How Millionaires Build Wealth Using Life Insurance
Life insurance can increase wealth at all ages by providing benefits to your loved ones. Life insurance death benefit can be used to pay estate taxes and preserve residual wealth. In this case, life insurance as an estate planning tools is more designed to protect wealth rather than build wealth.
Term policies also have a cash value component, so if you accumulated enough, you can borrow against your cash value. This way, you’re technically taking out a loan from the insurance company, so your cash value can generate returns on its own. Your beneficiaries will receive less money, and importantly, if you die before then, any outstanding loans will be deducted from the death benefit.
Types of life insurance for high-net-worth applicants
- Irrevocable life insurance trust (ILITs)
- Permanent life insurance
- Term life insurance
Irrevocable life insurance trust
If you are wealthy, a trusts may already be part of your estate plan. Irrevocable life insurance trust is especially useful if you plan assets on to your children, and it can have some estate tax benefits. ILIT is an irrevocable trust. It is only used to hold life insurance policies (the trust is the policyholder, and has a named trustee).
Permanent life insurance
A safe cash value accounts protects your money from the rise and fall of the stocks market. Traditional investment account generally offers high returns, but some cash value returns are more predictable.
Permanent life insurance has some disadvantages, it is more complicated than a term policy and it is five to fifteen times more expensive. Term life insurance is best for many people, although high earners who have exhausted their other tax-deferred savings account may consider life insurance or a permanent policy with interesting earning cash value.
Wealth Management Strategies Using Insurance
Achieving financial security while maximizing income and reducing the impact of taxation.
An Insurance strategy has evolved from a primarily safely focused strategy to an extremely flexible and versatile vehicle that can provide you with immediate tax, investment and income benefits. Your family and your business. While the protection element of life insurance remains critical, modern insurance policies combine both protection and investment features, providing policyholders with a variety of planning strategies and options for now and for the future.
List of insurance planning strategies, highlighting how insurance helps to solve a number of potential estate planning pitfalls down the road, while offering you an opportunity investment tool with significant tool with significant guarantees and an extra level of comfort in your long term financial plan.
- Estate tax funding
Insurance can be a cost effective and tax efficient means of satisfying future tax obligations at death. Insurance can provide immediate and tax-free liquidity to satisfy estate obligations including taxes, probate and estate settlement costs. These obligations can be satisfied on either a single life or joint last to die basis, as circumstances may require.
- Dependent support
In the event of premature death, insurance proceeds can ensure that your dependants (such as your spouse and children) are financially protected. Low cost term insurance may be most appropriate type of insurance for this purpose.
- Insured annuities for retirees
Insured annuities and cooperate insured annuities are unique vehicles for seniors, designed to provide policyholders with an alternative to traditional fixed income investments. By combining a life insurance policy and a life annuity, it is possible to create a fixed income investment with returns guaranteed for life, at rates that maybe better than those available through traditional fixed income investments and with less tax payable, as a portion of the income paid is a return of capital. Corporate insured annuities (available to insurable seniors with a corporation) can do the same but provide additional post mortern planning benefits through a Capital Dividend Account (CDA) credit and a reduction of corporate values for purposes of the deemed disposition of capital property at death.
- A tax efficient alternative to fixed income
Insurance can be seen as a separate asset class. Estate bound assets can be invested in a tax efficient, tax sheltered insurance contract. On the personal side, the insurance contract may offer the potential for asset protection (see below) and can avoid probate. In the corporate context, a capital dividend account (CDA) credit creates a conduit to take advantage of :
- Tax sheltered growth
- Tax free proceeds
- A conduit to distribute the proceeds tax through CDA.
- Utilizing insurance assets for retirement
One concern that some policyholders express is that investments in the insurance policy are “gone” and beyond the reach of the owner.
Through strategies, such as Insured Retirement Plans (IRPs) and Corporate IRPs, fund accumulate on a tax sheltered basis inside a life insurance policy, and can be accessed in a tax efficient manner during your lifetime via loan strategies.
- Estate equalization for business owner families
Insurance can be useful in circumstances where you operate a business and only one of your children is involved in the business but you still wish to treat your heirs equitably. In these circumstances, the business often represents can solve the problem of treating your heirs equitably. You can gift the business assets to your heirs working in the business and the uninvolved heirs can received cash proceeds from an insurance policy, tax free, to equalize the inheritance.
- Collateral insurance
Normally insurance premiums are non-deductible for tax purposes. The major tax exception to this general rule is the collateral insurance deduction in the income Tax Act [Paragraph 20(1)(e.2)}. This provision allows a full or partial deduction of insurance premiums where a policy is collateral for a loan and the specific requirements of the provision are satisfied. In appropriate circumstances, the deduction can allow for reduced cost of funding an insurance policy, satisfaction of significant debt obligations in the corporate context, added post mortern planning benefits through a CDA credit.
- Charitable insurance
As part of estate planning, many individuals focus on philanthropy in addition to providing for their families. The main strategies are either:
- Gifting an insurance policy to charity and obligations a receipt for the annual premium payment to reduce ongoing tax liabilities.
- Gifting insurance proceeds to charity as a beneficiary of a policy, and receiving a charitable receipt for the year of death to reduce estate tax liabilities.
Either way, the charity will receive a significant future gift. Variations to charitable insurance include estate replacement strategies and utilizing corporate vehicles to enhance the tax benefits.
- Buy sell funding for business owners
Shareholder agreement are fundamental for any corporation with multiple owners. Such agreements contain mandatory buy sell obligations in the event of the death or disability of a shareholder. Prudent planning requires such agreements to be funded with life insurance so that , the event of the death of a shareholder, funds will be available to satisfy the buy sell obligation. Structuring the buy sell to take maximum benefit of all available tax relieving rules including the capital gains exemption, loss carryback planning, spousal rollover provision, is critical to maximizing shareholder value and minimizing disruption to surviving stakeholders.
- Assets protection
Under provincial insurance legislation, personally owned insurance policies generally receive a special level of protection from creditor claim. For sample, where there is a named family class beneficiary, the insurance proceeds do not fall into the estate of the deceased and are thus not subject to deceased’s creditors.
In the case of preferred beneficiary designation or an irrevocable designation, the insurance policy is generally beyond the reach of the insured’s creditors during the insured’s lifetime. Note essential that you speak to a qualified legal advisor regarding any asset protection options available to you.
Life insurance was viewed as a pure protection instrument, the sole purpose of which was to provide funds at a particular point in time to satisfy certain liquidity needs that many arise upon death.
Today, when used properly, insurance can help to enhance your family’s overall planning strategy.