Can an insurance policy form part of your investment strategy? It’s one of the many questions I want to ask my guest this week. Gregory Rozdeba is the co-founder and president have Dundas Life, a digital insurance brokerage that uses technology to make life insurance simple, accessible, and personalized for Canadians. Gregory joins me on the show to discuss the various types of insurance you can buy and explains why an insurance policy might make sense as an investment. 

 

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Do you prefer to invest in socially responsible companies? If so, our sponsor, Wealthsimple, will help you build a portfolio that focuses on low carbon, clean tech, human rights, and the environment. To get started with socially responsible investing, head over to maplemoney.com/wealthsimple today. Now, let’s chat with Gregory… 

 

Tom: Hi, Gregory. Welcome to the Maple Money Show. 

 

Gregory: Thanks for having me, Tom. I’ve actually been a long-time follower so it’s great to be on. In the last few weeks I’ve liked the crypto angle. It’s been very interesting. 

 

Tom: You actually just gave me a perfect Segway way because it is something I haven’t fully understood and I’m not involved in. My investing is pretty much all ETFs. I have been interested in the idea of crypto. I still don’t know if I’ll call it an investment but maybe speculation. It’s something different than a collectible. There’s still something here where you can buy it for a price and hopefully it appreciates so you can sell it for another price. I’ll accept that much, at least. But I’m still trying to understand everything crypto and bitcoin. And speaking of that Segway, what I wanted to have you on about was specifically how insurance can be part of an investment portfolio. Again, I keep my life insurance very simple. I’ve got term life insurance. I think it’s 20 years and I believe it can renew. I haven’t hit that point yet, but I keep it simple. I keep the costs down just like my ETFs. I believe it’s an important part of estate planning, but what’s interesting talking with you is the idea that insurance could possibly be part of an actual investment portfolio. Can you start by explaining what kind of insurance we’re talking about that could actually form some sort of investment? 

 

Gregory: Sure. I think I’ll give a broader lay of the land initially because if I go into the more complicated products out of the gate, I think people will look at their own set up and think, how does this all fit? The most basic insurance contract is a term insurance policy. You have coverage for a fixed amount of years. If you die in those years—assuming you’re not in a war zone or doing anything illegal, the insurance company pays out whatever that number is to the beneficiary. That’s a term policy. There’s also living benefits, which constitute critical illness, disability insurance. Critical illnesses a one-time, tax free, lump sum that gets paid to you if you get a critical illness like heart attack, cancer, stroke. It can be four different illnesses or it can go up to 25. That’s a living benefit. It’s the same thing with disability. If you are disabled, depending on the definition of disabled (where you can no longer fulfill the duties of your job) then a disability policy would kick in and replace your income by a certain percentage. There is a term policy, there’s living benefits, and then there are the types of policies that have an investment component. There are participating whole life policies, which basically cover you for your whole life, so to speak. They do tend to be more expensive because the insurance company knows it will have to pay out this policy at some point as long as it’s in good standing. But it does grow over a certain period of years. With a whole life policy, it does have an investment component or a participating component sometimes where you basically participate in the life insurance company’s investment accounts. If you look at some of the condos in downtown Toronto and see the Canada Life or the Manulife logo slapped on them, the money’s coming from somewhere. Some people like them because it is a good baseline. It’s in there where if anything happens, it gets paid out. People like that certainty. But much like in financial markets, you pay for that certainty whether it’s through a lower returns or higher fees—whichever. A very popular product, though. Then there are universal life products which have a mutual fund component. You can choose what kind of risk tolerance you have as well as an insurance component built into it. When you look at a whole life policy as well as a universal life policy, you have to pay for what’s called the net-all cost of insurance, which is if you die at any point, this thing pays out. There’s a built in fee there. Bundling it, there’s a fee there. What I usually tell people for a contrasting a whole life or a universal life policy with a term policy is that it’s kind of like ETFs. If you know what you’re looking for and what your risk capacity is specifically with insurance, it is much cheaper to insure defined risk like a 25-year mortgage or you’ve just had a kid and you want to make sure that if anything happens in the next 25 years, nothing’s going to happen to you financially. It’s much cheaper to insure defined risk. Term 20 for half a million dollars for someone in their 20s or 30s is pretty cheap if you’re healthy. But if you start getting into the whole life products and the universal life products, they do tend to get more expensive. But before I pass it off, one thing I will note about a whole life product or a universal life type product is that if someone maxes out their TFSA or their RRSP and they’re looking for another area of tax-sheltered growth, that is an occasional discussion that we have over here. But again, there are trade-offs every time we look at strategies like that. 

 

Tom: So with the whole life, if it’s paying out when you eventually die, how does the insurance company make any money because they assume they’re taking your payments and investing them. How’s that look compared to if you just invested it yourself? I understand term more where they’re weighing odds they’re not going to pay it out at all, and that helps to pay for someone else’s unfortunate death. But if there’s a guaranteed paid out, I’m not sure how they make money on this. 

 

Gregory: It’s the same principle, basically. They still determine when they think you’ll pass away. Then you have hundreds, thousands, tens of thousands of people that buy these sorts of products. If you look at an illustration—I’ll just use a whole life policy as an example, looking at what the accumulated cash value is. Basically, if you decide two years later to cancel your policy for one reason or another, the cash value is either non-existent or tiny because in those first few years, you’re frontloading the cost of insurance. It’s basically the insurance company gathering the funds just in case. And then eventually, in your latter years, when they have to pay out, they can make economic sense of it. But it’s just a risk equation at the end of the day for the insurance company. Generally speaking, these products yield somewhere in the ballpark of six percent if you’re looking at a whole life policy, which is pretty good, all things considered. Because if you’re out in the market and putting everything into something like an S&P index—you’d know this better than I but, you’re yielding about eight percent annually, on average? 

 

Tom: That sounds fair. I often use seven percent myself, but I go on the conservative side just to be sure. 

 

Gregory: That makes sense. It’s not a bad one, but with a whole life policy, if you’re looking for approximately six percent, there’s a lot that we would need to delve into with that. But you can get something that resembles that kind of return in a whole life policy. The big, big, big difference is it’s far less flexible. One of my biggest pet peeves is when financial advisers advertise that it’s something that resembles a savings account. It’s not because it’s not easy to access. It’s like, “Well, you can just borrow against it.” And if I hear this again, I’m going to lose my mind. Be your own banker. That’s not really the point. There are easier way of ways of doing this, especially when people start taking on responsibilities like children, a mortgage, parents are getting older, things need to get done. The house needs to get renovated. It’s much more flexible to have this money in the different investment vehicles than having it tied up in a whole life policy. What I usually find is you’ll have individuals that reach out for these sorts of products and they’ll throw out these “pie-in-the-sky” numbers they could maybe afford. But there will be strain on their finances if they’re looking at these sorts of products. Most of the time, the conversations that we have are, “Okay, what are you hoping to do here? Let’s take a step back. Is this what you actually need?” And what we find again is, with a lot of people, you can just bring it back to term policy because you can really invest the rest and have more flexibility in that process. When looking at a whole life policy in that way, you do get some benefits. The return is okay. The challenge is that it’s far less flexible than a lot of the investment vehicles that present themselves as options in Canada. 

 

Tom: I’ve heard the term, “buy term and invest the difference.” How does that way out to these other options? Is it that flexibility more than anything? Or can you come ahead in the numbers? I guess one thing we can’t actually say is, when do we die? I’m sure that’s a big part of which one wins out in the end. 

 

Gregory: Right. The fees, it’s always the fees. You say, “Do I buy this mutual fund from the bank?” For a lot of people—and this may not be in vogue, but if someone at the bank talks to you about a financial product that you didn’t previously think about and it’s mutual fund and you’re paying the fees and you’re still getting that return, oftentimes the alternative is zero. Should that person be going with the bank? Do it. If that’s the only option you have and understand, go for it. It’s really better than nothing. From a term policy, I think the one area that really frustrates people is the uncertainty. A conversation we commonly have is, “Okay, I’m 45 years old, looking at a permanent product, looking at a term 20,” because a term 20 would carry them until retirement. “What happens when I turn 66?” Well, your term policy lapses and at that point we can determine what needs to get done. Hopefully, at that point, you’ve accumulated enough savings through your investment vehicles to set yourself up for a comfortable retirement. At 65 (just being a number I’m throwing out there) I know this varies by at that point, the goal is you have enough money for retirement so that you can basically self-insure yourself during those latter years. Because your burn is much lower. Your investment risk is probably much lower. But from an insurance standpoint, it becomes so prohibitively expensive after a certain age that it shouldn’t make sense to have an insurance policy. Ideally, during your working years, whether it’s 65, 70 or even 75… We’re seeing those once in a while because people are still working in a profession where they can and they want to make sure that while they’re working, while they’re accumulating their resources in case something happens, they’re taken care of. Regularly, when we chat with business owners who maybe own a mechanic shop or some sort of retail operation, and it’s going well, they don’t intend to stop working until they’re 70, 75, 77. The fees they’ll pay for insurance are higher, but they’re warranted because the revenue that’s being generated is disproportionately higher than what they’re paying for that sort of coverage. But for your average Joe out there, a term policy until the end of your working years should be sufficient again, in theory. Because in that time, there should be investments that are taking place in the background, accumulating decade by decade. But it’s never perfect. It never seems to happen that way. But that’s the goal. That’s the aspiration. These are the conversations we’re having with people in their 20s, 30s and sometimes even 40s. 

 

Tom: That was my thought, exactly, with term life. I got it just before my first kid was born. We had another kid two years later. So really, they should both be (hopefully) out of the house within that 20 year span. By then, I should be some form of retired, at least not requiring that income. It seems like what I consider the point of insurance is you’re insuring against something. Not just for a guaranteed payout, you’re insuring against a loss. That’s what I’ve done. But with these other options that do have an investment component to them, who’s it for then? Is it someone that maybe isn’t saving. Or is it higher net worth people? I’ve heard that before, too. What’s the right kind of person to be interested in these other options? 

 

Gregory: In this industry we really get tied up in a lot of the academic minutia—this is the way it should be—that kind of thinking. If you save for 50 years, this is what’s going to happen. You get your term policy. Life’s pretty great. If you chat with people out there, that’s rarely the case. That really is the ideal setting. But with a lot of people, what we’ll find is they’re going into retirement with a decent cash flow, no savings. At that point, it’s, “Well, if I die today, I’m out of options. I have nothing to leave behind.” I had one person tell me, “Force me into one of these products because I’ll never save this myself.” I don’t like that. Straight up—I don’t like that. If this individual knows themselves and look back at the last two decades and think to themselves, “You know, I’m bad at this and there’s no other alternative. And I can’t take the fluctuations in the market. When my net worth goes down, my stomach churns. I have no capacity for it,” it’s a very long conversation that needs to take place. Sometimes people say, “Listen, can you just give me something permanent for $15,000 to $25,000 in case I kick the can unexpectedly in the next couple of decades, my funeral will be taken care of and I can leave some money behind for my kids loved ones, charity, whatever,” that happens. From a planning standpoint, it’s not where you want to be, but it happens and we do have these conversations. When it comes to estate planning there is a lot that can be done using things like a whole life policy and borrowing against it. If you run a small professional corporation, you can borrow against it and reap some of the tax minimization strategies that are available as a result. It’s very difficult to get into very specific strategies. There’s a lot. I think Manulife releases tax guidance every year for life insurance, specifically. The book is the size of three encyclopedias. It’s an absolute menace. This is usually the investment products. But oftentimes, what we find is when someone is looking to plan—how do you get money out of the corporation in a tax efficient manner? What options are available? What if my corporation is owned by myself and I want to give some money to charity? I have a lot of money and residual earnings. What can be done? In these sorts of situations, a life insurance policy might make sense. It might not necessarily be in the spirit of things. We really have to vet carefully to see what the motivation is and what the goal is, ultimately. It varies dramatically, corporation by corporation, person by person. So it really needs to be tailored to that individual. But when it comes to charitable giving, that’s a very popular one lately. There are entire organizations that reach out to small business owners and high net worth individuals saying there are estate benefits. Your state will get the tax benefits of paying for this life insurance policy and then your charity will get whatever the amount of is set out in the policy, but your estate will get the tax advantages. It really does depend. It really does vary. It is case by case, but depending on the person’s situation, there may be ways to set your estate up well from a taxation standpoint, provide your preferred charity with some money when you pass away to leave some sort of legacy. These are all options that are available. I feel like I’m giving you a really general answers here because it gets complex, and we’ve seen situations where the motivation is just incorrect. People wonder how to save tax money with using a life insurance policy. We tell them to take a step back and look what’s going on. When do you want to retire? What are you doing with your business? It really gets personal. The one thing I stress when it comes to a lot of these strategies is, outside of something like a wealth portfolio, we really have to learn not just about their finances, but their health, their aspirations. We really need to dig in there and see the whole picture. But taking it back to some of the strategies that are available using something like a whole life or a u-all policy, there are tax minimization strategies that exist depending on the person’s situation. Giving to charities is a very popular option but it’s also for folks that don’t have savings that are just looking to leave something behind but have decent cash flow, don’t save, or have that habit at an older age. It’s not pretty, but these things come up. We try putting the person on the right course the best that we can over here. 

 

Tom: Well, I like what you said too about the person who said, “Just force me into one of these because I won’t save.” I get that it may not be the best thing they could do in their situation, but it’s very self-aware to say that and to go with that. I know there’s a lot of people out get on different sides of the homeownership or rent debate, but I’m a big fan of homeownership and I share that with a lot of people because it is for savings. If you’re not sure you’re going to stick to investments, increase them and all that, if nothing else, having a paid off house by retirement is a big step if you don’t trust yourself to save the money and keep it there. If it’s TFSA or something, it’s pretty easy to get back out. I get you example—that the person might not have been the best fit, but it probably wasn’t the right choice for them. 

 

Gregory: I think the big faux pas in the financial industry today is that for a lot of the people that need this advice, they don’t get it. If you look at someone who’s not high net worth or even moderately well off, there really isn’t an industry to support, to start. Historically, it’s been advisors that are just joining the industry, corralling whatever friends and family they can get in the door. Talk to them about finance. Talk to them about insurance. That’s a trickle now. There isn’t a lot of people joining the industry. And then from there, if you’re talking to wealth advisors who are saying, “The insurance side of things is bogus. These mutual funds are—well, they’re actually okay because we’re generating value here,” which I’m not going to argue with. When you look at how a lot of those businesses are constructed, a lot of it is, year-on-year you want to build up that high net worth clientele. You only have so many hours in the day and what you find is a lot of their lower net worth clientele get turned out, which is not good. Hopefully, they have something in place. And hopefully, it gets updated relatively frequently—every couple of years or so. But a lot of these wealth advisors try moving up the chain so that they’re spending less time on higher net worth individuals, to make more money. It is a business, after all. And when it comes to the banks, it’s a similar problem. I haven’t historically been a big fan of the banks from a banking standpoint, but they’re physically there. They’ll talk to you. They’ll position whatever product. It’s not always going to be ideal, but it will be better than nothing. At least with the banks, if someone goes in and says, “Listen, I don’t have a lot of money. I’ve got $20,000, $30,000 I don’t know what to do with. How do I start?” Someone in there will tell you, at least in very broad strokes, “What is your time horizon? What’s your risk capacity? Alright. Let’s throw you into this thing…” I think the big challenge that we’re looking to solve in part here is how do you provide qualified expertise to the broad market? Not just the people that are doing well financially, but people who actually need the feedback and advice that no qualified financial advisor or insurance broker can provide? Historically, a lot of insurance brokers and brokerages haven’t gotten a good rap in the markets. People think, “Oh, this person is trying to sell me something I don’t need,” or they’re not being honest and upfront. They check with another broker. One is telling them one thing. The other is telling them another thing. What’s actually correct? It’s a pretty common phenomenon. But I think with what we’ve built out over here at Dundas Life, we’re pretty efficient when it comes to servicing individuals. If someone shows up, we’ll take the time to provide them with qualified feedback, whether it’s from an insurance standpoint, direct them in one direction or another from an investment standpoint. But I find the big hurdle is that the people we leave to their own devices from an investment standpoint, don’t end up doing anything which is really frustrating because, ideally, you’re 30-years-old—buy the market ETF. Contribute every month. Let’s see where you can take this thing until you buy a house. These conversations get complicated. What’s the difference between an ETF? What’s the difference between a mutual fund? Why term? Why whole life? How does this play with me buying a house? How does play with me having a kid? How is this life insurance any different from accidental death and dismemberment, which is a common conversation with some advisers. There’s a lot going on and there doesn’t seem to be a lot of areas that people can turn to for just straightforward advice in one category or another. At least on the life insurance side, that’s what we’re trying to provide here. 

 

Tom: Yeah. And I appreciate that you sort of recognized the nuances here because I have spoken to other people (not on the podcast, but just in real life) and sometimes if they’re involved in insurance, they seem a little too set in their ways. You have to have whole life. That’s le life. That’s the best one. It starts to sound like maybe it’s just being self-serving. Even if even if someone said term life and nothing but—even though that’s the choice I made, I would be concerned that they’re being a little too rigid in their idea and not really taking a different situation into account. 

 

Gregory: I feel like that comes up a fair bit. I even see some people advertising online that advisers sell whole life because you’re getting some multiples more from a compensation standpoint. That’s not really how it works. How it works is it comes down to how much you’re spending per month. What’s the monthly premium? Oftentimes, I don’t say, “Listen, you want this amount of whole life? Well, this much in term life is this much cheaper so you should just go with that.” It doesn’t usually work that way. When we’re chatting with someone it’s, “Okay, from a budget standpoint, what are you working with? Also, what is the need here?” Fifty dollars in whole life is going to get you the same amount as $50 in term as a broker. I think that’s an area that’s been pushed a lot, especially in the last year but it’s just patently false. The reason why—and I’m starting to get this because I came from tech, originally. I’ve spent most of my career tech, but now that I’m a bit more on the brokerage side, what I’m seeing with the whole life conversation is the reason why a lot of these advisors get so rigid about whole life is because when you position term from a planning standpoint, a lot of people have the same feedback. I bought this 25 year term. I paid into it for 25 years and now I have nothing to show for it. What was that all about? That happens way more frequently than someone actually passing in that time, getting a whopping payout for their family. This is probably the way that it should be planned in a lot of situations, but this doesn’t happen very often. I think from a whole life standpoint, for some people that don’t reach out from an investment standpoint, through any sort of broker advisor, bank, then the only person that they’re talking to and probably will talk to you for the next decade is an insurance broker. That insurance broker will say you need something. And if you’re throwing it into this sort of product list, you’ll have something to show for it 10, 20 years from now. And again, it’s not pretty. It’s not optimal. Frankly, it shouldn’t be done as often as it is, but sometimes there’s really no alternative because going back to the labor and staffing issue, there’s really no one that wants to talk to someone making $30,000 to $50,000 every year in this industry because it’s not very profitable. And I think that’s unfortunate because those are the people that need that support the most. Initially, I thought this was dishonest. These advisors positioning this whole life type policy and then telling people they have coverage for the rest of their life. When you die, your loved ones will have $100,000. Alternatively, what I find is no one’s talking to the same people about investment products and what alternatives exist. No one is really getting in front of them, which I think is unfortunate. To kind of summarize that thought, it’s not ideal and I don’t like whole life being the only option where they’re being told, “Just get the whole life. Just get the whole life. Just get the whole life…” because it fits in every box. I’m not a fan of that. But simultaneously, what I’ll acknowledge from what I’ve seen over the course of the last few years is that when that isn’t done for that sort of clientele, rarely does anyone else show up and say, “Listen, I’m going to take the time with you to explain the difference between a mutual fund and ETF to get you to where you need to get to by the time you retire.” It just doesn’t happen. And I think from a servicing standpoint, that’s the big issue on the insurance side, on the wealth side. Get in front of these people that need the support and find a way to generate a business off of it. Because there’s so many people in Canada that need these sorts of conversations, and I don’t think they know where to start. Brokers, advisors, that’s where it should start. 

 

Tom: I know we can’t go into every detail because it’s too individual. But is there a general sense of when something like whole life or universal might matter? Would it be a certain income? Or certainly if you’ve maxed out your RSP and TFSA, I would assume you’d start looking for some other option?

 

Gregory: Generally speaking, it’s rare that we find someone that’s an ideal use case. As a precursor to this, we always explore the alternatives first to see if something is a better fit. Once in a while, we’ll come across someone that tells us, “I have plenty of savings. My house is paid off. This housing boom been great for me. I’m still making income and don’t expect to stop anytime soon. Along with my significant other, I max out my TFSA and my RRSP every year. Are there any other channels for tax sheltered growth?” A whole life policy could make sense in that situation. You do pay the fees, but you do get that tax sheltered growth. Again, you do have to pay for that in your cost of insurance, but your cash value accumulates every year within the policy. And when you pass away, your beneficiaries can get that cash in a very straightforward manner. One area that could be interesting from a whole life standpoint, term can also be used for this as well (depending on the situation) is to provide liquidity. Now, with this housing boom, everyone seems to have three properties. So if you were to pass away what happens? Well, you need to carve up the estate. And let’s be honest with ourselves, a lot of people don’t have a clear will, which is unfortunate. I can plug a handful of companies that could probably provide your listeners with one, but if someone doesn’t have a clear will and have multiple properties, maybe some debt, maybe some complex investments, dividing that and settling that can get incredibly complex. And it could be incredibly time consuming. What a life insurance policy can do in the meantime, is provide liquidity in that situation. So, if something needs to get serviced or resolved, there is a pile of cash after you pass away to figure that out. But generally speaking, when it comes to whole life, it’s a tax sheltered growth. Once you know everything else has really been taken care of, that could be a channel to explore. I usually don’t go in detail when it comes to universal life because conceptually, I think there’s usually a better alternative. I know there’s people that will disagree with me on this, and I’m sure there are cases where that’s not true, but I think this comes back down to the term argument. You have an investment product, which is usually some sort of mutual fund that is some market mutual fund. And then you have an insurance product. Then you have fees. If we carve this up, you go get the investment yourself or you go elsewhere for the investment and you get the insurance product for a specifically defined risk. Are you going to be better off as a result? The answer is, probably. I like whole life because insurance shouldn’t be (in my opinion) something that facilitates the speculative nature of individuals. I mean, you’re still taking on risk with the universal life policy. Market downturn could hurt. A whole life policy doesn’t operate that way. It does have an investment component, but it’s steady. For example, 2008, 2009 happened. Markets were tanking in the double digits. Your whole life policy was still trucking along at that five to six percent every year. So fundamentally, I guess if we’re looking at it in principle, my view on insurance is that you want it to be a part of a risk mitigation strategy rather than narrate to speculate. And if you’re looking at something like a universal life policy, it’s probably from a planning standpoint. It’s probably more intuitive to split it up into both and investment component and an insurance component. However, if it’s a part of a broader tax planning strategy, it could make sense in estate planning. So again, I feel like I’m not giving you a straight answer here, but there always seems to be a caveat. But fundamentally, I think insurance should be used for mitigating risk rather than speculating. 

 

Tom: Yeah, I agree, and I like the point you made about liquidity, too, because I was thinking, say you die and you have two children, maybe you have that one house and now you have some money from the insurance. If all you had was the one house and you paid it off—that’s great but you don’t have a lot of investments and savings, then that house basically has to be sold to create anything that’s able to be split between two children. So to have the money, if they’re in agreement, there’s something there that could possibly satisfy both sides. 

 

Gregory: And it’s the pace of HELOCs. Home equity line of credits are becoming popular and it’s breakneck out here right now. We don’t position them here. I’m just seeing that in the broader market. And when you tie in some of these estate plans that individuals have in some of the areas that they’re missing… Sometimes people are buying additional properties and it gets so complicated from a financial standpoint. You might be looking at just some regular suburban couple and then it’s, “Oh, we own a couple of rental properties.” Then you look at how a lot of that is structured. And if the documentation isn’t good (which happens more often than you think) it can get messy. It can get really messy. If your kids are spending all this time and they’re squabbling among themselves, woo! I was listening to this one speech—the industry group advocates bring in random speakers once in a while. And a family office that came in and someone asked, “What’s the value in a family office over like a wealth advisor or a broker?” We manage personalities. You manage the parents, you manage their money, manage the kids. When the transfer happens, a lot of money gets lost. Intergenerational wealth is a problem. So if you go through something like a family office, they basically say, here’s the plan that was set out by the parents to pass off to the kids. When you’re dealing with the kids you advise them to make sure they don’t make rash decisions. Because this happens a lot where people get a huge payout and decide it’s time to have some fun time. Time to buy a car. Time to go fly somewhere. Whereas some of these assets could produce some level of income every year. But people make these decisions. But from a family office standpoint, it’s just managing the personalities. We’re not a family office, we’re a brokerage. I just thought that was pretty interesting. I never thought of it that way. 

 

Tom: Yeah, it is interesting. The one loose end I wanted to tie up was, you mentioned the idea of borrowing from your policy. It didn’t sound like you recommended it. But if someone just wants to know what that is, is this similar to a HELOC where you’re maybe getting a better rate because it’s borrowed against an asset? Is that what we’re looking at here? 

 

Gregory: Yes. And I find this very interesting. I feel like Dave Ramsey (out of the States) always does this thing where he’s says, “Debt is bad. Get out of debt. Debt is awful. What are you doing? Credit cards? Are you kidding me? No one ever got rich off credit cards!” which is probably a healthy angle to take with a lot of people. Stop worrying about the noise. Worry about the fundamentals. The fundamentals are what you’re screwing up. With a whole life policy it’s a similar approach. Why are you doing this? More often than not, you probably shouldn’t be doing this, but where are you actually trying to accomplish? People do end up in difficult financial situations. Sometimes they need to cancel their policy outright and take advantage of the cash value that’s built into it. But you can also borrow against it. What is interesting, if you look at the return that these whole life policies can normally get you like, let’s say, six percent, then you can borrow against that policy at three to four by going to your local bank. Yes, you’re borrowing against an asset, and the bank will probably be depending on multiple variables and probably be more inclined to lend you money. So on that front, it’s pretty good. But then it comes down to what exactly are you hoping to accomplish, which is usually where it gets a little bit questionable. It can definitely be done. If this is what you want to do, then that’s great. However, what I find is the motivations tend to be a little bit—sketchy is not the right word, but the plan hasn’t really been thought out as to why. Any time you delve into something like this, there’s a cost associated with it. And what I found is, I’d have people talking about taking money out of their policy within one capacity or another, and then they’d get really frustrated when they found out what the payout would ultimately be for their beneficiaries because of how much they’ve roped out. It’s not a good situation to be in. You can borrow against. It depends on the situation. Borrowing against the policy for certain estate planning cases is common. It really needs to be crafted in a very specific way. Generally speaking, out the gate, we would say, “Well, we don’t want to tell our clients to do this out the gate unless the reason is very, very good,” whether the individual’s in a terrible financial situation and looking to service a ridiculous amount of debt that they can’t otherwise serve—there is always something. Borrowing against that is a possibility. You can do it at a reasonable rate, and you can get that settled whenever you have the cash or when you pass away. But situations vary, dramatically. I’m trying to come up with an example where something like this might make sense. If someone’s looking to maybe put a down payment on a house and their life insurance policy has value and they’re younger, something that we see once in a while is people buying child insurance where they’ll buy a policy for a kid. It’ll be a permanent policy. They’ll pay into it for 20 years. The child will have coverage for the rest of their life. It tends to be super cheap because the likelihood of a child dying in their first 20 years is pretty low in Canada, all things considered. The one example that is usually given in the industry is Jim Patterson, who owns those car dealerships out west. Apparently, he kicked off—and I don’t remember if it was borrowing or cancelling his life insurance policy and tapping into that cash value, but apparently, that’s where some of the initial money came from for his various business projects. So it depends. On one hand, if you’re in a tough spot or on another hand, if you just need capital, regardless of the costs involved, then it can be done. But generally speaking, we advise against that where it might not be necessary. 

 

Tom: Yeah, that makes sense. Because if you’re insuring against a loss but you’ve borrowed against the insurance, then the money’s not actually there to cover you. It will cover what you borrowed, but it is not there to go to charities, go to your family or whatever your original intent was. 

 

Gregory: But one thing I will say is, oftentimes there isn’t a plan for this money. It’s just there, right? So when they’re getting to an age where, let’s say they’re in their 50s, where they say, “I have enough in savings. I have this whole life policy. But I really want to buy this and B&B out in the countryside and I really want to figure this out…” that could a “use case” and a reasonable one. Sometimes there is no purpose behind the policy apart from just having some sort of baseline. We see that once in a while when people come to us with their existing situation. But again, it varies dramatically. 

 

Tom: Thanks for running us through all this. It is a complicated topic with all these options and it is very individual. I do suggest people look into this and then decide what’s right for them. Can you let people know what you do and where they can find you online? 

 

Gregory: Sure. Over here I’m the president of Dundas Life. We’re an online brokerage. We deal with everything from a quick and dirty term policy to cover your mortgage to more complicated estate planning cases. And the one thing I tell everyone is, we won’t give you an estate planning case by email. These things get really, really, really complicated. We don’t want to position something to you that’s not going to make sense and cost you in the long-run. So if someone does have a more complicated need, just get in touch with us personally, either with me or Stephen Sinclair. Shoot us an email or reach out to us through our website at www.dundaslife.com. 

 

Tom: Great, thanks for being on the show. 

 

Gregory: Thanks for having me. 

 

Thank you, Gregory, for making the topic of insurance a bit easier to understand and for explaining why insurance is such an important part of financial planning. You can find the show notes for this episode at maplemoney.com/173. If you have a moment, head over to our YouTube channel, and subscribe there as we’ll be getting back to releasing never-before-seen content soon. Just search for MapleMoney or go to maplemoney.com/youtube and subscribe today. Thanks, as always, for listening. I look forward to seeing you back here next week.