How to use Life Insurance as an Investment in Canada
If you're familiar with our content you know we specialize in leveraged life insurance strategies such as the infinite banking concept, be your own bank, and the immediate financing arrangement for Canadian business owners and high-income professionals.
These strategies build up cash value inside a life insurance policy to use as an asset and then leverage the policy to invest in other things.
Often when people think about life insurance they think of it as an expense, or a drain on their income.
Today we’re going to be talking about how you can use life insurance as an investment.
We’ll mainly be talking about participating whole life insurance, but some of this will be the same if using a universal life policy.
What is participating whole life insurance?
Whole life insurance is a type of permanent life insurance that offers both death benefit protection and a cash value component. The participating part of the name means that it grows with a dividend from the insurance company’s participating account. As the insurance company invests the money they collect from premiums, the returns on that are distributed to the holders of the participating whole life policies.
These types of cash accounts are safe and secure places to store your savings over a very long time. They are invested by an insurance company – which traditionally has a very conservative and long-term investment style.
Most of the companies we work with have paid out dividends to their participating accounts for more than 100 years and have never missed. This includes in world wars, the great depression, the 2008 crash and more recently during COVID. Canadians have depended on life insurance companies for insurance and investments for generations.
Here's what you are invested in when putting cash inside a whole life insurance policy in Canada.
A fully vested, investment
Another huge benefit of these types of accounts is that any money you put in there – or any growth you get from dividends – is immediately vested. What does that mean? It means that any money that hits this account is immediately guaranteed and will never go down.
Do you have any other investments in your portfolio that can make that claim that your money will never go down from the minute you put it in?
Now we have an account that’s safe, secure, guaranteed and has a 100 plus history of consistent growth. Who likes that? Well, everybody.
Insurance companies and banks like it very much. So much so that they’ll take your participating whole life insurance policy as collateral for loans up to 80 or 90 or even 100% when done correctly.
Tax advantages on growth
One benefit we haven’t talked about is the tax advantage that life insurance has.
In Canada, life insurance is considered tax exempt and the cash value growth inside is tax deferred. What this means is that when life insurance pays out, that death benefit is tax free to your corporation or to your beneficiaries personally depending on how it’s set up.
The tax deferral on the cash value growth means that your cash inside the policy can compound forever – which helps it grow bigger, faster and longer than traditional non-registered investments that get taxed every year.
Tax deferred doesn’t mean tax free. The deferral is until you withdraw the money. But as I talked about earlier, banks and insurance companies will lend 80 or 90 or 100% against these policies so if you ever wanted to use the cash value inside your policy, you could take a loan out against it and leave the cash inside your policy to compound forever with the tax deferral until one day you pass away and the entire death benefit pays out tax free.
By doing this, you effectively grow your money with no tax inside the policy and then the whole amount with the growth pays out tax free to your company or beneficiaries. There’s nothing else like it in Canada’s financial system.
You get guarantees, compound growth forever, tax advantages, liquidity, and legacy all wrapped up in a nice and simple way.
One thing we talk to clients about is swapping the fixed income portion of their portfolio with a participating policy with high cash values. You get the low risk growth and guarantees, but you also get all these other benefits that we’ve talked about.
By including a whole life insurance policy in your portfolio, you can potentially reduce your overall risk and increase your chances of achieving your financial goals.
An investment for retirement
Additionally, whole life insurance can be used to create an income stream in retirement.
We do this through what’s called an insured retirement plan and you can see the full video on this strategy on our Youtube channel and on our website.
Basically what you do for this is build up the cash value as high as you can and then take loans in retirement to supplement your retirement income.
Conclusion
The most important thing to note is that any strategy that uses a whole life policy is a very long term strategy. This is not something you are going to set up for 1 year or 2 years or 10 years. Like the name says – it's whole life. You set this up forever.
It's not an investment that will provide quick returns like shares or bonds or real estate. And people who compare it to those things are missing the point.
In conclusion, whole life insurance can be a valuable tool for Canadians looking to invest for the long-term.
It provides guaranteed cash value growth, tax advantages, diversification, and can provide an income stream in retirement. It also serves as a way to leave a legacy for loved ones.
Next Steps:
We've helped 100s of Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings and business growth since 2011.
To discuss how the right whole life insurance policy fits into your asset stack and your estate plan, schedule a Discovery call with one of our trusted advisors. We're based in Vancouver and take clients all across Canada.
Related Insights
Your Corporation Has Accounts You've Probably Never Seen
Executive Summary Your corporation tracks three notional accounts, the Capital Dividend Account, RDTOH, and GRIP, that never appear on a statement but directly determine how...
What Happens After You Reach Out to Safe Pacific?
Executive Summary When you reach out to Safe Pacific, a real person from our team emails you within 24 hours with a link to book...
The Protection Playbook for High-Income Employees
Here's something that surprises a lot of people. Some of the most financially fragile households we see are actually very high-income families. Not because they're...
Whole Life Insurance: The Strategy Most People Miss
Most investment portfolios are built around three pillars. You have equities, you have fixed income, and here in Canada, a lot of people have real...
Why High Earners Are More Vulnerable Than They Think
Most people assume that earning more money makes life simpler. More income, more security, more options. But the uncomfortable truth we see every day is...
How to Protect Your Income in Canada with Disability & Critical Illness Insurance
What would happen to your savings, your retirement plan, and your finances in general if you were sick or injured tomorrow and couldn't work? How...
The Decisions Your Future Self Will Thank You For
Most financial plans assume that life stays ordinary and orderly. Your income continues, the markets recover on schedule, your health holds up. But future you...
Liquidity: The Missing Piece that breaks most Financial Plans
Most financial plans look great on paper. Strong net worth, solid investments, a growing business. But here's an uncomfortable truth: a lot of plans don't...
Why Your Finances Feel Disorganized (Even When You're Doing Well)
Here's something we've been hearing a lot in client meetings recently, almost word for word: "I know I should have a better handle on all...
The Estate Tax Bill Most Business Owners Never See Coming
What actually arrives in the estate from a corporate investment portfolio versus a corporately owned life insurance policy. Every projection a business owner sees starts...
Use the Capital Dividend Account to Distribute Tax-Free Wealth
Eventually, every Canadian business owner asks the same question. How do I get this money out of my corporation without getting crushed by taxes? There...
Stop Under-Saving: How to Max Out Your FHSA
Everyone is talking about how expensive Canadian real estate has become. Almost no one is talking about how badly the average Canadian is underusing their...
