While there are many reasons why Canadians choose to invest in permanent life insurance, such as wanting to leave a very large gift to a charity, many middle class families view life insurance as a waste of money and a poor investment. This may be because your average Canadian’s experience is with term life insurance. Term life insurance is a policy for only a set number of years, and there’s no guarantee that that there will ever be a payout. Term life insurance works as a true insurance. It’s there to protect a person’s family, pay off debts — like a mortgage — and other large expenses in the event of a tragedy. Permanent life insurance doesn’t work that way.
Permanent life insurance (Universal Life, Term to 100, or Whole Life insurance) is considerably different. There is no set term, and it always has a payout. The wealthiest Canadians use permanent life insurance as a sophisticated investment opportunity that offers flexibility to their estate.
Tax Shelter. After contributing your maximum amount to RRSPs, RESPs, and your TFSA, permanent life insurance is the next tax shelter you should consider. Within your life insurance policy, you are generally able to invest additional money (or have it invested on your behalf) into funds. The money invested inside the policy accumulates on a tax-sheltered basis, and the money is also paid out tax-free. While withdrawing your investment can be a challenge, however, a single policy can be made to insure more than one person. The death of any of the insured parties will create an insurable event which allows the investments to be withdrawn tax-free. A popular choice is to insure yourself, your spouse, and your parents.
The Great Equalizer. It’s been our privilege to work with numerous successful entrepreneurs over the last twenty five years. Unsurprisingly, a common challenge faced by many of our clients is having a few extremely valuable illiquid assets, like a business, a home, and a family cottage, and wondering how they can distribute these assets fairly to all their children.
We generally suggest these clients take a look at their assets and which heir will find which assets most valuable. If one of your children is heavily involved in your business and the other is travelling the world, your business-savvy child may be very resentful if their sibling is also left a portion of the business. However, if you leave the entire business valued at $800,000 to them and only have an additional $300,000 in other investments for your traveling child; the traveler may feel forgotten. Permanent life insurance can function as the great equalizer. By factoring in capital gains and taxes, you can use all or part of your life insurance to ensure the siblings each receive a generous and fair inheritance.
Taxes & Capital Gains. Speaking of capital gains and taxes, they can easily become an excessive burden on an estate. Many of our clients have extremely valuable illiquid assets, such as their business or real estate. The capital gains on these assets can be substantial, and it may be difficult for the estate to find the cash to pay all of the taxes. Fortunately, your tax planner at MacMillan can help you to calculate the tax burden your estate will face. You can then make an informed decision about how to ensure enough liquid capital is available.
Due to its position as a tax shelter, the ease of equalizing the inheritance of your children, and the relief it brings to excessive taxation, permanent life insurance is a prized investment for many wealthy Canadians. If you want to learn more about how permanent life insurance may fit into your unique estate plan, the advisors at MacMillan Estate Planning can help. Schedule your free consultation today.