Since her early twenties, Danica Patrick has driven a racecar for a living; she is the most successful woman in the history of American racing and became the first female NASCAR driver to win a NASCAR Sprint Cup Series. It’s a risky profession and she’s chosen to manage the risk, in part, with life insurance.
The decision to invest in protection came naturally for Danica because her parents were proponents. Each had lost their father during childhood and witnessed the financial strain it put on their families. Danica didn’t want to leave people with bills they can’t pay for! Grieving the loss of a loved one is hard enough and she felt that life insurance would allow the people she loves to process loss without adding financial stress. The death benefit can be used for payment of final expenses, repayment of debt and mortgages, funding the replacement of household duties or replacing loss of income.
While at the beginning of her career, Danica needed life insurance, today she still wants it, even though she no longer needs it. For those similar to Danica, who have sufficient personal assets, here are few reasons you may want to consider life insurance …
- Transfer Assets Tax-Free: when life insurance pays out upon your death, both the face value of the policy and the accumulating investments are paid tax-free to your beneficiaries. If you were to grow those investments outside of an insurance policy, the growth will be taxed upon your death (when someone other than your spouse inherits the assets). Life insurance can eliminate that tax.
- Equalize Your Estate for Heirs: What are you going to leave the kids when you’re gone? Are you leaving assets of equal value to each of them? If you’d like to treat them equally but are leaving certain assets of value to one and not the other, Life insurance can be used to provide cash to equalize things.
- Enable Tax-Free Withdrawals from Your Corporation: If your company owns and is the beneficiary of a life insurance on your life, your company will receive a tax-free payment when you die. These proceeds will increase something called the “capital dividend account” of the company, which will allow for tax-free dividends to the surviving shareholders.
University of Michigan and football coach, Jim Harbaugh, recently agreed to a very innovative contract amendment that we wanted to share, as it highlights yet another way you can use life insurance creatively … as a tax-free form of compensation. In addition to paying him $5 million in salary, the University of Michigan will also loan Harbaugh an additional $14 million to pay the premium on a life insurance policy that will eventually pay $75 million to Harbaugh’s beneficiaries tax-free. For more details, we’ve attached the following link.
So why did Harbaugh agree to this? Simply put, he’s already making enough to sustain his lifestyle needs and the focus was to create a legacy for his heirs. If the university had paid him the $14 million directly, it would be taxable, but invested into life insurance, the $14 million creates a tax-free benefit of over $50 million for his heirs. What’s even better, Harbaugh can leverage up to 90% of the value of the policy while he’s alive! As for the University of Michigan, they get to recoup their original investment at time of Harbaugh’s death, whereas if they had just paid him the $14 million directly, they’d get nothing. It’s a win for both parties.
If you’re a business owner, CEO or high-income producing executive and you’re focused on saving or creating a legacy, life insurance is a financial tool that has many benefits; it may be something you thought you no longer needed, but when you look at all the different ways you can use it creatively, it makes sense to consider. If you’d like to have more of conversation on how to use life insurance for its tax and investment benefits, please contact us.
I often get asked by clients if I have life insurance on myself. When you look at life insurance as an asset class (not just a death benefit) and consider the tax and investments benefits, it’s a financial tool I strongly believe in, which is why I invest $42,000 in annual premiums into whole-life insurance, which is corporately-owned and paid for.
I invested in my first policy in 2006, as I figured when the world financial markets implode (just as they did in 2008), I wanted to have a portion of my portfolio hedged from market returns. What people may not know about life insurance is that there are no negative returns and traditionally speaking, you can expect a long-term rate of return of 5% to 7%. During economic downturns (or anytime), you can also access the investment value inside the contract to buy other investments at pennies on the dollar.
In addition to no financial risk, I also wanted to create liquidity for myself, particularly if I was in a situation where I couldn’t access traditional pockets of financing. I wanted something I could access that wouldn’t affect my credit score or debt service ratios, as one of our financial goals is to own five properties in five years. My wife and I recently bought real estate and we used the investment value inside the policy as part of the downpayment; in doing so, it didn’t affect our credit score or debt-service ratios and therefor affect our financing.
Probably the most creative reason I have life insurance, is to take money out of my company tax-free for retirement. I believe every business owner should consider life insurance for this reason. What most people don’t know is that under current CRA tax rules, having your company purchase life insurance allows the cash inside the policy to accumulate tax-free and the funds can be accessed tax-free indirectly from your corporation.
Lastly, and for more traditional reasons, there is the death benefit. Should anything happen to me, I don’t want to leave my wife Julia with debt or have her worry financially. If you’d like to have more of conversation on the tax benefits of life insurance and how it can compliment your investment portfolio, please contact us.
We work with hundreds of business owners and in the last five years, we’ve received many phone calls letting us know that someone’s become ill; it’s not unusual to hear that it’s the business owner whose suffered a heart attack, stroke or cancer. If you look at your own circle of family, friends and colleagues, you know someone whose been diagnosed with some type of illness and just think of how often you get asked to donate to a walk/run or other fundraising initiative. The reality is that more and more people are being diagnosed, but the good news is that survival rates have never been higher!
Most of our clients are aware of and have life insurance, but don’t have much in place to protect them against the consequences of a critical illness. Yet an illness can sometimes have more devastating effects. As much you’d like to think it will never happen to you, just consider the consequences if it did … what if you had a heart attack or stroke or were diagnosed with cancer and you couldn’t work for 3 to 6 months or longer, could your company manage without you? How would it affect the productivity and profitability of the business? How would your employees, suppliers and creditors react?
We’re always looking for ways to help better protect our clients against unforeseen risk; we came across an innovative solution, geared towards business owners and executives, called the Executive Health Savings Plan. It’s a great way to obtain protection against critical illness using a co-ownership approach, meaning you and your company can co-own the plan and split the cost and the benefits. The EHSP would provide a tax-free benefit of up to $2 million to the company 30 days after diagnoses of illnesses; the funds can be used as income replacement or to replace the business owner (or key person) while they’re recovering or pay bills and keep accounts afloat.
Here’s the best part: if you remain in good health and never make a claim, you get 100% of the total premiums paid into the plan tax-free, even your company’s portion! If you die before using the coverage, the company gets 100% of the total premiums paid into the plan tax-free. Either way, it’s a great return on your investment. If you’d like to have more of a conversation on how to use corporate dollars to protect yourself and your business in the event of an illness, please contact us.
How To Use Life Insurance Creatively
When you mention the words life insurance, people’s attention starts to waiver, usually because most of us only know it as a catastrophic death benefit and very few people want to think about, much less plan for death. However, if you care about investment returns, paying less in taxes and keeping more for your loved ones, as Tim Cestnick points out in the attached Globe & Mail article, you should pay attention to life insurance because it’s a creative tool that is extremely valuable in tax and estate planning.
In Tim’s recent article, he shares the many ways you can use it creatively …
- Enables tax-free withdrawals from your corporation
- Transfers assets tax-free
- Provides liquidity when needed
- Provides cash in retirement
- Equalizes an estate for your family
Life insurance may be something high-net-worth individuals thought they no longer needed, but when you look at it as a creative tool (rather than a death benefit) it just makes sense to integrate it with your overall financial planning. If you’d like to have more of conversation on how to use life insurance for its tax and investment benefits, please contact us.
Please Note: There are some tax changes coming in 2017 that won’t make this strategy as effective, so you want to take advantage of the current tax rules!
Often private business owners are advised to pay themselves enough of a salary and bonus to ensure they can maximize their retirement contributions each year, regardless of whether they actually need the salary personally. A business report, published by CIBC Wood Gundy, highlighted that if business owners do not need income immediately, a significant tax deferral (upwards of 30%) can be achieved by leaving the money inside the corporation and investing the funds, instead of paying them out as taxable T4 income.
Rethinking Conventional Wisdom
As a business owner, if you have other sources of income to fund your personal living expenses and you’re focused on saving for retirement or investing in general, should you contribute to an RRSP or should you consider saving your money inside your corporation? Conventional wisdom says to contribute to an RRSP because you get an annual deduction and your money grows tax-sheltered, but the downsides are that your money is 100% taxable when withdrawn and you must start withdrawals at age 71.
A lesser known, but more tax-efficient strategy is to leave the money you would normally pay yourself inside your corporation and invest it in the same manner as an RRSP. If you consider that currently the maximum RRSP contribution is $24,000, you would have to pay yourself over $40,000 of T4 or dividend income to net $24,000. Alternatively, you may want to consider investing the $40,000+ of income inside your corporation in a much more tax-efficient manner. So how do you do this? By implementing an investment life insurance contract which essentially acts as a tax-shelter inside your company and allows you to access your money at an anytime.
If you’d like to have more of a conversation on how this solution works, please contact us. For a more in-depth look at how this strategy works, we encourage reading through the attached CIBC Wood Gundy small business report.
For many of our clients, the financial focus is usually around saving money and paying less in taxes; while you may be aware of the traditional ways they can minimize your tax exposure, youʼre likely not aware of one of the best Canadian tax shelter …
1. Your Home
• Annual growth on your home accumulates tax-free
• Access to equity in the home is tax-free
• Can be passed on at time of death (to anyone) tax-free
• Capital gain on the sale of your principal residence is tax-free
• Canʼt claim the investment or mortgage payments as a tax-deductible expense
• Your contribution is tax-deductible
• Annual growth on RRSPʼs accumulates tax-free
• At death, can be passed on to your spouse tax-free
• Any withdrawals are taxable
• RRSPʼs must start withdrawl at age 71 (whether needed or not)
• Lifetime maximum contribution of $1 million
• At death, if not transferred to spouse, approximately 50% taxable
• Shown as earned income, which can cause old age security clawback
• Any withdrawals are tax-free
• Annual growth on TFSAʼs accumulates tax-free
• Can be passed on to a beneficiary tax-free
• Maximum annual maximum contribution of $5500
• Maximum lifetime contribution of $46,000
4. Corporate-Owned Life Insurance
Most people donʼt think of life insurance as more than a death benefit, nor do they know that under CRA rules, it makes for one of the best tax shelters. And for business owners, unlike the previous three options, the investment can be held inside your corporation and if you need access to the funds for lifestyle and retirement, the funds can be accessed indirectly from the corporation, tax-free.
• Annual growth accumulates tax-free
• Withdrawals are tax-free (indirectly from your corporation)
• Can be passed on to a beneficiary tax-free
• Maximum annual contribution of $4.5 million
• Liquid: you can access up to 90% of the investment value
• The investment value will not reduce in value, regardless of market conditions
• The deposits can be financed (minimum deposit of $30K annually)
• The insured must qualify for the insurance medically
If you’re a business owner whose company is profitable and growing (or transitioning) and you want to pay less in taxes and keep more for your loved ones, you will want to pay attention to corporate owned life-insurance. Why? Because it can help you pull money out of your business tax-free (or close to it) while you’re alive and at death.
What most business owners don’t know is that under CRA tax rules, having your company purchase life insurance allows for two tax-advantages: first, the cash inside the policy accumulates tax-free and their is no maximum you can put in. For those who may want access to their money for lifestyle or retirement purposes, the investment accumulating in the policy can be accessed tax-free indirectly from your corporation. Another tax-advantage is that the death benefit is paid out as a tax-free capital dividend, whereas other assets (such as cash, real estate or investments) are paid out subject to tax at time of death.
We came across the article (attached below) published in the Financial Post that highlights a few examples of how corporate-owned life insurance as a strategy can be powerful for business owners. In one example, it compared investing in traditional equities (such as real estate and the stock market) to investing in life insurance. And while most people think life insurance is a conservative, low-risk investment, you’d be surprised to learn that it compared favourably.
We often suggest to clients they consider this strategy as a compliment to their investment portfolio, as life insurance can be a great longer-term investment. If you’d like to have more of conversation on how to use corporate-owned life insurance as a vehicle to extract money out of your business tax-free, please contact us.
Most Vancouverites who have ever moved or are raving fans of CBC’s Dragons’ Den have likely heard of Frog Box – the reusable moving box rental company that’s locally based. Frog Box’s notoriety began when they secured financing from the celebrity investors on Dragons’ Den and went on to expand to 19 franchise outlets, building a solid company and bettering the world. And then the unthinkable happened.
The founder (and husband and father of two young children) was diagnosed with a rare and fast-growing cancer in August 2013 and eventually lost his battle to the illness. His wife, who was the VP of Global Operations for Lululemon, along with a silent partner had to step in to help keep things stable; while the business was able to make a smooth transition, this story got us thinking of how most business owners and executives don’t do a good job of planning for the unthinkable – injury, illness or death.
As much as we’d like to think it will never happen to us, just consider the consequences if it did. If you were to get injured or ill and you couldn’t work, what are your options? Do you have enough income or insurance protection in place? Is it addressed in a business agreement? If you had to take time off to recover, how would t affect the productivity and profitability of your company? How would creditors, suppliers and employees react?
Our intention is to get you thinking about important questions like these and thinking about business protection; most business owner’s don’t know how little it costs to protect their income and their business and that the cost may be tax-deductible. If you’d like to have more of conversation on how to use corporate dollars to protect your business and your family, please contact us.
Life Insurance! After just those two words, your attention is probably starting to waiver. But life insurance has played a key role in the creation and survival of some iconic businesses! While most of us think of life insurance as a death benefit, some of the most successful businessmen understood how to leverage the living benefit aspect.
Let’s start with Jim Pattison. When he decided to open his first business, a General Motors automobile dealership, he used his life insurance policy as borrowing collateral. If it wasn’t for the cash values in his life insurance policies, the bank manager may have decided against granting the loan to begin his business endeavor.
Next is Walt Disney. If it were not for life insurance, Disneyland might not have existed. After failing to secure traditional forms of financing to build Disneyland, Walt decided to provide his own financing. A large part of this came to be by collaterally borrowing money from the cash value in his life insurance. While Disneyland was an immediate success, getting the $17 million to open meant that Walt had to mortgage everything, including his personal insurance.
And then, Ray Kroc, who at 52 opened his first McDonald’s. What most people don’t know is that Kroc did not take a salary during his first 8 years and to overcome constant cash-flow problems, Kroc borrowed money from two life insurance policies (and also his bank) to help cover the salaries.
While we may not all be the next Jim Pattison, Walt Disney or Ray Kroc, most of us will have opportunities and emergencies in our lifetime; the cash in a life insurance policy (which is creditor protected) is a great vehicle to help you take advantage of business opportunities and cover emergencies. Please contact us if you’d like to have more of conversation on how to use life insurance while you’re alive.