Life Insurance Policies

Quick-Start: Optional. It is only used in scenarios of untimely death in the TIME MACHINE.

You can add 5 different types of life insurance Term life insurance, insurance from the employer, and the three types of permanent life insurance: Term to 100, Whole life, and Universal life.

  • The owner of the policy is generally who pays the premiums. For insurance from the employer, that's ignored, and the premiums are set to 0 since they don't affect your cash flow. For Term and Permanent life policies, they can be owned by yourself, your spouse, jointly with your spouse, or by your CCPC if you've entered one.
  • The insured is the person(s) whose death triggers the payment of the death benefit. For insurance from the employer, it will be the employee. For other types, if you have a spouse, the insured can be both of you and you can choose if the death benefit is received when the first of you dies or when the last of you dies.
  • The beneficiary must be the CCPC if the CCPC owns the policy. For personally held policies, you can choose the surviving spouse, your estate, or another beneficiary. If the beneficiary is "Other", the proceeds will not be added to your cash flow but you will you will see the payout in the Warnings column of the TIME MACHINE output tables.

If you set the age of death of the insured before the end of a life policy for the TIME MACHINE, for personally owned policies, you will see the payout in the Warnings column of the TIME MACHINE output tables. If the CCPC owns the policy, the payment of the death benefit will show up as an addition to Retained Earnings and possibly to the CDA account.

This is a useful exercise to determine if you need insurance or additional insurance for the future welfare of dependents or if you need to protect your legacy.

  1. Term policies

    Term life insurance expires after a fixed length of time, common terms are 5, 10, or 20 years. The premium payable every year is fixed from the start. The cheapest options require a medical exam, and your premium will depend on how old and how healthy you are. There can be a "guaranteed" renewal premium quoted in your policy so that you can extend the policy without a new medical exam. These premiums are usually much higher but allow you to continue the coverage. It's best to get a new policy (and a new medical exam) if you still require life insurance and are still healthy.

    Term policies expire at term and are not renewed automatically in the TIME MACHINE. To renew a term policy you must create a new separate policy starting at the end of the old policy. Renewal rates will most probably be higher than current rates since the insured will be older in the future.

    Another way to have a term policy renewed automatically in the TIME MACHINE is to enter it as a Term to 100 policy (see below) instead. In this case, you can change the premiums paid and the death benefit payable for any future year. Just make sure to enter a zero death benefit for the years after you stop paying premiums.

  2. Insurance from employment

    Life Insurance paid by your employer is usually a taxable benefit. It is like term life insurance where the term ends at the termination of employment. You should have already recorded the employment in INCOMES.

    The death benefit can be entered as a number of times your salary or a specific amount (in future dollars). If there is a cap on the policy payout, enter it in the Insurance amount field (if not, leave that field blank).

    The death benefit will thus be paid out, tax-free to the beneficiary of the policy.

    Since the employer pays for the policy premium, enter 0 for the premium here. If you buy additional life insurance through your employer, for which you do pay a premium, enter that policy separately as a Term policy.

  3. Permanent Life

    Permanent life insurance policies do not expire as term policies do. They are guaranteed to pay something at the death of the insured as long as the premiums are paid up. These include Term to 100, Whole Life, and Universal Life policies.

    Term to 100 policies are fairly straightforward. Usually, the premium is a fixed amount payable until the insured reaches a certain age (traditionally 100, but can be a different age). No more premium payments are required after that age, but the coverage continues after that so the death benefit is guaranteed.

    Whole life and Universal life are very complicated policies that consist of a life insurance component that pays a death benefit at death and adds an investment component called the Cash Surrender Value (CVS), or simply cash value, that can either increase the death benefit, pay the premium of the policy, borrowed from, or withdrawn. The main selling point of these policies is that the investment component grows tax-free (although that growth is taxable when withdrawn), and you can access some of those funds you put in at any time. Universal Life policies are more flexible than Whole-life policies in that they allow more flexible premium payments, more flexible choices of investments, and more flexible death benefits.

    For the TIME MACHINE, ideally, we would want to be able to project the value of the total death benefit received by the beneficiary at the death of the insured, based on the premium paid. We would also like to model the impact of loans and withdrawals. Life insurance companies have their own specialised software that provides what they call Illustrations to do just that for the specifics of their own life insurance products. Besides the many parameters required to be input due to the many bells and whistles that are included in these flexible policies, these calculations require knowledge that is not publicly available to value the policies. It is actually impossible for me to predict how much of a premium paid is going to pay for pure life insurance, fees, taxes, and additional benefits, and how much of it is going to the investment component.

    So to get around that, we ask you for the information we need from the Illustration that you can receive from your insurance advisor. This severely limits the projections of the life insurance in the TIME MACHINE, but that is not our fault. The illustrations are also complicated and it may take you some time to understand them and get the numbers out from them that we need. Your insurance advisor should be able to help with that. Given this information, we can determine the cash flow including tax implications of that illustration for your financial plan.

    What do we need? For every year from today:

    • Yearly premiums. How much you are paying for the policy? If a personal policy, it will come out of your yearly cash flow (your Wallet). If owned by your CCPC, it will come out of the retained earnings. The Illustration may show the premium payable even if paid by the investments within the policy. Make sure to enter what you (or CCPC) actually pay out-of-pocket.

    • Withdrawals from the policy are allowed from the CSV, or through loans from the insurance company. For each year we need to know how much was withdrawn by either mechanism. These withdrawals can result in at least a portion being included in taxable income (as income, not capital gains or dividends). Any taxable income to the CCPC is considered passive income and, thus taxed at the higher rate.
      • How much was withdrawn from the CSV? This is taxable in excess of the proportion of the total CSV it covers of the ACB. It will be credited to the cash flow.
      • How much was borrowed from the policy using a policy loan? This is taxable in excess of the ACB for the total amount of the loan. It will be credited to cash flow. If any taxable income is added, that is recorded and can reduce taxable income when the load is repaid.
      • How much was paid back to the policy loan? Policy loans can be paid back anytime. This will be taken from cash flow. There may be a reduction in taxable income up to any amount that was added when the loan was taken out.
      • The policy loan balance. This can reduce the CSV and the death benefit.
    • Total Death benefit payable to the beneficiary. This should include the CSV if that is the option selected for a Universal Life policy. It should have been reduced by the policy loan balance in most cases.
    • The Cash Surrender Value (CSV). If the owner is a CCPC, this value is added to the Value of the CCPC and shown in the CCPC table. The CSV in your illustration will vary by any amounts taken out, any policy loans received and paid back, and the growth assumptions of the Illustration.
    • The Adjusted Cost Basis (ACB). This amount reflects how much of the policies' CSV is not taxable if withdrawn. For a CCPC, this also reduces the amount of the death benefit that is added to the CDA account.

    The columns (loan balance, death benefit, CSV, ACB) reflect balances at the end of the year. If your policy started earlier than this year, we also need those balances for last year. That's a lot of numbers to enter in a web form. To make it easier, you can copy and paste the table provided into a spreadsheet. Then use the Illustration provided by your insurance advisor to fill in the spreadsheet. Then copy/paste your spreadsheet table into the box provided and click on the Parse button to automatically fill in the table on the web. Once the table is complete and correct, click the button to Save below the table to save it.

    For Term 100 policies the table is simplified as there is no CSV and the ACB is only required for CCPC-owned policies. Make sure to zero the premium column for years in which premiums will no longer be paid.

    Given this table, the TIME MACHINE will follow the orders of the illustration table exclusively. The premium payments will be made (whether you can afford them or not), no policy loans or CSV withdrawals beyond what is entered will be made, and the CSV and death benefit values will change only as outlined in the table. The only calculations left for the TIME MACHINE to do are to account for its implications for your personal taxes or corporate taxes for a CCPC-held policy. Tax events only occur when there are withdrawals/loans from the policy as outlined in the table. The death benefit paid at death of the insured is simply looked up from that table. For a personal policy, this death benefit is not taxable to the beneficiary (which could be your estate). For corporate-owned policies, the death benefit is added to retained earnings and that amount minus the ACB is added to the notional Capital Dividend Account (CDA), which allows for capital dividends to be distributed tax-free to the shareholders of the corporation.

    Collateral loans

    Using the automatic policy loan facility provided in your permanent life insurance policy's contract is convenient, but as mentioned this can affect taxes, the death benefit, and the CDA. An alternative method can be provided using a Collateral Loan. Many financial institutions will lend money to a policy owner using a life insurance policy’s cash value as collateral security. In this way, the policy's CSV and death benefit are not affected. That is unless the loan's conditions aren't met (due to not meeting payment or margin requirements if the CSV of the policy goes down). In that case, the lender may force a surrender of the policy, the policy would lapse, and the amount of the CSV minus the ACB would be taxable.

    You can enter a loan in LOANS, and select the insurance policy as collateral. Usually, these loans are interest-only LOCs, but you can choose any type of loan. The borrower should match whoever owns the policy (yourself, your spouse, jointly held, or your CCPC). The payments will be taken from cash flow as usual, and any balance at the death of the insured will be repaid from the cash flow, which will include the death benefit at that point. The death benefit will be what was entered in the table above, The amount added to the CCPC 's CDA account will not be affected by the collateral loan.