Using Life Insurance to Enhance Returns, Guarantees, Tax Savings and Investment Diversification – Part 2
This is a continuation of my article last week on Canadian investors looking for a financial edge and wealth management ideas that provide better returns, guarantees, tax savings, and diversification.
Here’s a couple more ways to use life insurance to get that edge:
Example 3: A 60-year-old doctor with a professional corporation.
He has life insurance that he and his wife took out 30 years ago. The doctor’s corporation has $600,000 of investments today. If that doctor gets his life insurance policies properly valued by an actuary, let’s say they are valued at $400,000. With careful planning, the doctor can transfer the life insurance policies to his corporation and get some significant benefits.
The biggest benefit is that the doctor can effectively swap the $400,000 worth of insurance policies into the corporation and then get $400,000 of assets out of the company tax free. This could save as much as $130,000 of taxes depending on the province.
Another benefit is that the insurance policies can now be funded using corporate, pre-tax dollars. Other passive investments in the corporation that were paying the highest tax of all can now be tax sheltered in the insurance policy.
This strategy does have some issues related to cash surrender values and cost basis of the insurance, but the benefit can be significant for anyone with a corporation who has insurance held personally. The key is that even if the policy is owned by the corporation, when it pays out, the funds can be mostly or entirely paid out of the company tax free, so the beneficiaries get the same amount whether the policy is held inside or outside the company.
Example 4: A 68-year-old has a corporation with $1 million of investments.
They tried not to draw funds from the corporation because they didn’t want to pay the tax bill. The problem is that when they pass away, the children will want to liquidate the company and will face a bigger tax bill. Again, insurance can be used to help increase their estate and minimize taxes. Earlier we discussed the high passive tax rates on investments in a company. In this case, the company over time can use much of this $1 million to both fund an insurance policy plus the opportunity to shift funds to grow tax-free within the insurance policy. The reason for this is that with certain policies, there is an insurance component and an investment component.
In this scenario, the best tax strategy is to eventually move most of the funds into the policy, so when the 68 year old passes away in 15 or 20 years, most of the corporate assets would be paid out to the shareholders (beneficiaries) tax-free. In addition, the rate of return on this investment (funds into the insurance policies and funds paid out) can be well over 6% annualized, even if investing in a GIC/money market option.
Needless to say, all these strategies need to be developed in concert with the client’s other financial and legal professionals, and are subject to the person being insurable. There is some leeway on joint last-to-die policies if one of the insured was rated. This is where getting a preliminary opinion from the insurance company ahead of time comes in.