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Life Insurance Strategies, Part 3

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Using Life Insurance to Enhance Returns, Guarantees, Tax Savings and Investment Diversification – Part 3

This is the final article for Canadian investors looking for a financial edge, and wealth management ideas that can provide better returns, guarantees, tax savings, and diversification.

Here’s another creative way to use life insurance to get that edge:

Example 5:  A 60-year-old couple wishes to leave much of their estate to charity.

Their current plan detailed in their wills is to leave 90% of their joint estate to three named charities.  A better alternative for the couple and the charity would be to look at funding an insurance policy with the charity being the owner and beneficiary of the policy.

If structured properly, the couple can use the insurance premiums as an annual charitable contribution and use the tax credit (45% to 50% of the donation in most provinces) to lower taxes each year.

For example, if the couple put $20,000 a year into three insurance policies, they would effectively be paying $10,000 or $11,000 after tax.  The charities would receive a payout on the policy, totaling around $1.5 million.  If the couple followed the more conventional method, the charities would receive substantially less for three reasons:

  1. Payouts from a permanent insurance policy can be greater, as the internal rate of return often exceeds 10%, a decent growth rate compared to the pre-tax returns of an equivalent investment outside an insurance policy.
  2. The couple gets a full tax benefit every year.  If they did a similar sized lump sum charitable donation through their estate, they would miss out on much of the tax benefit.
  3. The tax-free growth within the insurance policy would allow more money to be paid out than if the assets were taxed every year in the hands of the couple.

Most charities would rather own an insurance policy than be left money in the estate, as it means the charity receives a cheque shortly after the insured passes away.  If left in an estate, it can take much longer to receive the money, and in some cases, family disputes around a large charitable donation can lead to people contesting the will.

As with all insurance strategies, there is a need to coordinate the planning process with your existing accounting and legal professionals for your protection.  Based on my experience with clients and family, a properly designed and implemented strategy using life insurance can significantly enhance one’s estate value, often with negligible impact on retirement cash flow.  In many cases it can also significantly reduces their tax burden, as interest earning assets can be tax sheltered inside these policies in the future.

As with all wealth management strategies, what might be appropriate for some individuals might not make sense for others.  These articles simply suggest some opportunities and ideas that many people may not be aware of, that could help them achieve their goals.

Life Insurance Strategies, Part 1
Life Insurance Strategies, Part 2
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