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Permanent life insurance is considered one of the last tax-efficient ways high-net-worth (HNW) Canadians can protect and pass along their wealth, but a new survey suggests more advisors should be discussing the option with clients.
An IG Wealth Management study released on Wednesday shows almost nine in 10 (88 per cent) HNW Canadians plan to pass their estate to the next generation. Yet, just more than half (54 per cent) have a permanent life insurance policy. The survey also shows that only 17 per cent of HNW survey participants, which include 500 Canadians with more than $1-million in investible assets, consider themselves to be “very knowledgeable” about the tax advantages and benefits of life insurance on their estate.
Although 78 per cent of survey participants said they work with a financial advisor, only 42 per cent said their advisor has given them strategies to reduce taxes using permanent life insurance. Just 36 per cent said their advisor discusses permanent life insurance as part of their financial and estate plans.
With permanent life insurance, the insured pays a regular premium that grows tax-free in the policy and is then paid tax-free to their beneficiaries after they pass away. The benefit also bypasses probate, which means it’s paid out more quickly than many other assets in an estate. Depending on the type of permanent life insurance, the policy can be used as collateral to secure a loan. If a person dies before paying back the loan, the unpaid amount would be reduced from the payout to beneficiaries upon death.
Death isn’t an easy topic for advisors to discuss with clients, but it’s an important discussion to help maximize estate plans, says Alana Riley, head of insurance, mortgage and banking at IG Wealth Management in Calgary.
“As Canadians, we’re all seeking the most tax-advantaged strategies possible,” she says.
Ms. Riley notes there are three main uses for permanent life insurance – estate preservation (funding a tax liability so that the cost doesn’t become a burden on the estate), estate equalization (to help ensure beneficiaries receive their intended share of assets) and estate maximization (to minimize taxes).
“It’s when these plans aren’t in place that family situations can break down, and it’s left to the next generation to navigate it,” she says.
Earmarked for ‘never money’
Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth in Toronto, says permanent life insurance can be a good option for wealthier Canadians who have maximized their registered retirement savings plans, registered education savings plans and tax-free savings accounts.
He views it as a potential alternative to non-registered investing. For example, a permanent life insurance policy can replace part of an investor’s fixed-income portfolio, which is taxed highly.
Still, he notes the insurance should be earmarked for a person’s “never money.”
“‘Never money’ is money they may never use in their lifetime and plan to leave to people like their children, grandchildren, or to charity,” he says.
Many people set up these policies to cover expenses that might be passed along in an estate such as the taxes and maintenance for the family cottage, or to cover probate fees.
“It’s often used to provide liquidity in the estate,” he says.
Life insurance can also smooth out an estate, Mr. Golombek says. For instance, a widow with two kids might want to leave the family cottage to one child after she dies and give the other child (who isn’t interested in the asset) a life insurance payout equal to its value.
“It can be one the most inexpensive ways to fund a large gift on death,” Mr. Golombek says.
He notes the younger someone purchases a permanent life insurance policy, the less expensive the premiums will be, which is also a factor in deciding whether to buy it.
“If it’s a stretch for you to pay the regular premiums, then you shouldn’t do it,” he says. “It’s got to be part of the budget.”
Options for business owners
Permanent life insurance is an increasingly popular option among business owners, especially since the federal government changed the taxation of Canadian-controlled private corporations in recent years, notes Laurent Munier, partner and professional financial advisor at Safe Pacific Financial Inc. in Vancouver.
“It’s one of the last tax-exempt options available to business owners,” he says.
Volatile markets have also sent many investors looking for a safe place to store their money, Mr. Munier adds.
He notes business owners can use the insurance to provide a death benefit to family members or business partners. For instance, the benefit could be paid to the surviving business partners, enabling them to buy the deceased person’s share of the business.
Life insurance can also be used as leverage to help a business owner maintain and grow their operations, Mr. Munier says. The owners could use the policy to secure a loan from a financial institution and use the money to buy inventory or purchase equipment, for example.
Mr. Munier says he has recommended this strategy to several clients and has used it to expand his business.
“It’s a great option for business owners who want to grow money in their corporation, have the liquidity and eventually want to pass it down in a tax-efficient way to their beneficiaries,” he says. “There’s really nothing else like it.”
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