In addition to protection against catastrophic financial losses, life insurance policies have other benefits that can assist you in reducing your tax imprint. Growth inside a life insurance policy is tax-sheltered and death benefits are paid tax free. Various combinations of these two attributes can be used to keep more of your wealth in your own pocket.
Protect Your Wealth
Protect Your Business
The fundamental purpose of life insurance is to protect against catastrophic financial losses. Businesses have their own set of specific risks that should be protected against as well as tax implications that are unique to business applications.
Intergenerational Wealth Transfer
This strategy allows you to transfer wealth to your grandchildren. You maintain control over the policy during your lifetime, and invested funds grow on a tax sheltered basis. Upon your passing, your grandchildren have access to the funds at their tax rate (not yours) which they can then use for education, housing or other needs. Additionally you can gift them a fully paid up life insurance policy.
Life Insurance Funded Buy-Sell
You’re in a partnership and it’s going well. If your partner passes however, you’re going to be in a sticky situation – you’re now in partnership with your partner’s spouse. You of course want to carry on long term business, your deceased partner’s spouse just wants short term cash and to get bought out. A life insurance funded buy sell gives you control over the business, and your partner’s spouse a cash buyout – everyone’s happy.
Insured Retirement Plan (IRP)
The strategy that will make you say “why didn’t I know about this?”.
Are your RRSP’s and TFSA’s maximized? Consider a policy that allows you to grow your investments on a tax sheltered basis before retirement and then access those funds on a tax-free basis after retirement – without the maximum limits imposed on RRSP’s and TFSA’s. And since the retirement funds aren’t taxed as income they won’t impact any government benefits that are income-tested. (more info).
Disability Funded Buy-Sell
Similar to a life insurance funded buy-sell, but in the event your business partner becomes permanently disabled. Now you have the funds to purchase your partner’s shares, giving you full control over the company and your partner has the cash that they need now that they’re permanently disabled.
Life Insurance as an Asset Class – The Bond Beater
You have a diverse, professionally managed portfolio. A smaller portion of that portfolio is invested in bonds or similar stable guaranteed investments. Replacing that portion of your portfolio with a life insurance policy can produce better returns and better guarantees.
Business Overhead Disability
For individual practitioners – if you become disabled your individual long term disability insurance will cover your income. But what about your office expenses? Rent, staffing and utility costs – they all continue on when you’re not there. Business overhead disability insurance helps cover those ongoing costs during the initial duration of your disability.