Using life insurance as an investment in Canada
Technically, life insurance is not an investment. It is life insurance and should be used primarily as such.
But there is a lot of talk about using life insurance as an investment on the internet - so this is what they mean.
The basis starts with a properly designed and over-funded Participating Whole Life Insurance policy.
There are 2 reasons that it can be seen similar to an investment:
- The premiums you put into this type of policy grow with a dividend that is paid out every year by the Insurance Company
- The money you contribute to the policy is liquid through leverage, at 80% to 100% LTV Loan to Value ratio
- Growth inside an participating whole life policy in Canada has tax advantages
This means you can always access the money you put into the policy in a tax efficient way, through loans.
Why is it tax efficient?
Because you don’t pay tax on debt, aka money that is loaned to you.
You can leverage this policy for a loan directly from the insurance company, or you can go take the loan from the bank
Now you can use the money you take out via loan for whatever you want while you’re alive
You can invest, you can supplement your retirement, or you can help pay for your children’s major life milestones.
Now you have an asset that you can access 80-100% Loan to value, that is constantly growing with a yearly dividend.
Then when you pass away any outstanding loans you have are taken from the cash value of the premiums, and your beneficiaries receive the money from the death benefit as well as any money left over from the premiums.
The flexibility of the death benefit
The death benefit pays out, quickly, and tax-free to your beneficiaries.
Just like a will, you can structure the division of the pay out however you want.
However, unlike a will nothing you set up can be contested or challenged.
For example, if your death benefit is 10 million, you can allocate 1 million to each of your 3 children, and each of your 7 grandchildren.
You can divide up the death benefit across as many people in whatever distribution you want.
However you set up the insurance to pay out your beneficiaries, the insurance company will pay them out like you said, and nobody can change that.
Another thing about this strategy that ensures you can provide a legacy for generations is you can set up a trust, through what we call an annuity settlement option.
You can say, well I want the life insurance to pay to my beneficiaries, but I want to give them this much per year for X number of years, or every 6 months, or every month.
This is a great option if your beneficiaries are younger, or maybe they’re not that good with money yet.
Insuring multiple people to ensure a lasting legacy
Another option to ensure a long and steady family legacy, is to use this exact same strategy across multiple people.
When purchasing Life Insurance there's three main people:
The policy owner, or the person who pays the premiums.
The insured, or the person who the insurance is covering, and will pay out should this person pass away
And the beneficiary, or the person or people who will receive the death benefit should the insured pass away.
As a parent or grandparent, you can become the policy owner on a policy where the insured is your child, or grand child.
We can set up the policy to name your child/grandchild as the contingent owner on the policy, which means when you pass away, they would automatically become the policy owner, allowing for a tax-free ownership transfer of the policy.
You can also transfer the life insurance policy to the life insured child or grandchild, while you’re still alive so they can access the policy’s cash value.
Since the insurance is on them when your child or grandchild passes, there will be a life insurance payout to their kids or whatever beneficiary they choose.
With this strategy the money is never spent. It is only lent out. Which guarantees the family legacy for generations.
Next Steps:
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