Today more Canadians, especially high income earners have an increasing need for death benefit protection but at the same time have access to a wider variety of retirement investment options. Life insurance is a valuable tool that can be used as one of these options. This begs the question, how can life insurance help high income people better manage increasing longevity and today’s ever increasing risk with the multitude of investment opportunities to pick from? By understanding and considering the impact of a number of things as outlined below.
A changing tax landscape: Tax rates are going up both federally and provincially. At the same time, increasing land, business and real estate values are increasing the need for innovative income tax planning. Now is the time to sit down with someone to plan around the tax implications with all of their different retirement investment strategies.
The opportunities with different tax related investment buckets: From the taxation standpoint, there are four “buckets” available for retirement savings.
- Qualified tax-deferred: Includes RRSPs, RRIFs and pensions.
- Non-qualified tax-deferred:Includes investments like annuities.
- Non-qualified taxable:Includes stocks, bonds, mutual funds and cash equivalents.
- Qualified, tax-free:Includes TFSAs, which are subject to annual contribution limits. This is a bucket that more Canadians should take advantage of!
More Canadians need to consider life insurance: Life insurance can and should be included in the “qualified, tax-free” bucket, as well. If designed, purchased and managed properly, life insurance can offer significant value. Permanent life insurance has unique characteristics that may be difficult to find in other financial alternatives for people with high income. It’s important though to have a financial assessment done to determine if you have a valid need for death benefit protection before considering the benefits of using the tax-free accumulation features of life insurance.
Who can benefit most from life insurance in their tax planning? Permanent life insurance as part of a tax saving strategy will appeal the most to high income earners, for example those who are maxing out their RRSPs, TFSAs, and other investment vehicles. This applies mostly to Canadians who are under age 55 and have the money to fund life insurance after maxing out their other retirement investment options.
Life Insurance is beneficial in several ways: Life insurance adds value when designing your financial plan. It can be a very positive financial vehicle for yourself, both in terms of providing a meaningful death benefit for your family and an opportunity for cash value accumulation to supplement your retirement income. In other words, life insurance can provide lifelong death benefit protection to meet minimum protection needs, and children’s needs after the primary income earner dies.
Life insurance offers an attractive financial risk protection vehicle as well as an accumulation tool, by offering tax-deferred cash value accumulation and tax-free income potential, assuming withdrawals and loans are properly structured.
I recommend sitting down with a trusted life insurance advisor to review the many benefits that life insurance as a tax-free asset class can bring to the table.
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