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Life insurance myth busted

My introduction to the world of finance was in 1985 as a life insurance agent. I am grateful for those early years as they taught me a lot about the foundational principles of financial planning.

My introduction to the world of finance was in 1985 as a life insurance agent. I am grateful for those early years as they taught me a lot about the foundational principles of financial planning.

I had the good fortune of working with my friend Gerry, a great mentor who helped me to look at our industry objectively and with a view toward the client's best interests. It was a somewhat uncomfortable experience though, as what I found often flew in the face of industry tradition.

The most uncomfortable revelation came when I was forced to compare cash value life insurance policies against simple strategies. Such strategies include buying inexpensive term life insurance and investing the cost difference in an RRSP.

What was originally pitched to me as a combination of magic and financial genius quickly melted into the reality that cash value insurance contracts are simply a mixture of risk sharing and investment capital.

My key concern is that their complexity makes analysis difficult. Add to that the fact the embedded insurance costs are higher than if you were to buy pure term insurance. Also, the two per cent provincial premiums tax is levied not only on your insurance costs but also on deposits allocated to your investment reserve. Capping off this bad news, the management expenses on the cash reserve are far above most investment portfolios.

Suffice it to say my findings consistently show that life insurance makes a horrible investment. However, let's also be clear investments make horrible life insurance. They are two completely different financial vehicles. The net result of mixing them generally results in higher consumer costs.

Life insurance is an essential foundation to most financial plans and should be dealt with separately from an investment portfolio. For that reason we generally recommend a well-designed and less expensive term insurance plan. With the money saved it is best channelled into your RRSP, TFSA and paying down debt.

Some insurance agents have told me that people usually do not have the discipline to save money and that the cash value insurance policy will help them. That's quite a condescending example of the ends justifying the means. A financial advisor's job is not to impose discipline, but rather to help clients achieve their goals by charting the right course.

The opinions expressed are those of Richard Vetter, a Certified Financial Planner and owner of WealthSmart Financial Group in Richmond, BC, www.wealthsmart.ca