Many individuals buy life insurance as a means of financial protection for their beneficiaries. Others buy it not only for this reason but as an investment as well. There are some who try to decide as to whether Life Insurance or RRSP’s provide the best investment.

What are RRSPs?

savings

This is a registered retirement savings plan that is available to Canadians. Every individual has the opportunity to put a specific sum of money into this. They can do so throughout each year once they start making an income. As the money sits in the RRSP account, it earns interest.

What is the Benefit of RRSPs?

One of the immediate benefits is that it lowers the income tax that is paid on the income earned. This is done in the year the RRSP contribution made. It can be very beneficial for putting an individual into a lower tax bracket.

The second benefit is that when money is withdrawn from the RRSP, it has a lower tax applied to it.

How Old Do You Have to Be to Contribute to the RRSP?

You can start contributing from the time you start earning an income. You can continue to do so up until the age of seventy-one. The maximum you can put is up to 18% of earned income. But, there is a maximum amount that anyone can contribute to their RRSPs. This amount is shown on the individual’s tax assessment.

Life Insurance

There are main types of life insurance.

Term Life Insurance – which is not going to give any type of investment opportunities. But will pay a lump sum to the beneficiary in the event of the insured’s death.

Permanent life insurance – Within this category, there are some additional choices. Such as Whole life or Universal which can also be used for investment purposes.

Universal life insurance –  Creates an investment opportunity with some tax advantages.

REGISTERED RETIREMENT SAVINGS PLANSLIFE INSURANCE
You will eventually pay tax on the RRSP investment. The advantage is it’s a deferred tax.The proceeds from life insurance are tax-free. Tax is deferred on the investment portion.
You have a limit on what you can invest each yearThe maximum amount of insurance you buy depends on the metrics of the insurance company
Creditors can go after the RRSPs with some exceptionsCreditors cannot touch the proceeds of the insurance if they are paid to the beneficiaries
You can withdraw early on your RRSP for specific needs without being penalizedYou can access the cash value of your policy and use it for whatever you want
You have flexibility in what you can deposit to your RRSP account each yearYou are compelled to pay the same premiums agreed upon

Life Insurance Instead of RRSPs?

investment

 

At first, it is difficult for individuals to look at life insurance as an investment. But, there are some types of life insurance policies that perform a dual function. It provides financial security for the beneficiaries. It will allow for a return on investment.

Which Do You Choose?

Both Life Insurance and RRSPs have their benefits. Which can make it difficult to choose.  You are probably looking at this type of investment to serve two purposes.

  1. To protect your loved ones financially in the case of your death.
  2. A form of investment that you strengthen your financial situation in your retirement years.

You will need to look at these two important factors separately and determine what your wants and needs are for each of them.

a) determine which one is going to provide better financial stability for your loved ones. Would it be the proceeds from the RRSPs or the life insurance?

b) Which one is going to be more beneficial to you for retirement investment purposes?

c)Based on your specific circumstances you will be able to determine the answer. If the answer both relates to one of them, then you have an easy solution.

d) If your answers lead you to both options, then you have a bit of a challenge on your hands. You now have to decide which purpose is more important. Then base your decision on this.

Additional Option

The other option is to invest in both. You can find some excellent insurance packages for investment life insurance if you shop around carefully for it. If your finances allow you to budget for some investments, then considering both RRSPs and life insurance may be a good option. You can decide on a life insurance cost that is comfortable for you. Then the remaining money from your investment budget could be put into an RRSP.

The Investment Aspects

You also need to try and determine which investment is going to bring you the greatest return on your dollar. There are the tax advantages. How beneficial these are going to be is going to depend on your tax bracket now and in the future.

For ROI you need to do some forecasting about both the RRSPs and the life insurance.

Estimating your RRSP Return

You can estimate how much your return on this investment will be doing calculations based on your working years.

To determine this you need to start with some base information;

  • How much do you have in your RRSP right now?
  • What is going to be the annual rate of return during your working years?
  • How Much can you contribute to your RRSP each year you are working?
  • Also, how old are you right now?
  • How many years until you retire?

Then added to these calculations you need to determine how many years of retirement you think you will have, Plus, the annual rate of return during retirement.

There are RRSP calculators that you can use based on this information that will allow you to estimate what you will glean from your RRSP contributions.

Estimating Your Life Insurance Return

Return

This is a little more difficult because of all the variables. It is going to depend on the life insurance policy you choose. Which life insurance company you go with will be another factor. Also, which investment options you choose about that policy. Your insurance agent should be able to give you some examples of estimates.

Resources

https://www.theglobeandmail.com/globe-investor/personal-finance/maxed-out-rrsp-try-a-life-insurance-strategy/article545323/
https://www.londonlife.com/planning-your-future/protecting-you-and-your-family/life-insurance–what-do-i-need-to-know-.html
https://www.bmo.com/insurance/life-insurance/universal-life#
http://www.advisor.ca/news/industry-news/ul-may-trump-rrsp-in-some-cases-17206
https://www.getsmarteraboutmoney.ca/calculators/rrsp-savings-calculator/