Whether owned personally or by a corporation, permanent life insurance offers a range of planning advantages that can enhance your overall estate planning, increase liquidity and provide tax-saving opportunities, which makes it a potentially valuable tool when it comes to financial planning.
Let’s explore how leveraging this strategy can add significant value to your financial portfolio and help you achieve your long-term goals.
Permanent life insurance stands out as a unique financial solution since it provides lifelong coverage and the opportunity to accumulate cash value over time. The cash value grows on a tax-deferred basis, meaning the investment gains within the policy are not taxed as long as the policy remains active.
However, there may be tax implications when a policyholder withdraws cash from the policy or surrenders the policy for its cash value. The tax advantage extends to the investments within the policy, even upon death when the insurance benefit is paid out.
This tax-deferred growth can play a crucial role in long-term wealth accumulation and financial planning. Moreover, beyond the tax advantages, certain permanent insurance products offer stability through a range of investment options. These options provide policyholders with the flexibility to allocate their cash value across diverse investment choices, such as mutual funds or segregated funds, available for their specific policy.
This diversification of investment options enhances stability by allowing policyholders to tailor their portfolio to their risk tolerance and financial objectives. It also enables them to adapt to changing market conditions, potentially mitigating risk and optimizing returns.
Estate planning considerations
Permanent life insurance can also be an invaluable tool when it comes to estate planning.
The death benefit received by your beneficiaries is typically tax free and provides them with a lump sum of funds to help cover estate taxes, final expenses and/or other financial obligations. By incorporating permanent life insurance into your estate plan, you ensure the well-being of your loved ones and preserve the value of your estate for future generations.
Corporately owned permanent life insurance also offers unique advantages that can translate to an enhanced estate value. By transferring funds from taxable investments to a permanent life insurance policy within a Canadian-controlled private corporation (CCPC), you can effectively reduce your overall annual taxable investment income.
In the event of the insured person’s death, the designated corporate beneficiary receives a tax-free death benefit, which can be credited to the corporation’s capital dividend account (CDA) after subtracting the policy’s adjusted cost basis (ACB).
For corporate beneficiaries, the CDA offers a tax-efficient mechanism for transferring funds from the corporation to the estate or new shareholders. If the death benefit exceeds the CDA credit, the remaining amount can be distributed as a taxable dividend from the corporation.
In addition, accessing or leveraging the accumulated cash value is tax efficient. Policy loans, when appropriately structured, are generally not considered taxable income. This allows policyholders to access funds for personal or business needs without triggering immediate tax liabilities. These loans can be repaid over time or deducted from the death benefit, thereby providing flexibility and liquidity for when it’s most needed.
Many financial institutions offer collateral loans against the cash value of a permanent life insurance policy, granting borrowers access to 90 per cent to 100 per cent of the cash value. These borrowed funds can be used for a variety of purposes, including investing in new business ventures, acquiring rental properties or reinvesting back into your investment portfolio.
Notably, when borrowed funds are utilized for investment purposes (such as rental property), the interest expense of the loan becomes tax deductible, potentially further enhancing the overall investment return.
To fully leverage these benefits, it is crucial to work closely with a knowledgeable insurance professional who can tailor a plan aligning with your goals and circumstances, ensuring you maximize the potential advantages of permanent life insurance while securing your financial future.
Overall, however, permanent life insurance helps build wealth, optimizes estate planning, increases liquidity and provides tax-saving opportunities.
Russell Feenstra is a wealth adviser at Nicola Wealth Management Ltd.