How to Leverage Your Life Insurance Policy: Stories of 3 Canadian Business Owners
Today we’re going to talk about some real life stories of 3 clients that we work with.
For their privacy of course we’re going to change their names and not share any identifiable details, but all the numbers and the strategies are real.
These stories are great examples of our favourite part about what we do here at Safe Pacific, seeing our clients succeed and living great lives on their terms.
We specialize in is working with business owners and incorporated professionals who have holding companies.
We wrap up the retained earnings funds in their company inside specially designed life insurance policies that they can leverage and invest.
Homer’s Bullet Fund
Our first story is about a great guy - let’s call him Homer for this case.
Homer is a smart dude - Ivy League MBA, owns his house, lovely wife, 2 young kids. He had recently sold his company for low 8 figures and by the time it split with the partners, taxes and everything he was sitting on mid 7 figures.
He was coming up on 40 and could financially retire - but he’s not going to because he’s just not that guy.
We started working with him about 2 years before COVID shut down the world - and even then he thought the market was too frothy and was due for a correction. Well we all know what happened in March 2020 - COVID shut down Canada and the Canadian and American markets crashed big.
However, 2 years prior we had set up a large dividend-paying whole life policy for him with Sun Life - and in this case we had done what’s called back-dating the policy so he had actually made 3 premium deposits into the policy by the time the March 2020 crash happened.
His annual premium deposit is $400 thousand dollars per year and we had set up the lending at the bank - so he had access to about $1.2 million line of credit at prime which was 2.45% at the time.
When the March 2020 crash happened and nobody knew what was going on and the whole world was freaking out he did exactly what he’d planned to do in a crash. He was waiting for this. He took $800 thousand from the line of credit and bought into the market at almost exactly the bottom.
He didn’t buy anything crazy. Bought some Canadian big 5 banks and energy dividend paying stocks for a bargain.
Well, we all know what happened after that. Markets rebounded and by the end of the year TSX was higher than where it was before the crash.
Homer made a healthy profit and earned about $50,000 from the dividends.
In early 2021 he cashed out his original $800, 000 and repaid the loan to BMO and basically has a $600 thousand dollar Canadian banking and energy stock portfolio for free. And he still can expect to earn about $40 thousand from the dividend every year.
There’s no reason to expect Canadian big 5 banks or pipeline companies are going to stop paying a dividend anytime soon - so he’s probably going to keep earning $40 thousand a year passively off the dividend until he sells which he probably won’t. There’s no reason to sell.
This is a home run and one of our favourite client stories in 10 years of doing this.
It’s exactly what you’re supposed to do when you set up one of these life insurance leverage strategies like the IFA immediate financing arrangement or CSV cash surrender value lending.
You’ll remember he had access to about $1.2 million and didn’t deploy the whole amount. He had a plan, when the correction he was waiting for happened he took the shot. Didn’t overplay his hand. Didn’t buy anything crazy risky - you generally can’t go wrong with big 5 Canadian bank stocks and the big energy companies.
This is a perfect example that relates to our other video about having a bullet fund. This is the bullet fund - an opportunity presents itself and you need that bullet ready to take the shot.
Bart’s Business Investment
This next story is a little bit more practical because he’s using it to fund his company.
Our last guy was Homer so this client’s name can be Bart.
Bart owns a a business buying a selling certain commodities. We’re in Canada and we produce a lot of raw material - well he buys and sells truckloads and trainloads every day.
Each sale or transaction is millions of dollars - but he doesn’t get paid right away. Depending on the contract it can be 30 or 60 or 90 days before he gets paid - so it’s an expensive gig and he has to float these shipments until he gets paid from the buyer.
When we met with him he had about $3 million dollars cash sitting in his corporation and he hated it. He obviously wanted to do more with the money than have it sitting in cash, but he couldn’t because he needed the money to float the inventory.
There was nothing he could really invest in that would provide a return while also giving the liquidity to fund the inventory.
Because of the nature of his business, lending is difficult to get, and it’s expensive when you can get it. So borrowing isn’t a great solution for him to float the inventory.
The solution we came up with is really interesting. We suggested he talk to his lawyer about setting up a holding company and transfer the $3 million into the holdco. Then we started depositing $300 thousand into a life insurance contract each year for the next 10 year - which will transfer his full $3 million bankroll into the insurance. The insurance will live inside the holding company.
The insurance we’ve set up for him earns a dividend - so this solves his problem of not earning anything on the money that’s sitting inside his corporation.
With this insurance in place the bank has secured him a line of credit much cheaper than he could have qualified for before. And this line of credit will grow each year as the holdco makes the premium deposits.
What’s he’s doing is taking the loan funds from his holding company and lending the money to the operating company to finance buying and selling the commodities that they trade in.
His holdco is making an additional return here from the lending - which the opco is getting at better rate than it could have qualified for on it’s own.
So he’s winning in 2 places - he’s solved his problem of not earning on the funds sitting in the company through the life insurance dividend and then he’s earning again when he lends the money to his operating company. He’s doing all of this, while keeping complete liquidity so he can finance the truckloads and trainloads of raw materials that he’s shipping to his customers.
Down the road - in 15 or 20 years the life insurance policy will have grown much larger than the $3 million we’re originally working with and it will become a key component of his retirement plan.
So I guess he’s really winning in 3 places. 2 right now and another one when he wants to retire.
This story is great because it’s such a simple solution to a problem he thought couldn’t be solved.
It’s also a great example of using one of these insurance leverage strategies to fund your own business. It’s hard enough to get business loans from banks - and this is a great way to secure the lending.
We’re based here in Vancouver and in Vancouver the whole world revolves around real estate. So this last story is about one of our clients who runs a MIC - a MIC is a Mortgage Investment Corp and in very simple terms they lend out money against different types of real estate.
Lisa’s Stacked Investments
Our client - should she be Marge or Lisa? Doesn’t matter.
Anyways, Lisa is a VP at a big private MIC here in Vancouver. They have a big fund and they also let other people invest in the fund.
Over the past few years it’s returned anywhere from 9 - 14% with a pretty low loan-to-value so it would be considered a safe MIC compared to others.
Lisa uses this strategy of leveraging the life insurance for a line of credit at the bank. So each year when she makes her next premium deposit she takes the line of credit money and dumps it into her own MIC. It’s super simple and plus she’s VP at the MIC so she knows every property that’s in there and her risk is really low.
This story isn’t very exciting because she’s simply taking money from the bank and dumping it in a fund - but the kicker is that her MIC has a huge line at the exact same bank that we’ve set her up for the insurance lending and we got her the money cheaper than her own MIC gets the money from the same bank.
It’s because the insurance is such a secure asset to lend against that in this case, the bank is giving her money cheaper against her insurance policy than they’ll give the money to her company against a real estate portfolio.
Lisa is a great example of what we call stacking investments. She’s earning the dividend from the life insurance and then also probably going to earn about 9% from investing in her fund - so she’s earning twice on the same dollar.
Conclusion
So there you have it - 3 actual client stories about different ways you can use an insurance leverage strategy to build your wealth.
All 3 of them use the same type of lending - an immediate financing arrangement or IFA but all are using it in completely different ways and for different reasons.
Our boy Homer is using it to invest in his holding company. Bart is using it in his holding company to float inventory in his operating company and Lisa is using it to stack investments, growing her wealth and also adding investment into the mortgage fund she works at.
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.
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