I realize that insurance agents get a bad rap. There are few people on the face of the Earth who can be more persistent than an insurance adviser.
I often tell the story of the time I met with my own adviser who was trying to sell me a policy. I told him I would sleep on it. He then said: “Tim, that sounds good. You sleep on it, and if you happen to wake up in the morning, give me a call and let me know your decision.” We had a good laugh.
If the truth be known, life insurance can be used in many effective ways, and so shouldn’t be dismissed quickly. Today, I want to share with you some of the ways in which many affluent Canadians have used life insurance in the past. Some of these ideas might just make sense for you.
1. Tax-sheltered accumulation
Assets inside an insurance policy can accumulate free of annual income tax, and this sheltering can allow for greater accumulation over time than when using comparable vehicles. If you’re accumulating part of your investment portfolio inside an insurance policy, holding all or some of your fixed-income investments in the policy will allow you to shelter what might otherwise be highly taxed interest income.
2. Reliable returns on investment
A number of Canada’s life insurance companies offer whole life policies with a very high consistency of returns in the form of dividends paid on the accumulating balances inside these policies. The low volatility of returns, along with the tax-free payout of these amounts upon the death of the insured, can create attractive internal rates of return.
3. Insured bequest of shares
It is possible to donate private company shares to charity upon the death of a shareholder. Using life insurance, it is possible to then redeem the shares bequeathed to the charity to provide cash to the charity. The strategy results in an elimination of tax on the private company shares on death, greater value left to the heirs of the deceased’s estate, and cash in the hands of the charity.
4. Extracting funds from a holding company
Many people accumulate significant assets inside holding companies, often the result of profitable businesses. Accessing these assets on a tax-efficient basis can be a challenge because of the level of tax imposed on distributions from holding companies. Life insurance can be used to create a tax-free “pipeline” from the holding company to the shareholders as the result of the “capital dividend account” that can be created when a holding company is the beneficiary of a life policy.
5. Cascading assets to future generations
Some families have more assets than they will consume in the lifetime of the current generation. When assets change hands and move from one generation to the next, the tax liability can be significant in the absence of effective planning. Life insurance can create an opportunity to move assets from one generation to the next free of tax when the lives of the next generation are insured by the current generation.
6. Creating a source of cash
Some families have used life insurance policies as a means to accumulate assets and achieve attractive after-tax rates of return. These families recognize that they have access to the accumulating assets inside the policy if they desire to use it as a source of cash flow. While assets can be withdrawn directly from these policies, it is common to find these families borrowing against the policies to access cash instead (because it is more tax-efficient).
7. Covering taxes on death
Given that life insurance pays out tax-free upon the death of the insured it can be an effective tool to provide cash at the time of death to satisfy a tax liability. In addition, where there is exposure to U.S. or other foreign estate taxes, it can be more cost-effective in some cases to use life insurance to pay those taxes rather than implement more complex and expensive structures.
8. Reducing the value of a corporation
The higher the value of a family’s holding company(ies) at the time of death, the higher the potential tax liability that might arise. It is possible to use a “back-to-back” structure where life insurance is purchased back-to-back with an annuity by such a holding company with the effect that the value of the holding company is reduced, thereby reducing the potential tax on those company shares on death.
Link to original article in The Globe & Mail
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
Related Insights
Using Life Insurance to Fund a Buy-Sell Agreement
Imagine one of your business partners passes away tomorrow. Suddenly, their spouse or their kids own a share of your company—and you're expected to buy...
5 Mistakes High-Income Canadians Make With Their Wealth Plans
If more money automatically meant more wealth, every top-earning Canadian would retire stress-free. But that's not reality. The gap between earning well and building lasting...
What are Notional Accounts and How do They Work in Canada
If you've wondered what are Notional Accounts and how do they work in Canada, this is the post for you. Most incorporated Canadians are great...
What Canadian Business Owners Are Telling Us Right Now — And What To Do About It
Every week, our advisors sit down with incorporated business owners and professionals across Canada. And while every client's situation is unique, the conversations we're having...
Retire Tax-Free in Canada Using the Insured Retirement Plan
What if your RRSP isn't enough to retire comfortably? And what if there was a way to access tax-free cash flow in retirement—without market volatility,...
How Canadian Real Estate Investors Are Using Whole Life Insurance
What if you could unlock hundreds of thousands in capital—without selling a single property or applying for another mortgage? In this article, we'll explore How...
Use Corporate-Owned Life Insurance to Transfer Wealth Tax-Free
What if your estate faced a $500,000 tax bill after you pass away—on capital gains alone? What if there was a way to fund that...
CDA: How to Pay Yourself Tax-Free from Your Corporation
Imagine extracting hundreds of thousands in corporate profits—tax-free—without triggering personal tax liability. That's exactly what the Capital Dividend Account (CDA) allows incorporated professionals to do...
How to use Life Insurance as Capital Gains Relief
What if your biggest tax bill hits after you're gone? In this article, we'll explore how to use Life Insurance as Capital Gains Relief and...
OpCo to Legacy: The Estate Tax Trap
If your business owner client passed away tomorrow, what would happen—from a tax perspective—and what have you done as their advisor to plan for it?...
How Critical Illness Insurance works in Canada
What would happen if you were diagnosed with cancer tomorrow? How would you cover your mortgage, your bills, or your business expenses while you focused...
How Disability Insurance Works in Canada
What would happen if you suddenly couldn't work—due to an accident or serious illness? Understanding How Disability Insurance Works in Canada can help you prepare...
