Why do Savvy investors use life insurance to protect and grow their investments? Why are investors depositing huge sums of money up to $2 million per year into life insurance? There must be a good reason? What do they know that you don’t?

In this LinkedIn Livestream, we explore the incredible benefits of using Whole Life Insurance to grow your investments in a tax-free environment. Do you know cash value in a life insurance policy can be used as collateral for a bank loan? If the loan is used to invest the interest can be tax-deductible.

This strategy is commonly known as “Become Your Own Bank.” Consider that when you’re retired, banks are less confident of loaning you money because you are no longer employed. That’s where Whole life insurance becomes an amazing wealth-building or wealth-creation tool. What if you had $1 or $2 million in cash within your life insurance? At this point, you have the most powerful position in having a “zero-risk” loan arrangement with the bank.

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. 

Besides loving education, summers off (for those of you not teaching summer school) above-average income (average Canadian employment income according to StatsCan age 45-54 is $64,800; age 35-44 was $59,600) plus benefits, teachers will receive a great pension.

The Ontario Teachers’ Pension Plan provides a pension income example: If you earn $85,000 in your five highest salary years and have 30 years of credit, your basic annual pension would be 2% × 30 × $85,000 = $51,000.

According to StatsCan, a retired couple had annual expenses between $40,800 to $48,600. Approximately 50% of retired couples have a combined total after-tax income greater than $50,000.

Couple: Cumulative after-tax income

Sources of Income

When teachers marry teachers

When teachers marry another teacher and work as a teacher until they retire, their combined retirement income will provide income well above their living expenses (assuming they don’t try to live like the Kardasians). They will have roughly $30,000 of additional after-tax disposable income to spend any way they want. The #1 concern people have about retirement is: Will I have enough money to retire? When a teacher marries a teacher, they will not have that concern.

When you pray for rain you have to deal with the mud

Two married teachers really need a financial advisor because they already have their retirement income goal solved. The issue is where do you invest the excess cash you have throughout your retirement years? An RRSP will only create a larger taxable income for you. You’re also going to lose about 35% to taxes at the last death of the couple. What you need is a pool of money that will provide a non-taxable income stream at retirement (if you need it).

The #1 Wealth Building Strategy for Teachers

What if I told you, that you could invest into something that is boring, returned 5-6% per year with no tax, low risk, and if you died would pay your spouse more than 10x what you invested tax-free! How much money would you invest? Sounds too good to be true although this is the one exception that breaks the rule.

It’s Participating Life insurance. There are many advisors who will suggest using Universal life insurance however this should be avoided if using this strategy for wealth building. It may be the only type of permanent insurance the advisor sells, so ask questions.

The advantage of participating life insurance is the accumulated cash value in your policy. When the annual dividend is deposited to your policy, it is reinvested into the fund producing compound returns, and because of the nature of how insurance cash values are invested your balance never decreases unlike investing in an RRSP. The illustration below compares the year over a year difference between accumulating cash values vs. the stock market. Note the far right column with a severe market decline (due to Corona Virus). The growth in the insurance cash value was unaffected and continued to grow.

In this strategy, you would deposit money to the insurance policy the same way you would if you were investing in an RRSP. The excess cash above the actual cost of insurance is invested in a fund managed by the insurance company (the fund is actually huge, about $41 billion). Because the money is used to pay death claims & dividends, the investment allocation has to be conservative. You’ll find about 20% of the fund is invested in the stock market and the rest are bonds, mortgages & private placement. The fund is largely unaffected by severe downturns in the stock market.

Not all investments are equal

The illustration above compares a non-registered investment vs the participating life insurance. In this example on the left, we are depositing $1,000 per month for 20 years. In the mutual fund, $240,000 is invested and grows at 7% but is taxed each year. Annual taxation on the fund is a drain upon the longevity of the use of funds. A total of $489,314 is withdrawn over retirement. The owner passes away and there is No money left to pass to his/her heirs.

In the insurance example on the right, the same amount of money is invested, $1,000 per month for 20 years for a total of $240,000. There is no tax on the growth of the cash value which is one of the main advantages of participating life insurance. Over the course of retirement, the owner withdraws $548,955 ($59,641 more than the mutual fund) and the owner passes away at the same age as the mutual fund example. At his/her passing, $1,290,448 goes to his/her beneficiaries tax-free!

Clearly, the life insurance investment a superior wealth building solution as compared to an RRSP.

Additional advantages

Two teachers with pension income and RRSPs accounts will likely experience a claw-back of their government retirement income whereas, the income received from the life insurance is tax-free and will not affect their government retirement income.