If you are looking to buy financial products, there are many places that you can go like banks, trust companies, credit unions, life insurance companies, and mutual fund companies.
The lines that used to distinguish institutions have become increasingly blurred. At one time, if you wanted to buy stocks, you went to see a stockbroker. If you wanted a GIC, you went to the bank. For life insurance, you went to a life insurance company. Now banks, life insurance companies, and mutual fund companies are all in the same game and even products have become increasingly similar. Despite the convergence, life insurance companies still have some unique benefits that investors should be aware of. Let’s look at some of the advantages of investing with a life insurance company:
- Guarantees. When you buy a segregated fund through a life insurance company, there are typically guarantees of capital under two circumstances. The first is when you die and the second is when you reach a 10-year maturity period. Some products like the Manulife Guaranteed Income Plus products are taking these benefits to new level by offering a guaranteed income for retirees needing income from their portfolio. While this may seem incredibly advantageous, remember that the life insurance company is not offering you these benefits for free. They come at a cost and in some cases a very expensive cost. Make sure you take the time to find out the fees that are being charged.
- Creditor Protection. Safeguarding assets from seizure by creditors is an important and often overlooked aspect of investment assets. Generally, assets held within life insurance contracts and annuity products, including most insurers’ RRSP, segregated fund contracts and term deposits cannot be seized by creditors, provided that certain conditions are met when the contracts are arranged.
- Probate Protection. When you have to probate an estate at death, there is the potential for significant fees and time delays depending on the complexity and size of the estate. One of the ways to minimize fees and time delays is through the use of investments with insurance companies. Essentially, investments held with an insurance company transfer directly to the named beneficiary at death without having to go through the estate and the probate process.
- Pension Income Credit. Persons age 65 and over who receive annuity income from a qualified pension are eligible to claim a maximum tax credit of $2,000 on their tax return. There are many types of pension incomes that qualify for the credit, but amounts received from OAS, CPP and QPP do not qualify for the credit.
When a person is age 65 and older at any point in the year, the definition of pension income for purposes of the tax credit includes:
· Income from a superannuation, pension fund or pension plan;
· An annuity payment out of an RSP or an annuity purchased with a refund of RSP premiums received on the death of a spouse;
· A regular payment out of a RIF, a LIF, or an LRIF;
· An annuity payment out of a deferred profit sharing plan purchased by the person or by the plan.
· The income (or interest) element of GICs held with a life insurance company.
· The income (or interest) from a non-registered, prescribed annuity.
So, if you have GIC interest income or life annuity income through non-RRSP money, having that money through a life insurance company may help you qualify for the $2000 pension income credit.
The investment world continues to converge because mutual fund companies and banks are partnering with insurance companies to provide products with all of these unique benefits. Although these benefits have merits, make sure you understand what you are investing in and most importantly how much you are paying for these benefits.