Insurance solutions for growth and security
Insured annuities
An insured annuity combines two individual products: a life annuity contract and a life insurance policy. By using a portion of each annuity payment to pay premiums on an insurance policy, you can ensure that an amount equal to your original capital is restored when you die. You receive a guaranteed stream of income plus a return of your initial deposit, as you would with a fixed-income investment like a GIC or bond, but with greater return potential.
Tax-exempt life insurance for individuals
Tax-exempt life insurance works when, instead of putting your non-registered savings in taxable investments like mutual funds, GICs or other investments exposed to income, dividend or capital gains taxes, you can invest these excess savings (up to certain maximums defined in the Income Tax Act regulations 306 and 307) in a tax-exempt life insurance policy.
The policy provides an immediate estate value as well as tax-sheltered growth on the cash value accumulating within the policy. At death, and if a beneficiary is named, the proceeds are transferred outside of your Will, avoiding probate fees, if applicable, and paid tax-free to your heirs. It is ideally suited for those who are close to retirement or already retired and are looking for ways to shelter substantial non-retirement savings from taxation and add a life insurance component that helps build up their estate.
Tax-exempt life insurance for businesses
When used for business, the corporation purchases the tax-exempt life insurance policy on the business owner's life. The corporation can use corporate profits to make additional contributions to the policy above and beyond the annual policy premiums, which accumulate inside the policy. Within the policy, the excess profits can be invested in a variety of vehicles and can continue to grow free of tax until withdrawn or paid out tax-free at death.
It's possible to access the capital within the cash surrender value of the policy by borrowing against the policy's cash surrender value. Essentially, this allows the corporation to access the investments without paying tax.
When the business owner passes away, the corporation receives the policy death benefit and the accumulated investment growth, free of tax, plus a credit to its capital dividend account (under current tax laws) for the amount of the life insurance proceeds less the insurance policy's adjusted cost basis. Capital dividends may then be paid tax-free to your estate.
The Insured Retirement Plan (IRP)
An IRP complements your existing retirement strategy with tax-exempt life insurance that offers you tax-free supplemental income. If you are at least 10 to 15 years away from retirement, you are maximizing your annual RSP contributions and you are looking for additional tax-deferral strategies, this plan may provide a solution to your needs. You should have excess discretionary income, existing coverage or a need for insurance, and you should be in good health.
You purchase a tax-exempt Universal Life contract which is typically funded for 10 to 15 years. At retirement, or when you need income, the policy can be assigned to a financial institution for a series of tax-free loans. Upon your death, a death benefit is used to repay the bank loan and the remaining death benefit is paid out to your beneficiaries tax-free.
Buy/Sell Agreements using insurance
A buy-sell agreement allows for the smooth transfer of shares or other business assets from a departing or disabled shareholder to the remaining shareholders of a corporation. Its primary purpose is to facilitate this transition without jeopardizing the financial well-being of the departing or disabled shareholder and his or her family, or the financial health or viability of the corporation.
Key person insurance
The death of a business owner or key executive can result in a devastating financial loss not including all the time spent building knowledge, experience, relationships, reputation and skills. During the disruption, employees and customers may lose confidence, creditors may apply pressure for payments, lenders may reduce credit, debtors may delay payments, and competition may take advantage of the situation.
Key person insurance can provide a business with the financial rescue when cash is needed most. The business purchases a life insurance policy on the life of the business owner or key executive. In the event of death, the life insurance proceeds provide a source of funds that will aid when finding a new replacement or, in the case of a business owner, an interim manager.
Life insurance premiums paid by the business for key person insurance protection are not deductible for tax purposes. However, life insurance proceeds received as a consequence of death are tax-free.
RSP/RIF Tax Protector
The RSP was created to provide a means for most Canadians to save for their retirement on a tax-deferred basis. However, this asset is taxed as income in the year of death, at the highest marginal tax rate in the respective province. Therefore, Canada Revenue Agency is the silent beneficiary for the RSP and/or RIF, taking on average half of the value of the registered plan.
Life Insurance is the most cost-effective method of compensating for these taxes. If you consider your RSP/RIF funds to be an estate as well as an income asset, the RSP/RIF Tax Protector may make sense for you. The lump sum of cash (equal to the tax bill) provided by the RSP/RIF Tax Protector can be purchased at an annual cost of 1-2% of the average RSP/RIF account balance.
The RSP/RIF Tax Protector will deliver the lump sum of cash at death to the desired beneficiary on a tax-free basis without generating accounting or legal fees, or probate tax in the estate of the plan-holder. Tax protection provides replacement of the estate value lost at death on the RSP/RIF asset.
