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You’re in a great place. You’ve worked hard and invested wisely to accumulate wealth — you’ve probably maxed out your RRSP and TFSA contributions — and now you’re looking for another place to put your savings.
You may have recently sat down with your advisor and realized you have more than enough means to live comfortably, and now want to provide for the next generation. How can your money be protected but still grow — ideally in a tax-efficient way?
Enter permanent life insurance, an often-overlooked tool with several unexpected advantages for Canadians who want their money to work as hard as possible for them, now and in the future. It’s the kind of life insurance that can be just as useful for you in your lifetime, as well as help protect the people you love when you’re gone.
“It’s so versatile and can be used for so many different purposes,” says Rob McGavin, managing director of total wealth planning & insurance at Scotia Wealth Insurance Services, a full-service Insurance brokerage firm within Scotia Wealth Management. “People are surprised when we show them the powerful tax benefits of life insurance and how allocating some of their wealth to it can ultimately help them achieve their long-term goals.”
“There’s some really innovative planning you can do with it that many clients are unaware of.”
Permanent life insurance is an essential tool in wealth management.
Permanent life insurance: the basics
Before getting into that, here’s a quick life insurance overview. As you might know, there are two types: term and permanent. Term life insurance, where you pay a set premium over a period of time, typically ranging from ten to 30 years, is generally used as a way to make sure your family is looked after financially in the event of premature death. Generally speaking, term policies automatically renew up to a certain age and at pre-determined premium levels that increase over time, ultimately expiring by age 85. McGavin explains that it’s a risk-management vehicle, similar to car or house insurance, with value because of the peace of mind and protection it delivers over that coverage period.
Permanent life insurance, on the other hand, provides lifetime coverage with premiums that are initially higher than for term life insurance and is used to address capital and liquidity needs at death, regardless of when death occurs. Moreover, it can be an asset in itself, one that is part of your estate planning, but one that can also benefit you in your lifetime. “Permanent life insurance, also known as tax-exempt life insurance, goes beyond protection and is undervalued as a unique investment vehicle,” he explains, nodding to the fact that with two main kinds of permanent life insurance — whole life and universal life — you can build up a cash value in the policy which can be accessed during your lifetime or simply left to grow for the next generation.
“Permanent life insurance is a great option to consider for investors looking to incorporate more tax-efficient options into their asset mix,” says McGavin, who explains this product can be best suited for clients who recognize they are projected to save more than what is required to meet their retirement and income goals. “This is a chance to redeploy some of those excess savings into a strategy that can substantially enhance the wealth they distribute, or potentially leverage during retirement.”
It’s also often something that could be beneficial to business owners, he suggests, who want to capitalize on the wealth they’ve built up in their business, or potentially use insurance as a way to fund an eventual ownership transfer.
Intrigued? Here are six unexpected ways permanent life insurance can help your money work harder for you:
Improve investment tax-efficiency
This one’s for you if you have already taken full advantage of the two tax-free savings vehicles available to Canadians — RRSPs and TFSAs — and you’re looking for another way to grow your investments in a tax-efficient way. “Unlike a traditional investment portfolio where you pay tax on annual income, there’s generally no taxation on growth within a permanent life insurance policy,” McGavin says. (Unless, of course, you pull money out.) What your investments look like will depend on the type of permanent life insurance you get. “With Universal Life, usually you can literally build an investment portfolio within the policy, and you choose how it gets allocated,” he explains, adding it can be directed toward such things as guaranteed interest investments, or more equity-type investment options. “Whole Life is managed more like a mutual fund inside the policy, and your growth is heavily tied to the performance of the fund and results in dividends – or other credits – that are added. With either type of policy, you are able to greatly reduce your exposure to taxation as you accumulate wealth while enhancing your estate.”
Diversify your investment portfolio
As a “non-correlated” asset — a term used in the finance industry to describe anything whose value tends not to move up or down in sync with the markets, like gold — life insurance can be a hedge against unexpected world events and market volatility. “With Whole Life in particular,” McGavin explains, “it’s an opportunity to allocate your investments into something that reacts differently to market movements than the rest of your portfolio. And some of these funds are invested in a variety of interesting asset categories, such as private placements and real infrastructure, providing a further layer of diversification.”
While the product mechanics can help reduce the investment risk associated with Whole Life, it’s important to note that the policy’s cash value is guaranteed and may even grow depending on how the policy performs. “You might buy a million-dollar policy, for example, that starts with projected cash values but that’s just the starting point.”
That’s in reference to the fact that, provided premiums are paid, the policy contractually guarantees that your cash value will reach certain levels over the years and, with positive investment performance, should one day eclipse what you originally paid in premiums. “At the very least,” McGavin says, “even if there were very poor returns and the dividends or credits that would normally get applied are very low, you’re likely to have a cash value beyond even the originally guaranteed levels.”
An aside on those dividends (referred to as credits in some cases): Whole Life “dividends” are different than what you might be used to receiving when you own stocks, where capital can be lost if you reinvest it and the market tanks, for example. “With a Whole Life dividend, once you’ve received it you won’t lose it,” McGavin says. “The worst thing that could happen is that you don’t receive a dividend in a given year, but the insurance industry has a long history of consistently paying dividends.”
Provide supplemental retirement income
If you need to supplement your income in retirement, you can always draw down on the cash value of your life insurance policy, but you would pay tax on that. Instead, McGavin suggests that the cash value that’s accumulated inside your life insurance policy can be used as collateral for a line of credit, which you can draw on for income.
“You will incur interest expenses,” McGavin says, “but you’ve got your policy that continues to grow.” When you pass, the death benefit from your policy can be used to pay off the line of credit, and then whatever is remaining can be distributed to your beneficiaries.
Distribute wealth to family in a tax-efficient manner
As you might know, life insurance death benefit payouts aren’t taxable, meaning your named beneficiary will receive the entirety of what you’ve left them. With permanent life insurance, you get that benefit with the ability to potentially grow the money you want your loved ones to inherit along the way — without having to pay taxes on that growth every year either. “What it creates in terms of a projected estate value, especially on an after-tax basis, it often looks more attractive than what you would grow within a traditional conservative investment,” says McGavin, adding that this is often a major selling point for clients.
Be the basis for a charitable strategy
In a similar manner to the above, using a permanent life insurance policy to protect and grow money that’s destined for a charitable organization or family foundation can be a great strategy to maximize what you’re able to give — and benefit your estate. “When you pass away, the proceeds go to charity, which means the estate is benefiting from making that large charitable contribution,” McGavin says. “You can also do it while you’re alive, so that the premiums you pay on the policy generate a tax credit.”
Protect assets from creditors in a worst-case scenario
While it’s a scenario you hope your family will never have to face, it’s worth noting that permanent life insurance can be a creditor-protected asset. “The primary purpose of life insurance is for the benefit of your family, and that’s why the government has enabled this to be protected from creditors when it’s structured as such,” McGavin says.
He adds that permanent life insurance can be a complicated product to wrap your head around, which is why he says it’s imperative to talk this through with a qualified life insurance professional, like experts at Scotia Wealth Management. Creating substantial wealth doesn’t happen by accident, and it is equal parts hard work and careful planning — using life insurance can be a key strategic pillar.
Learn more about how Scotia Wealth Insurance Services can help you take full advantage of this unexpected, overlooked tool here.
This publication has been prepared by The Bank of Nova Scotia is for general information purposes only and should not be considered or relied upon as personal and/or specific financial, tax, pension, insurance, legal or investment advice. We recommend that individuals consult with their qualified advisors, including tax and legal advisors, before taking any action based upon the information contained in this publication. Opinions and projections contained in this publication are our own as of the date hereof and are subject to change without notice. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of The Bank of Nova Scotia. Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of Scotia Capital Inc. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank group of companies. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Insurance Agents (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc.
Advertising feature produced by Globe Content Studio with Scotiabank. The Globe’s editorial department was not involved.