Ten Questions to Answer Before Considering This Method

The ten questions

1. Do I have a genuine need for permanent life insurance?

   What the question is really asking. Whether coverage that lasts for life, rather than for a term of years, is wanted for its own sake, independently of anything else the contract does.

   This question comes first because it decides whether any of the others are worth asking. A participating whole life contract is, before anything else, permanent life insurance, and the cost of providing that coverage is charged inside the contract every year for as long as it is in force. A household that wants permanent coverage is paying for something it wanted. A household that does not is paying for something it did not want in order to reach a feature attached to it, which is a poor trade in almost every case. The honest test is whether the coverage would still be wanted if the accumulated value provision were removed from the contract entirely.

   Read further: Whole life insurance, Term insurance, and when it is the right answer.

2. Is my income stable in an average year, and not only in a good year?

   What the question is really asking. Which year the premium is being sized against.

   A long commitment sized to an exceptional year fails in an ordinary one, and failing partway through costs more than never starting. Income that varies is not a disqualification; income measured at its peak is the problem. The useful exercise is to look back at the last several years, find the ordinary one rather than the good one, and ask what surplus that year actually produced after everything else was paid. Business income, commission income and seasonal income all deserve this treatment specifically, because the good year is the one that gets remembered.

   Read further: How a reasonable plan fails, How premium works.

3. Do I have an adequate emergency reserve?

   What the question is really asking. Whether cash exists somewhere that can be reached today, without a request to anyone.

   Accumulated value inside a contract builds slowly, because the cost of putting the contract in force falls heaviest at the start. In the first years the amount available for an advance is small and can be nil, and even once value exists a request is processed by the insurer in business days rather than minutes. A contract is therefore not an emergency reserve and does not replace one. A household without cash it can reach immediately is a household that will eventually have to interrupt the commitment to meet something ordinary, which is the sequence that produces much of the disappointment in this product.

   Read further: How long an advance actually takes, How value accumulates.

4. Am I carrying expensive consumer debt?

   What the question is really asking. Whether there is an outgoing cost that is larger and more certain than anything a long contract offers.

   Interest on high rate consumer debt is charged now, at a stated rate, and it compounds against the household rather than for it. Any capital directed elsewhere while that debt stands is capital doing less than it could be. This question is not asking a reader to conclude anything, and it is not a rule about ordering. It is asking whether the balance and the rate have been written down, side by side with the proposed premium, so that the comparison is visible rather than assumed. A number nobody has written down tends to be the number that decides the outcome.

   Read further: Opportunity cost, Capital recovery.

5. Have I considered my TFSA and RRSP priorities?

   What the question is really asking. Whether the registered position has been established as a fact before any contract is discussed.

   This question asks and does not answer. This page does not tell a reader to fill registered contribution room before considering a contract, and it does not tell a reader to do the reverse. What it does say is that an insurance contract is not a registered plan, that owning a policy neither consumes nor creates contribution room, and that unused room does not disappear because a contract exists. So the question is factual: what room is currently unused, what has each account been intended for, and what would change if premium were committed. Which of these to fund, in what order, and in what proportion is a question for the household's accountant, who has the numbers and holds the licence for that answer.

   Read further: How growth is treated inside a contract, The registered contribution room argument.

6. Can I maintain the commitment if income decreases?

   What the question is really asking. What happens to the contract in a bad year, and whether that answer is known before the bad year arrives.

   Contracts contain provisions that help here, and the provisions differ between insurers and between contracts. Some allow the required payment to be reduced, some allow accumulated value or dividends to meet it for a period, and some allow the contract to be converted to a reduced amount of paid up insurance. What none of them does is make the shortfall costless. The question worth asking of any specific contract, before signing, is which of these provisions it contains, what each one costs, and how long the contract can carry itself without a payment. An answer given in general terms is not an answer about the contract on the table.

   Read further: Paid up additions, Waiver of premium, Risks and failure modes.

7. Is my time horizon measured in decades?

   What the question is really asking. Whether the household expects to still hold this contract long after the circumstances that prompted it have changed.

   The cost of putting a contract in force is weighted to the early years, so the arrangement rewards duration and punishes a change of mind. A household that may want the capital back within the first several years is looking at a structure that returns materially less than was paid in during exactly that window. This is not a question about intention, because everybody intends to continue. It is a question about the events already visible on the horizon: a business sale, a move, a retirement, a large purchase, a child's education, an ageing parent. If one of those is likely to need the capital, the horizon is shorter than it feels.

   Read further: The cost of leaving, at each stage, Cash surrender value.

8. Have I reviewed guaranteed values separately?

   What the question is really asking. Whether the decision has been tested against the column that is contractual, on its own, with the projection covered up.

   Every illustration contains at least two sets of numbers. One is the guaranteed schedule set out in the contract at issue, which does not decrease. The other assumes a dividend scale that is declared annually at the insurer's discretion and can move in either direction. Reading them together is how an illustration is usually presented, and reading the guaranteed column alone is how the contract is actually evaluated. The practical version of this question is to look at the guaranteed column at years three, five, ten and at maturity, and ask whether the decision still holds on those figures. If it only holds on the projected column, the decision depends on an assumption rather than on a contract.

   Read further: The guaranteed schedule, Dividend scale, Why a rate is the wrong unit.

9. Do I understand the consequences of early surrender?

   What the question is really asking. Whether the exit cost has been read as a number rather than described as a concept.

   A contract surrendered in the early years returns the cash surrender value, which sits materially below cumulative premiums paid at that stage, and the shortfall is permanent. A surrender can also produce a taxable amount, because a disposition arises and amounts above the adjusted cost basis can be taxable, with the conclusion for a particular set of facts belonging to the household's accountant. The version of this question that does any work is not whether a reader understands it in principle. It is whether the reader has seen the actual figure, for the actual contract proposed, at year three and at year five.

   Read further: Cash surrender value, Adjusted cost basis, The cost of leaving, at each stage.

10. Do I understand that dividends are not guaranteed?

    What the question is really asking. Whether the reader can state, without help, which part of the illustration is a contractual promise and which part is an assumption.

    A dividend is declared annually by the insurer's board at its discretion, based on the experience of the participating account, and scales have moved in both directions historically. Established Canadian insurers have long records of paying one, and a record is evidence rather than a commitment. Separately, the guarantees that are contractual are obligations of the issuing insurer and depend on its continuing financial strength. They are not backed by any government, and Canadian policyholder protection is provided by Assuris within published limits that change over time and should be confirmed with Assuris directly.

    Read further: Dividend scale, How participating contracts work, What is verifiable, and how to check it.