Most people think of life insurance as an expense. But few realize that certain types of life insurance contracts can be an extraordinarily good investment. Some insurance contracts provide guaranteed internal rate or return on death at life expectancy of 7% and higher. This means that if your marginal tax rate is 40%, you will need to earn about 12% in a regular investment in order to match that. Today guaranteed investments don’t earn more than 3% a year. There are several reasons why life insurance works so well.

The key element is its tax treatment. Most life insurance policies have tax exempt status, which means that not only the growth of your investment inside the policy is tax free, but also the eventual withdrawal at death. Even with an RRSP investment you will have to pay tax one day. With life insurance there are no taxes, period. This works especially well with corporate policies owned by Canadian Controlled Private Corporations (CCPC). Because the tax rate on passive corporate income is very high (46.7% in BC currently), the tax exempt status of a corporately owned policy can produce a dramatic increase in the net return.

Another element contributing to the high return in life insurance contracts is the way the money is invested. There are two types of life insurance contracts with cash values – Universal Life and Whole Life. While with Universal Life a policy owner may choose any type of investment and loose all their money, with Whole Life the money is invested by an insurance company, usually in a very well balanced long term portfolio. Such investments produce exceptionally stable and predictable returns. Even today when the stock market is crashing, there are some insurance policies earning 8% a year.

The major drawback of investing in your life is that you can enjoy the returns only after your death, which for many of us is too late. Even though you can withdraw cash from your life insurance policy, such a withdrawal may be taxable, which reduces the net return achieved due to the tax exemption. However, life insurance companies have come up with a creative way to deal with this problem. An Insured Retirement Program (IRP) uses a policy with a cash value as collateral for a loan which is later repaid when the insured dies and the death benefit is paid out tax free. Since the loan proceeds are not taxable, the overall effect of this transaction makes life insurance a good investment even if you plan to use the money. If you want a stable and predictable investment with good return in your portfolio, consider investing in your life.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.