Insurance should serve your overall financial goals

Universal Life insurance provides every Canadian with beneficial tax and estate planning opportunities. Unlike Term Life insurance, Universal Life insurance is much more than a single payment upon death of the insured.

The purchase of an asset like a Universal Life policy can set the stage for many opportunities that have only been afforded to the ultra-wealthy in the past.

Universal Life Insurance – The Tax Efficient Financial Vehicle

Universal Life insurance policies offer the policy owner tax-deferred accumulation on the growth of the cash value inside the policy. This effectively enhances the investment yield by allowing maximum compounding investment returns during the accumulation period. This tax-deferred accumulation continues, even until the death of the policy owner, at which time the death benefit and the accumulation fund passes totally tax-free to the estate. Withdrawal of the cash accumulation before death may result in the policy owner paying some tax.

Much more flexible than Whole Life insurance, Universal Life insurance can play an integral part in these strategies:

Accessing Income for Retirement
When funds are required for retirement, the owner of a Universal Life insurance policy has these potential options: Taxable Withdrawals, Loan Advances, or Combination of both.

Withdrawals from the policy are available at any time. The taxable portion of any withdrawal is calculated by prorating the policy’s adjusted cost basis. The owner also has the option to pledge the policy as collateral to a third party financial individual purchases a Universal Life policy, the institution and receive loan advances.

This approach to funding retirement income has been developed to take full advantage of the tax efficient attributes of the life insurance policy.
When structured properly, the benefits of tax deferred growth on the accumulation fund and tax-free receipt of the death benefit, including any accumulation funds, are realized when the policy matures on the death of the life insured.
The earlier in life that an individual purchases a Universal Life policy, the greater the impact it can have as a financial instrument. 

Estate Enhancement
This strategy is designed to enhance the amount of capital that can be kept in the estate.

Process: 1. Purchase a tax efficient Universal Life insurance contract on your life.
2. Contribute investment assets into the investment fund in the policy, in excess of the minimum premiums required for the life insurance costs.
3. Any income earned within the accumulation fund is not taxed unless it is withdrawn from the policy.
4. On the death of the insured, the death benefit, including the amount in the accumulation fund, is paid to the estate tax-free. Depending on the length of time, the return to the estate can be significant over other investment vehicles.

Funding Capital Gains Liabilities
Capital property such as real estate, shares in a private corporation, or investments in stock market shares all attract tax when sold or at the premature death of the property owner. This is not-withstanding spousal rollovers, which may only defer the capital gains tax.
Traditionally, people prepare for these events using one or more of these alternatives:

• Liquidating existing assets, which could attract more capital gains tax and recaptured depreciation,
• Borrowing funds using other assets as collateral,
• Creating a cash reserve by systematically saving, or transferring the risk to a life insurer.

Estate Equalization
You can use the proceeds from life insurance to plan for the equalization of value amongst the heirs of an estate. In particular, this works well in cases where specific bequests, such as a business or real estate are being passed to a specified heir. Life insurance can be used to pass on equivalent value to heirs that do not receive specific bequests.
An Estate Equalization strategy can help to foster family unity after one’s passing and also to reduce the possibility for a challenge under the Wills Variation Act from a disgruntled heir.

Charitable Gifting
A permanent life insurance policy can be used to provide a legacy gift to a charitable organization. There are two ways to accomplish gifting a sizable legacy while also receiving a charitable tax receipt for your generosity.

Options: 1. Transfer the ownership of the policy to the charity. You will receive a tax receipt for the value of the policy at the time of transfer and, each year for the amount of any insurance premiums you pay. The charity receives the entire insurance amount at the time of death.
2. Retain ownership of the policy and designate the charity as beneficiary. Your estate will receive a tax receipt for the entire insurance amount at the time of death.

[nbox type=”success”]Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. [nbox]

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This website is for general financial education only. All information is based on Canadian products and services, and meant for the education of Canadians. Information is accurate as of publication date, and is subject to change without notice. For advice specific to your situation, please contact us by phone.