Estate Planning - Should I buy Life Insurance or Invest?

This is a question I come across for a variety of clients, usually those who are: single, under 30 and with no mortgage; or couples over 65 who have outstanding debts but want something in place to maintain a home for their partner or pass on to their children.

There are very few clients I've come across who have successfully invested money over the years that could have been used instead of or to supplement life insurance and reach retirement with no debts. This kind of "Best Case Retirement" thinking assumes that you will either live long enough to accumulate a substantial amount of investments, continuously work long enough with no disruptions to accumulate a substantial amount of investments and will not have major unexpected events occur that not require you to withdraw a substantial amount of investment money from your portfolio. The question shifts from what product to spend your money on to how thorough have you been in planning for your financial future?

Even if you have no spouse or beneficiary, securing a low-cost insurance policy will ensure you are covered and can be expanded or reduced depending on your future situation. If they own a home, most people in their 50's and 60s still have a substantial amount of mortgage left and if they were to pass away their spouse would not be able to maintain the home with one less income. Children especially cannot maintain the family home if they are not able to secure a mortgage on their own income nor will they be able to pay the Capital Gain tax on the home ownership transfer out of pocket if their parents did not leave a financial estate behind.

However, insurance is not always the answer. Sometimes budget and age makes purchasing insurance not an option and a focus on saving and investing is the only way. If leaving behind a large financial estate for your beneficiaries (family or otherwise) is not a goal then there may be other avenues to explore with your surplus income. I've recently come across two seperate clients with adult children on disability who live at home. For them, liquidating the house to cover expenses is not an option because their children are not able to work and could not afford to live in Toronto even with the home sale proceeds. Insurance is possible but too costly at their age and now we need to make plans based on their existing investments and determine what the potential benefit will be to the next generation.

In the Monysense article below, the question to purchase life insurance or invest depends on what are you trying to achieve. The family basically wanted to know if purchasing a Term policy in their 40's was an appropriate low-cost alternative to creating a $500,000 financial estate for their children in addition to their home and investments. If they continue to enjoy good health their home could be debt-free by the time they pass away. When it comes to passing on this home, their children would be required to pay a capital gain of at least a few hundred thousand dollars. Would there be sufficient investments to cover this or will the home have to be liquidated? What is the projected value and capital gain of the home? What is the projected net worth of their estate as they age and withdraw investment money for their retirement lifestyle? These are questions that need to be both asked and answered in advance of making a decision on life insurance but oftentimes this level of due diligence is not done.

It's never too early or too late to plan to identify your current and future net worth, outline your short- and long-term goals and plan accordingly.

Buy Life Insurance or Invest?

Michael Thorpe