Marginal tax rates for high-income earners have continued to rise over recent yeas. Depending on your province of residence, as a high-income earner you may now be subject to a combined federal-provincial marginal tax rate of 50 percent or more. As such, it has become ever-more important to make use of all of the tax-planning strategies available to you.
Have you considered using life insurance as a tax-planning opportunity?
The use of an exempt permanent life insurance policy, such as whole life or universal life insurance, cannot only provide the benefit of life insurance protection, but also act as a savings vehicle. For instance, the owner of a universal insurance policy can effectively invest funds inside of the policy and generally accumulate and shelter the cash value from taxes, based on certain regulatory limits. If you were to invest assets within a non-registered account, the income that you will earn will be exposed to your high marginal tax rate.
As the cash value component of permanent life insurance grows within the policy, it may be accessed tohelp support other objectives throughout your lifetime. This may include funding liquidity needs of anindividual or business, or supplementing retirement income, if needed, while the policy continues toachieve the original goal of providing protection. Upon death, proceeds of the policy may be distributedto beneficiaries on a tax-free basis.
There are differing ways in which you can access the cash value, including: i) withdrawing the cash valuefrom the policy; ii) borrowing from the insurance company based on the life insurance policy’s terms; oriii) using the cash value as collateral for a third-party loan. Depending on how the cash value is accessed,there may be tax consequences, but there may also be potential tax benefits. For example, when usingthe cash value as collateral for a loan, where the loan is used for business or investment purposes, theremay be an opportunity to deduct taxes through interest and collateral insurance deductions, which canreduce annual net after-tax costs to secure coverage.
If you have surplus assets that you will eventually pass along to your beneficiaries, these assets may alsotrigger significant tax obligations at death. As such, some investors consider the use of permanent lifeinsurance for estate planning purposes as the beneficiary can receive the death benefit on a tax-freebasis. Life insurance has the potential to provide other benefits for estate planning, including:
Facilitating Estate Equalization — The proceeds of the policy may be used to help in equalizing anestate. For example, life insurance can play a role for a business owner who is passing a family businessto his or her children. If not all of the beneficiaries are involved, those members who are notparticipating in the family business can be given an equivalent value from the proceeds of the lifeinsurance policy.
Covering Estate Tax Liabilities — Upon death, your estate may have significant assets intended to bepassed on to beneficiaries that will be subject to a tax bill. Often, a family cottage or family business mayhave appreciated in value over time leading to significant capital gains taxes. The proceeds of the lifeinsurance policy may help to fund those tax liabilities, so that the assets can be successfully passed along to beneficiaries. Otherwise, assets may need to be sold to cover the taxes.
As with all insurance products that are used for tax and estate planning purposes, a cost-benefit analysiswill help to determine the best course of action. If you would like some perspective on how permanentlife insurance may benefit your particular situation, please feel free to get in touch.
Disclaimers
Ventum Financial Corp.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Ventum Financial Corp. or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them.
Insurance products and services are offered by life insurance licensed advisors through Ventum Insurance Services Corp., a wholly owned subsidiary of Ventum Financial Corp. This material is provided for general information and is not to be construed as an offer or solicitation for the sale or purchase of life insurance products or securities mentioned herein. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please seek individual financial advice based on your personal circumstances. Please note that only Ventum Financial Corp. is a member of CIPF and regulated by CIRO. Ventum Insurance Services offers products sold through members of Assuris designated by OSFI