An even better option for self-employed individuals is to buy the insurance policy within their company.
Remember that the named beneficiary of an insurance policy can be quite flexible. In some cases, parents are more comfortable with the process if they know that the grandchildren are also named as beneficiaries on the policy.
Among other benefits of this strategy, the insurance policy is creditor proof, and the death benefit is not considered family assets in the event of marriage breakdown (unlike the RRSP and TFSA).
Some might suggest that it seems odd to financially benefit from a relative’s death. While one can understand the point of view, it is really no different than anyone who is likely to receive an inheritance. It is simply helping your family to do smart financial planning.
An example
We have an imaginary investor – let’s call him Joe.
Joe is 41. His yearly income is $200,000, and he has no more room in his RRSP or TFSA. He has $150,000 in non-registered investment assets. If Joe had more RRSP room he would put more money in.
Joe’s mother, Susan, is 70. Other than a prescription for high cholesterol and a bad knee, she is in decent health.
Joe’s insurance broker has searched the market to find the best return for a permanent policy for a 70-year-old woman. Joe deposits $12,000 a year for 15 years and the policy is fully paid up – a unique feature of this particular product. This policy also has a return of premium. It essentially adds one dollar of payout for every dollar Joe puts in.
After one year, Joe has put in $12,000. If Susan passed away, the insurance payout would be $193,000, for a return of 1,508 per cent.
Every year Joe puts in $12,000, the payout goes up $12,000. In year five, Joe would have put in $60,000 and the insurance payout would be worth $241,000.
In 15 years, Joe has put in $180,000. In this case, the policy is now fully paid, and Joe doesn’t need to pay another dollar. The payout figure does not continue growing past this point.
As it turns out, Susan passes away shortly after, at age 85. Joe is now 56 years old. The insurance policy pays out $361,000 to the beneficiaries. In this case, Joe is the sole beneficiary.
If Joe had put the same $12,000 a year for 15 years into a non-registered GIC, to have the same after-tax return as this strategy (assuming Joe pays a 46 per cent marginal tax rate), he would have to find a GIC paying 15.35 per cent.
Not only did this strategy provide Joe with extra tax shelter, but it guaranteed he would at least double his money, tax free, whether Susan lived to age 71 or age 95.
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Source: TriDelta Financial
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