Whole Life Insurance offers tax-free investing in addition to a tax-free death benefit.

Most people are unaware that whole life insurance is one of the most stable investment vehicles available to anyone who is healthy enough and with stable cash flow to fund their policy.

As interest rates are predicted to climb steadily over the next few years, insurance companies will make billions in profits. These profits are partially translated into the annual dividends paid into the whole life policies.

It’s also very possible that the dividend scales of insurance companies will begin to increase as interest rates increase.

Wealthy People Do This and So Can you!

Why should I have so much insurance, it’s not like I’m going to use the money?

That’s what many middle-class Canadians say about insurance, although wealthy families have an entirely different view of insurance (especially the ones who stand lose a huge chunk of their wealth to taxes). But the truth is that many taxes and related expenses –  whether on investment income, capital gains, or on death – can be legally avoided now with proper planning.

Insurance can be the most versatile and reliable financial product in your portfolio.  Many Canadians don’t know how to use it to preserve their hard-earned money and achieve desirable tax outcomes. Nor do they know that it’s available to everyone. When we think of insurance, many people think it’s used for burial expenses and to leave a little money behind. It also happens to be the greatest wealth-building tool available to everyone.

Life Insurance enjoys unique treatment under our Income Tax Act. Consider using it to reduce or eliminate your taxes, leaving more tax-free funds to family and favourite charities. Health and disability insurance will protect your earnings if you get sick and provide access to the finest medical care in the world, while property and casualty insurance products protect your business, home and tangible assets.

In fact, there has never been such a good time to buy insurance.  Here are 10 ways to use insurance to increase your wealth.

1. Life Insurance as a Wealth Building tool

If you are like every person I meet, you want to leave as much as possible for your family (and hopefully your favourite charity) and as little as possible –  ideally nothing – to the government.  Canadians who die without a spouse or financially dependent child or grandchild, unwittingly leave the government up to half of the value of their Registered Retirement Savings Plans and Registered Retirement Income Funds.

A further tax of 25 per cent is payable on the growth of your non-registered holdings like real estate and bonds. And there are still estate costs that have to be paid.

Life insurance can mitigate those losses by providing tax-free funds to the estate and its beneficiaries.

2. Estate preservation

The main goal of estate preservation is to minimize the tax burden at death.  

To do this properly, start by developing a robust financial plan with your financial advisor, who will ask you what you want to do in retirement and where you want your money to go after you die.

If you own shares in a private holding company or investment corporation, proper planning now can reduce or eliminate the double taxation that will result from the deemed disposition of the shares at death and the tax liability on the final distribution of the assets out of the corporation.

The last thing you want is having to sell an asset to pay the tax liability at death.

~ David Aaron, Aaron Wealth Management

3. Wealth Transfer

While many people believe they can only buy life insurance for themselves or as part of a joint last-to-die policy, it’s also possible to transfer wealth by buying a life insurance policy on a child or grandchild.

As the owner of the policy, you pay the premiums, and if you pay more than what is needed you create cash value. When the policy is transferred to the child in the future it may qualify as a tax-free rollover and the child will have access to the cash value. If you transfer the policy to the child once he/she is 18 and there is a policy gain, that income is attributed to the child, not you (It also happens to be a legal method of avoiding taxation on the growth of your investment).

4. Immediate Financing Arrangement (IFA)

A leveraging strategy can allow you to obtain a life insurance policy without having to use your own funds to pay the premium.  You can enjoy all of the tax benefits and vastly increase the value of your estate while your own money continues working for you in your business or investment portfolio.

IFA policyholders pay only the interest cost on the borrowed premiums for a permanent or whole life insurance policy. The loan gets paid off from the ultimate death benefit payout. Along the way, all of the interest paid is tax-deductible and the tax savings can be used to reduce the outstanding balance on the line of credit.  The after-tax interest cost on a $100,000 insurance premium is usually just a few thousand dollars in the current rate environment.

5. Is your will up to date?

While insurance can go far in helping to preserve your estate, all will be for naught if you don’t have a will. More than half of Canadians do not have an up-to-date will.

Your will is the very heart of estate preservation, ensuring that your assets will go to your heirs or a charity beneficiary according to your wishes.

Without a will, your estate will be administered by a bureaucrat according to applicable provincial law. Most provinces grant a preferential share of the estate to the spouse and the rest gets split between the spouse and children. 

Certain assets, like private company shares, don’t have to go through probate and should be dealt with in a secondary will.

6. Disability Insurance

Successful Canadians who check the fine print of their company benefits booklet are usually surprised to learn that while they enjoy a healthy annual compensation package, their long-term disability coverage is insufficient and may only pay out to a maximum of $10,000 a month, all of it fully taxable.

High-limit disability insurance is now available with coverage of up to $150,000 a month or $2 million per year, all non-taxable.

7. Long-Term Care Insurance and Critical Illness Insurance

The biggest and fastest growing demographic in Canada – and most of the world – is seniors. Statistics Canada predicts more than seven million seniors by 2021.

Long-term care facilities now cost about $4,000-$10,000 a month and can rapidly deplete retirement savings, putting a financial strain on a spouse or family.

Recognizing that the cost of long-term care or suffering a critical illness can be significant, wealthy people buy policies that include a return of premium option, and if no claim is made they get back all of the premiums paid.

You can also purchase joint last-to-die insurance that will enable you to enjoy your retirement years without worrying that you won’t be able to leave something for children or a favourite charity.

8. Best Doctors Insurance®

We live in a great country, with a health care system that provides universal coverage (and long wait times for treatment) through our taxes. But all those taxes aren’t enough to get you the specialized care you need as quickly as you want it. 

Best Doctors Insurance® provides immediate access to the finest healthcare at Centres of Excellence around the world with a $5 million lifetime fund to cover treatment costs.

A “healthcare concierge” helps you navigate the system, from diagnosis to treatment and recovery, and looks after everything from scheduling doctor’s appointments to arranging travel and accommodation. No doctor’s referral note is required.

Service providers are paid directly (it’s not a reimbursement plan) for tests, procedures, treatments and surgeries not available in Canada.

9. Leave a Legacy

Many people have a favourite charitable organization near and dear to their hearts, whether it’s an organization devoted to an illness that afflicted a family member or a school that helped them get to where they are today

As a parent/grandparent/great-grandparent, you can set up a strategy that will provide ongoing giving through an endowment in the form of an irrevocable gift to a private foundation or a donor-advised fund (DAF) within a public foundation. 

A DAF requires that a board of directors be set up to distribute the funds. Often adult children or grandchildren join the board to keep their family’s name alive and be aligned with a specific cause.

If the decision is taken to provide for a charity through life insurance the proceeds are usually many times greater than the policy premiums and the family name will be remembered as a generous one that gives back to the community. It’s also a great way to instill a love of philanthropy in the family, especially by having young family members involved in the process.

10. Property and casualty insurance

Above and beyond customary property and casualty insurance like house and car coverage, other aspects of your life deserve appropriate protection.

Your office is your second home and should have coverage that includes potentially costly flood damage and business interruption insurance. The latter compensates for lost income resulting from catastrophes like a major weather event (ice or snow storm) that prevents you and your staff from going into the office.

Directors and Officers insurance protects you from lawsuits brought by investors, employees or customers. This insurance will pay for legal fees, settlements and other costs. Professionals like doctors, engineers and architects also need Errors and Omissions coverage in the event of a suit for errors or negligence.

Get Professional Help

Don’t go it alone. Get the benefit of experience and knowledge from a team of seasoned insurance professionals who can assess your needs and suggest appropriate strategies. Simply getting insurance in place isn’t enough – get the right types of insurance in the right amounts, with the help of professionals who will be there to advocate for you in the event a claim is made. 

The Life Insurance Agent of Canada: There are various different types of life insurance available, but how do you know which one is right for you? Once you’ve found the right product, how much should you buy?

Do I need life insurance?

Are you married, have children, a mortgage, or other outstanding debts? Chances are you need some life insurance to assist your dependents should you pass away. (If you don’t have some of those things, don’t assume you don’t need life insurance.)

Take a typical family – husband, wife, and two kids. If the husband passes away, the wife is left with one income to provide for the three of them. One income to pay for everyday expenses, save for college, two growing children, and fund a future retirement. If there was a lump sum of money (Tax-Free) available to cover most (if not all) of these costs, that would be ideal.

Life insurance was designed for this primary need. It’s about maintaining the quality of living for the surviving family members and it’s not just paying down debt or living expenses. Consider the impact on children if the home needs to be sold because it is unaffordable for the surviving spouse. Moving to a lower-income neighbourhood, and changing schools all cause anxiety and leave hidden scars. Adequate Life insurance provides cash and that cash provides better choices.

I have some life insurance coverage from the school board. Do I need more?

While it’s true life insurance is available through the school board, it’s not nearly enough to cover all your needs such as; debt retirement, funeral expenses, living expenses, housing expenses, daycare, future education costs even retirement needs.

With the high cost of housing prices in Canada, many people need at least $1,000,000 in coverage to cover their family’s future costs, lost income and lost retirement savings.

How much do I need?

This depends on who you are, what life stage you’re in, what debts you have, and what goals you’re working towards! It is a custom situation for everyone, and one size rarely fits all. Most financial professionals use calculators to determine how much insurance their clients require.

For many people who are trying to use a rule of thumb, you should aim for between 10x-20x of your annual salary in coverage. But of course, this can be a wide range, so some custom analysis is always the best way to go.

Once you have an idea of how much you need, the cost of getting this insurance can vary widely depending on the type of insurance you buy.

What kind of insurance to buy?

There’s two kinds of life insurance: Term and Permanent

Term – this is purchasing pure insurance for a period of time. If you are 30 years old and want to insure yourself until you are 60, then you’ll purchase a 30-year term policy.

A level-term policy will keep the premiums the same throughout the 30-years (recommended), but once you reach 60, that insurance will go away (or get a lot more expensive). Term insurance is the lowest cost method of covering a large goal over a relatively short period. Term insurance is the highest cost of insurance to use at older ages say above 50 to cover final needs such as funeral and estate taxes. Permanent insurance is more cost-effective for those goals especially as final needs expenses rise over time.

Permanent – Permanent insurance comes in various forms – Whole Life & Universal Life. These are variations of a life insurance policy with a savings account (“cash value”) attached to it. Whole Life policies have a fixed amount of growth to the cash value (i.e. 5%).

Universal Life can assign these savings to segregated funds so it has the potential to grow faster or do a fixed rate of return. It also provides a lower premium than whole life.

These policies can get confusing very quickly, and there seems to be a limitless amount of riders (additional benefits) that can be added to these policies. They play a vital role in your financial plan during estate planning or as an alternative investment.

Who do I buy it from?

If you have an insurance agent that you work with, many of them are qualified to sell life insurance. If they only present insurance from one company ask why? Some companies pay more to advisors to sell their products. It’s ok to ask the advisor to disclose their compensation to you. In fact, it may reveal the motivation for recommending that particular insurance solution.

What do you recommend?

Insurance should always be considered by completing a comprehensive insurance needs analysis. Situations are different for everyone and implementing the wrong insurance solution can have devastating consequences. I do believe everyone should have insurance, rich & poor alike all have a need.

In 20 years of providing insurance solutions, I’ve been in many homes where the family never increased their insurance coverage since the first time they bought it. Think of your grandparents buying $10 thousand of coverage when homes were only $20,000. Many of them never bought insurance as their family expanded and their needs grew. Sadly, some of those families desperately needed more money at their passing.

There’s a saying our business; “I’ve never met a widow who complained the death claim was too much.”