With equities portfolios down by more than a third in value, risk-averse clients may be ready to trade in equities investing for the relative certainty of permanent life insurance.

“When markets tumble, or there’s economic trouble, it’s easier to talk about insurance,” says Brian Burlacoff, a senior advisor with Sun Life Financial Inc. in Toronto.

Permanent insurance can be used in a number of ways. It is often used by businesses to fund succession or charitable giving. For individual clients, it can function as a third asset class; for clients with spouses and families, it can be part of retirement and estate-planning solutions.

There are three main stripes of permanent insurance products: term to 100 (a term/permanent hybrid), whole life and universal life.

The best way to present per-manent life insurance products to clients is in conjunction with term insurance, says Bruce Cumming, a registered financial planner and chartered life underwriter who runs Cumming & Cumming Wealth Management Inc. in Oakville, Ont., under the DundeeWealth Inc.umbrella. Then, address how each product serves your clients’ needs.

Permanent insurance is distinguished from term insurance, which, as the name suggests, simply expires when the term is up. Clients should see term insurance as analogous to renting an apartment, Burlacoff says. When the lease is up, the client walks away with nothing, but he or she had a roof over his or her head for that time. As an added attraction, term is generally cheaper than permanent life.

The issue with term insurance comes when the term expires. If your clients’ liabilities have diminished, many will leave insurance behind with their last term policy — but they shouldn’t. If, for example, your clients have more assets than they will spend, or they are certain they want to leave behind some cash for charities, children or other beneficiaries, permanent insurance makes more sense than either term insurance or registered or non-registered investment vehicles.

Burlacoff also argues that your clients should not wait until they are older to buy permanent insurance. He recommends clients buy now, when they are younger and prices are lower. Clients can always add to these policies, he says, as their needs change.

Leaving term to 100 aside until later, whole and UL products have at least one characteristic in common: the clients’ premiums pay for the cost of the insurance and also accumulate in the so-called “cash value” of the policy — sometimes called the “cash surrender value.” The cash value grows because part of the premiums are invested in financial instruments.

Where UL and whole life differ is the client can’t choose the investments inside a whole life policy. The life insurance manufacturer invests a whole life portfolio in a balanced portfolio tilted heavily toward bonds, with some real estate. In contrast, with a UL policy, clients can choose their investments.

“One gives you flexibility with deposits and investment choices; and the other one, whole life, gives you zero flexibility,” says Cumming. “You have to make the prescribed premium payment for eight or nine years. Some of that pays for your insurance, and how the money is invested isn’t known. The insurance company takes on that responsibility.”

But it’s arguable that what whole life insurance clients give up in flexibility, they gain in certainty. “The appeal of whole life” Cumming adds, “is its simplicity, which can be appealing during volatile markets for clients who simply don’t want the hassle of managing more money.” Cumming notes one whole life policy that guarantees a minimum investment return of 4%. “It’s the equivalent of getting 7.5% before taxes,” he says. “What a terrific way to make 7.5%, forever.”

The magic of insurance — and this applies to all permanent insurance products — is that it isn’t taxed. So, the logic is that an estate taxed at the highest marginal tax rate would need almost double the cash from non-registered assets to produce the same return as insurance — and that’s apart from the death benefit.

For some clients, however, not knowing what’s inside the policy’s investments is a no go, Cumming admits: “We call it the ‘black box’.”

For those clients, UL is a better option. In a UL policy, clients and advisors choose a portfolio of investments or indices that are similar to mutual funds. The goal in a UL policy is for the cash value in the policy to grow and, over time, generate enough income to pay the cost of the policy, Burlacoff says. People who understand equity-market growth are generally more willing to consider a UL policy.

@page_break@The drawback of a UL policy is that, apart from the death benefit, an advisor or client can never know for certain what the rate of return will be at the end of the day. “One of the problems,” says Cumming, “is that you can’t illustrate the growth of the investment for these products.”

A term-to-100 policy, on the other hand, is easy to figure out. It is a permanent life policy stripped of all of its cash surrender value; your client simply pays for the insurance and counts on the death benefit for his or her estate. It’s a much cheaper product than UL or whole life.

“Term to 100 looks like a mispriced product,” Cumming adds, “when you look at the internal rate of return over 30 or 40 years.”

The potential benefits of permanent policies for retirement and estate planning are myriad. As couples age, each spouse can have a permanent policy naming the other as a beneficiary; the couple can then be less frugal with their savings, knowing that a death benefit will fund the later part of the surviving spouse’s retirement.

“That doesn’t mean the couple should drive down their RRSP savings as fast as they can,” Burlacoff says. “But it allows them to make different decisions.”

It’s not quick and easy to access the cash surrender value of whole and UL policies, Cumming notes. Policyholders can do so by assigning the policies as collateral for loans, either from the manufacturer of the policy or a bank. The loans are eventually repaid from the death benefits, with the remainder going to the beneficiaries.

Any permanent life policy virtually guarantees that your clients will leave some benefits to their children. The death benefit is transferred tax-free — and immediately (unless the children are minors, when different rules apply), as it doesn’t need to be probated.

And, again, because benefits are tax-free, permanent policies can be a low-cost way to pay off the capital gains and taxes incurred by an estate liquidation. Otherwise, every dollar in the estate could be taxed at the highest marginal rate.

The wealthy may argue that they have enough investment savings to pay for estate taxes and to leave to relatives. But insurance achieves the same goal at a much lower cost and with greater tax efficiency. IE