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Cost of universal life insurance outweighs its advantages
2002年10月25日
【作者:Jonathan Chevreau】The bear market in stocks has many investors scurrying to the safety of fixed income. But such safety is obtained with low returns and high taxation.
Because it's taxed like earned income, it's almost futile to invest in fixed income outside tax shelters like RRSPs, RRIFs or RESPs.
Those with good corporate pensions will find pension adjustments limit what little RRSP contribution room they have. Nor do Canadians have what Americans enjoy: tax-sheltered Inflation Bonds.
So in desperation, financial advisors have latched onto a new gambit -- using Universal Life insurance (UL) policies as a fixed-income tax shelter.
In the summer, this column reported on a debate at an insurance conference which concluded non-registered equity portfolios outperform UL equity investments. However, it found UL yielded slightly more after-tax on fixed-income investments than comparable non-registered investments.
A version of this strategy was reiterated in recent weeks to 7,500 financial advisors by AIM Funds Management in a 20-city AIM road tour.
When you consider the insurance side as well -- including a tax-free death benefit -- the argument may seem compelling.
But, warns Greg Hurst, manager, pension division for Vancouver-based Heath Lambert Benefits Consulting, "the undisclosed acquisition costs of permanent insurance are huge. The tax-exempt aspects of owning such insurance offset the acquisition costs, but only if the policy remains in force for many years."
AIM's Jamie Golombek cautioned, "UL policies are expensive. There are premium taxes of 2% to 4% on deposits; they must pay the IIT or investment income tax, which reduces pure returns by 0.5% to 0.75%; there are mortality costs, since the client is obliged to actually buy life insurance along with the investment component of the policy. There are also regulatory capital costs of 15 to 20 basis points, and Compcorp assessment fees of eight to 10 bps.
Consider too the often undisclosed commissions on UL policies. These can range from 50% to 100% of the first-year premium, with renewal commissions of 3% to 10% on each subsequent year's premiums, one source says. Insurers may also pay volume bonuses and other rewards outlawed in the mutual-fund industry years ago.
When you add it up, the average management expense ratio on a UL investment is 1% to 2% higher.
A Vancouver-based financial advisor who didn't want to be named says it's not worth paying 2% fees to get a 1% benefit of the UL tax shelter, even for fixed income. And that's with a 30-year horizon. For shorter horizons, the benefit is smaller. "The only situation in which this works out is in case of early death, hardly the sort of thing most people hope for."
Non-registered equity funds, by contrast, avoid some of these costs, benefit from the 50% capital gains inclusion rate and enjoy a deferral on taxes if profits are not realized along the way.
AIM commissioned an outside actuary to analyze the investment performance of UL policies from six major Canadian life insurance companies. The actuary is the same person who argued the pro-UL position at the Peel Institute debate in the summer, but he declined to comment for this article. However, his opponent in the debate, independent Toronto-based insurance broker Robert Porter, continues to recommend that consumers avoid UL for both equity and fixed-income investments.
"While UL policies may be cashable at any time, they should be considered long-term holds," Porter says. "If redeemed early, they could be subject to hefty surrender charges. Policies can lapse or they can make you pay higher premiums." Insurers can increase other charges at any time and "blow the performance to nonsense." Porter concludes that even with fixed income, a UL policy is "a gamble. It's just not worth it."
The hypothetical client used in the AIM presentation was a 45-year-old male non-smoker who makes 20 annual deposits of $20,000. A non-registered guaranteed investment certificate paying 6% was compared with a UL fixed-income investment paying 4.5%, reflecting UL's higher fees. A $500,000 death benefit was used.
At age 65 and 70, the accumulated values built up in the taxable fixed-income portfolio and the UL policy were about equal. By age 80, UL accumulates $1.25-million after tax, versus $1.13-million for non-registered. The picture changes dramatically if you invest in equities instead of fixed income. For comparison purposes, AIM uses a 6% return for both stocks and fixed income. The only difference is taxes.
The non-registered equity portfolio outpaced the UL equity portfolio at all ages. At 65, the open plan nets $800,000, compared with $600,000 for the UL policy. By 80, the gap widened to $1.9-million to $1.2-million and by 90 to $3.3-million to $2.1-million.
When a $500,000 tax-free death benefit is added to the final estate, then up to age 80 UL had a slight advantage, even on the equity side. However, if the client lives to 85, the non-registered stock portfolio again has the edge, even after UL's death benefit.
My own conclusion is that while UL may offer valid estate-planning applications, its use strictly as a short- or mid-term investment tax shelter is dubious, whether for equities or fixed income.
jchevreau@nationalpost.com
資料來源：Financial Post
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