Unknown and Often Unused Tax Shelter
The Unknown and Often Unused Tax Shelter
So much of our collective planning effort, whether from our accountant, lawyer, investment advisor or financial planner focuses on gaining tax advantages wherever possible.
As insurance advisors we are constantly asked by clients to help improve their financial situation mainly through the optimization of tax results. For these clients we have a simple yet elegant solution, Life Insurance. Life insurance has a common misperception that it doesn’t benefit you, only your beneficiaries after you die. While that is true, and often the main purpose of having life insurance, life insurance is also a very powerful investment tool for yourself personally, and more importantly, for your corporation.
What’s Changed in the Tax World?
Using life insurance as an investment isn’t new, but it’s certainly getting more attention. It was the 1981 federal budget that brought about the tax rules for tax-exempt life insurance products. Since then we have been using life insurance as a two-pronged tool; the creation of life insurance proceeds and investment values. The proliferation of incorporated companies, changing of the corporate tax rates and general growth of the economy over the past 30 years has led to a large group of business owners with both capital needs upon death (i.e. capital gains taxes), and desires to invest capital.
The 2018 federal budget served to change the tax environment for private companies through the introduction of the small business deduction claw-back based on passive investment income and tax on split income. Add to this higher personal tax rates on salary and dividends and suddenly business owners have a large increase in tax. This article isn’t meant to be a dissertation on the tax rules, we’ll save that for the accountants, but these changes have helped set the stage for the increase in the promotion of life insurance for investment purposes.
Value of Life Insurance as an Investment
You may not be aware that life insurance provides some very valuable tax advantages.
- Investment growth on the capital inside the policy is exempt from tax
- Withdrawals of the capital and growth can be taken tax-free upon a disability or illness
- Accumulated capital is transferred tax free to your beneficiaries upon death
- The life insurance proceeds are paid tax-free to the beneficiary
These are some substantial tax savings that are compounded when you add in the benefit of retaining the small business tax rate as you have reduced your company’s passive investment income.
Flexibility of a TFSA
The products that we recommend have flexible deposits. Meaning that you can make deposits between the minimum and maximum in any given year. And if you miss a deposit in one year you can double up the next. Any withdrawals taken from the policy result in an increased ability to make higher future deposits. Meaning you don’t lose any of the investment room the policy has created.
The type of life insurance that creates cash value is called permanent life insurance and there are a couple of main types and several subtypes of permanent insurance.
When someone with life insurance dies, the beneficiary doesn’t typically care what kind of insurance the person had. When investing in a cash value life insurance policy for you, the features and flexibility of the life insurance policy matters a lot.
There are many factors on the various product designs that must be taken into consideration. This doesn’t mean that choosing the right product with confidence is impossible—it just means it is easier to choose the right policy when you have knowledge and experience on your side.
That’s where we come in. We have developed tools to reduce the complexity into simple fundamentals we are confident you will understand.
With over 30 years of experience analyzing and testing products and applications, working with insurance company actuaries on product development and seeing firsthand what does and doesn’t work, we can guide you through the decision-making process, showing you the true impact of using life insurance so you feel confident about your decisions.
You may already have the tax shelter. Over the past 20 years a very common type of permanent life insurance had policy holders paying only the insurance premiums, leaving all the tax shelter room unused. You may already have a tax shelter that you can start using right away. And depending on the age, the investment guarantees may be very attractive, and the policy could be grandfathered under the old, and more favorable, tax rules on cash value growth.
We encourage you to ask us to look at your situation so we can review all your options and help you make an informed decision for you, your business and your family for generations to come.