I was recently a panelist on a video podcast titled Life Insurance for High-Net-Worth individuals (“HNW”) and Business Owners. The link to the podcast can be found here.
The panel was moderated by Simon Kay of IPS Insurance. Simon specializes in Life Insurance for HNW individuals and corporate business owners and is the pioneer of Private Underwriting.
Private Underwriting is a very exhaustive process, but in simple terms, it allows people with underlying health and lifestyle concerns to have all underwriting requirements collected independent of any insurance company. IPS can then identify any areas that might place upward pressure on premiums and work with the client and their doctors to clarify or address any areas of concern. IPS can then set forth a position and advocate solely for their client with the insurers on a no names basis, protecting their clients' privacy. Simon can be contacted at this email: simon.kay@ipsinsurance.ca
The other panelist was Jay Hershfield. Jay is a highly regarded tax and estate specialist with an insurance expertise (which you will undoubtedly agree with once you watch the podcast) and is currently a director with Scotia Wealth Management. Jay has a wide range of experience from working with the Tax Policy Branch with the Federal Department of Finance, a Life Insurance company and with several large Financial Institutions.
The title of the podcast is self-descriptive and discusses in fairly simple terms why you as a HNW individual or corporate business owner would want to consider permanent insurance even if you have no need for insurance based on your financial resources.
Simon is in the midst of editing a second podcast on some of the hard questions to ask when you are considering entering into a life insurance policy. I will post that podcast in the near future. I think it is excellent and a must watch if you are considering purchasing a permanent life insurance policy, if I do say so myself :)
As the podcast focuses on permanent insurance, I below provide a brief written summary on what is permanent insurance, some of the reasons to use it and where permanent insurance is typically used by HNW individuals and corporate business owners.
Unlike term insurance which typically covers temporary needs, permanent insurance provides lifelong insurance and is often used for longer term needs. The two most common types of permanent insurance are Whole Life and Universal Life, and most policies combine a death benefit and savings component to the policies.
Permanent insurance can provide liquidity and efficiency for an estate. This liquidity and efficiency together with the ability to equalize an estate, can help facilitate family harmony after the passing of a parent.
Where a corporation is the beneficiary of permanent insurance, the Return on Investment is in many cases greater using insurance than where you create your own investment or sinking fund; because the insurance proceeds are credited to the capital dividend account (see this prior blog post on the capital dividend account) and can typically be paid out tax-free (subject to certain tax rules discussed in the second podcast).
The following are some potential uses of permanent insurance:
1. Estate planning – On death (typically upon the last spouse to pass-away), the value of your estate will be allocated in some combination to the CRA in taxes, your family or charity. Permanent insurance can be used to provide the liquidity for paying your estate tax liability, estate equalization with your family, charitable purposes or simply estate growth/maximization by leaving a larger estate to your family from the insurance pay-out.
2. Business or partnership agreements – Permanent insurance can be a very tax effective way to buy out a deceased partner or shareholder under the terms of a partnership or shareholder agreement, especially for corporate shareholders by utilizing the capital dividend account.
3. Legacy Assets – For HNW individuals, insuring the tax liability related to legacy assets such as residential or commercial real estate, cottages or a small business seems somewhat counter intuitive, as you would assume the estate can just sell those assets or others to pay the tax liability related to the legacy assets. However, on numerous occasions I have had parents express a desire to have their estate keep legacy assets after they pass away, for sentimental reasons or because they think the future appreciation will be significant. They therefore purchase permanent insurance to cover the legacy asset tax liability, to alleviate the income tax pressure on the estate.
4. Passive Income rules- Permanent insurance can shelter income tax-free within a policy, which effectively reduces taxable passive income for a corporation and therefore can potentially reduce the small business claw back for corporations.
5. Charitable – You can name a charity as beneficiary of a policy or make a bequest of the death benefit from a permanent policy to a charity of your choice and your estate will receive a charitable tax credit upon your death. You can also purchase or transfer a policy (this may result in a taxable deemed disposition, so speak to your accountant first) to a charity and you would receive a tax credit on the yearly premium payments.
This is my last blog post of 2022, so Merry Christmas and/or a Happy Holiday and a Happy New Year to you and your family.
Simon is in the midst of editing a second podcast on some of the hard questions to ask when you are considering entering into a life insurance policy. I will post that podcast in the near future. I think it is excellent and a must watch if you are considering purchasing a permanent life insurance policy, if I do say so myself :)
As the podcast focuses on permanent insurance, I below provide a brief written summary on what is permanent insurance, some of the reasons to use it and where permanent insurance is typically used by HNW individuals and corporate business owners.
What is Permanent Insurance?
Unlike term insurance which typically covers temporary needs, permanent insurance provides lifelong insurance and is often used for longer term needs. The two most common types of permanent insurance are Whole Life and Universal Life, and most policies combine a death benefit and savings component to the policies.
Why Use Permanent Insurance?
Permanent insurance can provide liquidity and efficiency for an estate. This liquidity and efficiency together with the ability to equalize an estate, can help facilitate family harmony after the passing of a parent.
Where a corporation is the beneficiary of permanent insurance, the Return on Investment is in many cases greater using insurance than where you create your own investment or sinking fund; because the insurance proceeds are credited to the capital dividend account (see this prior blog post on the capital dividend account) and can typically be paid out tax-free (subject to certain tax rules discussed in the second podcast).
Uses of Permanent Insurance?
The following are some potential uses of permanent insurance:
1. Estate planning – On death (typically upon the last spouse to pass-away), the value of your estate will be allocated in some combination to the CRA in taxes, your family or charity. Permanent insurance can be used to provide the liquidity for paying your estate tax liability, estate equalization with your family, charitable purposes or simply estate growth/maximization by leaving a larger estate to your family from the insurance pay-out.
2. Business or partnership agreements – Permanent insurance can be a very tax effective way to buy out a deceased partner or shareholder under the terms of a partnership or shareholder agreement, especially for corporate shareholders by utilizing the capital dividend account.
3. Legacy Assets – For HNW individuals, insuring the tax liability related to legacy assets such as residential or commercial real estate, cottages or a small business seems somewhat counter intuitive, as you would assume the estate can just sell those assets or others to pay the tax liability related to the legacy assets. However, on numerous occasions I have had parents express a desire to have their estate keep legacy assets after they pass away, for sentimental reasons or because they think the future appreciation will be significant. They therefore purchase permanent insurance to cover the legacy asset tax liability, to alleviate the income tax pressure on the estate.
4. Passive Income rules- Permanent insurance can shelter income tax-free within a policy, which effectively reduces taxable passive income for a corporation and therefore can potentially reduce the small business claw back for corporations.
5. Charitable – You can name a charity as beneficiary of a policy or make a bequest of the death benefit from a permanent policy to a charity of your choice and your estate will receive a charitable tax credit upon your death. You can also purchase or transfer a policy (this may result in a taxable deemed disposition, so speak to your accountant first) to a charity and you would receive a tax credit on the yearly premium payments.
This is my last blog post of 2022, so Merry Christmas and/or a Happy Holiday and a Happy New Year to you and your family.
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Thanks for this information. Looking forward to part 2 of the podcast!
ReplyDeleteplease also advise for HNW clients is it better to get IFA or pay premium from your RE in the corporation
ReplyDeleteSee today's (Jan 30th) blog post and podcast on the tough questions to ask before purchasing permanent insurance. We discuss leveraged insurance (I think your are considering leverage as an IFA). In any event there is never a one shoe fits all answer. Your answer depends on your personal and corporate situation, risk tolerance, future profitability of the corporation etc etc. Any purchase of a IFA should be thoroughly analyzed by you, your accountant and insurance advisor.
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