How to turn your life insurance policy into a TFSA on steroids

How to turn your life insurance policy into a TFSA on steroids

Posted by Admin1034 in Blog, Uncategorized 13 Sep 2016

Life insurance. After just those two words I can sense your attention starting to waver.

But if you are a high-net-worth Canadian who cares about your investment returns and paying less in taxes, you should pay attention to life insurance.

Ted Rechtshaffen: In 2015, what is rich anyway? The definition is important as many people who I would define as rich, live their life as though their wealth could disappear any day

By high net worth, in this context I mean someone who will very likely be leaving an estate of at least $2 million, as well as anyone who has $500,000 or more in a holding company.

My tax and insurance partner at TriDelta, Asher Tward, helped to develop three strategies that can meaningfully help you:

Pulling money out of corporations tax-free (or close to it)

This example uses a 70-year-old couple who have a holding company. Today, a 70-year-old man has a median life expectancy of 15 years and a woman has a life expectancy of 17 years.

The strategy here is to have the company purchase a “Joint Last to Die” policy on the couple. The death benefit of this strategy will be tax-free to the corporation, and the vast majority of that payout can be pulled out of the corporation tax free using something called the capital dividend account.

Unlike term insurance, which may never pay out, permanent insurance (Universal Life, Term to 100 or Whole Life) will definitely have a payout and can therefore be looked at as an investment. The question is, would this be a better investment than stocks or real estate?

To begin with, the insurance payout is not based on the number of payments made. It will pay out the same amount if someone dies in five years as if he or she dies in 25 years; in five years the company would only have made five annual payments but still received the full payout.

Going back to our couple, at 15 years, the pre-tax equivalent rate of return would be 20.1 per cent on the insurance. This means that if there was an insurance payout in 15 years, the corporation’s investments would have had to earn 20.1 per cent a year to equal the after-tax amount from the insurance payout. (This assumes the alternative was capital gains investments in the corporation being taxed at a top rate of 25 per cent.)

At 20 years, investments would have to earn 12.5 per cent to balance the insurance. At 25 years the number drops to 8.1 per cent, and at 30 years the number is 5.6 per cent.

This would mean that even if one member of the 70-year-old couple lives to age 100, the life insurance rate of return would still be the equivalent of 5.6 per cent on a pre-tax basis.

This is better than many investment returns, even if someone lives long past life expectancy. In addition, this return is not tied to the variabilities of the stock market or real estate. Furthermore, unlike these investments, which will all be taxed inside the corporation and will also be taxed (likely) as ineligible dividends if withdrawn from the corporation, life Insurance can help to eliminate most of this tax.

It is really a new, uncorrelated asset class for your investment portfolio.

One caveat: There are some tax changes coming in 2017 that will make this strategy a bit weaker; if put in place in 2015 or 2016, though, you can take advantage of the current rules.
This averts sildenafil for women them from exploiting in the sack. With the enormous efforts of the health analyzers, the pharmaceutical market has been stuffed with a number of people who are not tadalafil cheapest really aware of what exactly the term erectile dysfunction mean. After winning their division, they were easily defeated in the state’s two largest cities: Houston and Dallas. viagra purchase buy Garlic in pregnancy New research shows that consuming garlic during low priced viagra pregnancy can reduce the risk of raised blood pressure in pregnancy (Pre-eclampsia).
TFSA on Steroids

With all the discussion about TFSA limits and the election, it is worth noting that there is an option to tax shelter significant amounts of non-registered money outside your TFSA. These significant amounts will be somewhat reduced effective 2017 on new insurance policies, but not on those taken out before 2017.

Here is the strategy.  A Universal Life Insurance policy allows you to add additional investments into funds (stock, bond, global, domestic, etc.), with the advantage that these investments are tax sheltered if they are held within a life insurance policy. The amount you can hold depends on a number of factors, but can often allow for hundreds of thousands of tax sheltered investments. While there can be some small drawbacks to investing in an insurance policy, for those holding significant non-registered assets, the tax shelter can meaningfully overcome any drawbacks.

The challenge is getting the funds out in a tax efficient way.

One way to get access to the funds efficiently is when an “insurable event” occurs. An insurable event is usually the death of one of the insured, but in some cases can also be a critical illness or disability of one of the insured.

The key is that you can set up a joint policy with multiple people insured — so you might have a policy with you and your spouse and your parents. In some cases, if any one of the three or four people has an insurable event, it allows you to withdraw the accumulated investments funds with no tax implications. So, just like a TFSA, there was tax sheltered growth and no tax to withdraw funds.

 Guarantee a part of your estate

For those who could run out of money before they pass away, insurance is not a good source of estate planning. The idea being that you may need the money while you are alive, and while an estate for loved ones is nice, it is not the priority.

This strategy is for those who will likely have an estate (including real estate) of $2 million-plus when they pass away. The idea is to take a small portion of that $2 million and to guarantee it, while providing a decent rate of return. Guaranteed returns these days hover around two per cent, so an ability to guarantee a much higher return on money targeted for your estate is a good thing. In addition, insurance money bypasses any probate fees that might be found in some provinces.

The strategy example uses a 65-year-old couple — who have a likely estate value in the range of $4 million — to take out a $1 million “Joint Last to Die” policy that would be fully paid in 20 years. This would require an investment, or shifting, of $27,000 a year from the investment portfolio (much of which is going to the estate anyway) to insurance that is definitely going to be paid out at death. The pre-tax equivalent rate of return if there is a payout in 15 years is 21.4 per cent. If it is a 20-year payout, the number drops to 11.2 per cent, at 25 years would be 7.8 per cent and at 30 years would be 6 per cent. This assumes that the insurance funds would act as a bond or GIC alternative, which would otherwise be taxed at up to 50 per cent.

The key to this approach is that you can be certain that $1 million is being left to your family (or charity), and while the remaining estate may fluctuate up or down depending on markets, this is a certainty, and one that delivers a pretty good rate of return in most cases.

As with most high net worth strategies, some planning and expertise is required to make sure that you would in fact benefit, and that is it set up properly. There are a lot of moving targets in terms of changes to tax laws, pricing on policies and even pricing among life insurance providers.

The good news is that life insurance is a contract. Once it is in place, it is contractually guaranteed and future changes will not affect your policy or pricing.

Life Insurance may have been something you thought you no longer needed as a high-net-worth individual, but when you look at the tax and investment benefits, it might just become a new financial friend.

 

Sorry, the comment form is closed at this time.