Cove Continuity Advisors > Financial Wellbeing  > Maximizing Tax Sheltered Investment

Maximizing Tax Sheltered Investment

You probably know about the main investment tax shelters in Canada, RRSPs and TFSAs.  These types of plans are great as they allow you to earn investment returns and not pay tax.  The untaxed returns compound within the plan creating a much higher investment balance over time.

But, do you have another investment tax shelter that you don’t know about?  Perhaps one you set up years ago and forgot about? Or didn’t know how to use it?

I am talking about universal life insurance policies.  These types of policies have unbundled cost and cash value components.  Meaning that you could be paying the minimum premium to cover the costs and never build up any cash value.  In our experience it’s very common for clients to have a universal life insurance policy with no cash value.

Depending on which policy you have and when it was set up, the policy may have a high contractually guaranteed minimum investment return. 

We recently reviewed some of our clients’ policies and noticed that some policies have a guaranteed investment return of 3.5% which is equivalent to a 7.5% pre-tax return (1)

If your bank offered you a Guaranteed Investment Certificates (GICs) at a 7.5% rate, would you take it?  Most people would.  Even as rates have increased over the last couple of years, today’s rates max out at around 5%.  And the earnings are completely taxable.

If you have missed making premiums into the cash value of your universal life insurance policy, don’t worry.  Your ability to do so hasn’t gone away.  Unpaid cash value premiums can accumulate over time.  You may have seen this on your annual statement from the insurance company as a maximum premium deposit, probably of some very high number.

The cash value of the universal life insurance policy is an asset to you and can be accessed at any time.  The investment may also be paid as an additional tax-free life insurance benefit.

The deposit flexibility of your policy gives you the opportunity to make cash value deposits whenever investment capital is available.  This may happen in situations such as:

  • Salary increase/bonus
  • House downsize
  • Inheritance
  • Business sale
  • RRIF withdrawals above spending needs

If you are currently investing in non-registered or registered investments, consider investing in your universal life insurance policy to take advantage of the tax-free investment growth.

The amount of the deposit is based on the amount of insurance.  Even if Cove didn’t set up your policy, contact us to find out how much you can deposit and take advantage of the tax-sheltered investment.

Notes:

Pre-tax return based on a 53.5% marginal tax rate. 

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