earned is not taxed as long as the policy is "exempt" under the Income Tax Act. Most universal life policies are exempt. The life insurance company monitors these policies and warns you if there is going to be a change in tax status.

The first advantage your investment in this policy has over outside investments is the interest it earns compounds tax-deferred. Even if you fully withdraw all funds from the policy after twenty years, you will earn up to 22% more, after tax, than if you pay the taxes all along (assumes current tax rates).

You may not have to pay any tax at all on these earnings. The second tax advantage is that you can use them to pay for the insurance costs in the policy. Because the earnings within the policy are tax-deferred, you can actually pay the insurance costs with untaxed dollars.

The third tax advantage is that the total investment gain in the policy can be passed on without any tax whatsoever at death. For example, $3,000 per year savings invested at 6 annually for 30 years, and taxed at 50% (approximate top Canadian tax rate) each year would accumulate to $142,726. Untaxed savings, on the other hand, would amount to $237,175, two-thirds more for your heirs! Plus, of course, the tax-free insurance benefit.

Preferred tax treatment is not the only reason to consider this type of life insurance plan. As Glenn's needs change over time, he can add extra insurance protection to his Universal Life policy. If he finds he needs less protection in the future, he can reduce the amount as well.

Jane has income that fluctuates seasonally. When her earnings are high, she can make larger deposits to her policy. When she goes through a lean period, she can reduce or even stop her premiums for awhile.

For information purposes only and not intended as specific life insurance advice. Please see your insurance professional for a personalized plan.

Want help with your life insurance?

Call Hans Mathisen today at (306)242-7042.
or email -

Copyright 2008 Life Letter. All rights reserved

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