Life Insurance for High-Net-Worth Individuals and Corporate Business Owners - Podcast and Blog

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.

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.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

The Basics and Uses of Term and Permanent Life Insurance

I am back after a summer of R&R, which proved more golf does not mean you will play better golf. 😊 I hope everyone had a good summer and had a chance to decompress from the stress of the last year and a half.

With the ability to finally get together with friends and family (socially distanced) this summer, there was lots to catch-up on and discuss. I guess because of COVID contemplation, the topic of insurance surprisingly came up a couple times during these get togethers and I noted some confusion on the topic.

So, I thought today, I would post on the basics and uses of insurance and discuss the two main types of insurance: term insurance and permanent insurance.

Term Insurance

In its most basic form, term insurance covers you if you die during the term of the insurance; but there is no cash value, guarantee or payment if you die once your term insurance has lapsed. Term insurance is often limited to a certain age (75-85) and becomes very expensive as you age (for example, my term insurance increased substantially when it renewed at the end of the 10-year term when I turned 60 years old). Thus, many term policies are either cancelled as your need for term insurance diminishes (see discussion below) or people allow them to lapse due to the age/premium cost constraints. It should be noted there are variations on term insurance and certain polices allow you to convert the term policy to permanent insurance.

On an overly simplistic level, term insurance can be compared to renting versus buying a home. When you pay rent on your apartment, condominium, or home, you have a place to live, but the rent paid does not build any equity and the monthly rent paid is cash forgone. The same holds with term insurance. If you are healthy throughout the term of the policy, you do not build any cash value/equity and the monthly insurance cost paid is forgone (although obviously, if you die while owing term insurance, your estate is paid the insurance).

As term insurance is temporary and has no cash value, it is the most cost-effective type of insurance available and is generally used to insure a specific need or a couple needs, such as one or two of the following:

1. Income replacement – term insurance can be used as a "replacement" of income for the deceased person. This is particularly important where one spouse/partner is the breadwinner, but is still often, a very good idea even when both spouses work. The objective of the term insurance in this situation is to allow your family to live in the manner they are accustomed to even if you or your spouse/partner passes away.

2. Financial security for dependents – this is really just a subset of #1, but term insurance ensures your spouse/partner is taken care of the rest of their life, and your dependents are financially covered until they are ready to join the workforce.

3. Debt and Mortgage protection - insurance can be used to pay off debt, typically the mortgage on your home when you pass away so that your family is relived of the debt burden.

4. Funding of University - many parents want to ensure their children are educated and use insurance to backstop that goal in case they were to pass away.

Permanent Insurance

The two main types of permanent insurance (although there are several variations and permutations) are:

1. Whole Life

2. Universal Life (“UL”)

These policies provide insurance coverage for life, so your estate is guaranteed an insurance payout of some quantum. I provide some brief comments on whole and UL insurance below:

Whole Life

With a whole life policy, the risk is typically shared between you and the insurance company. The insurance payments are generally fixed, have a cash surrender value (that can be borrowed against during the life of the policy or withdrawn if the policy is surrendered) but the premiums growth of the cash and death benefit can be affected by a calculation called the dividend scale. If the dividend scale drops too low, there will be less cash value and potentially require further premium payments by the policyholder to ensure the policy does not lapse. So, when looking at a whole life policy, you should ensure your advisor provides different dividend scale scenarios in their proposals, so you have an expected scenario and a worse case scenario to compare.

Universal Life

The premiums for a UL policy are typically more flexible and generally do not provide a significant cash surrender value and the risk of the policy typically falls to the insurance company. There is an insurance component and a tax sheltered “savings” component.

There are various opinions on whether whole life or UL are better choices, but really, they are dependent upon your personal risk and insurance needs. In all honesty, both whole life and UL are complex to understand. I plan in the future, to have a guest post to discuss in greater detail the differences, advantages and disadvantages of whole life and UL.

Where to use Permanent Insurance

Whether you purchase whole or UL, permanent insurance usually makes sense for the following situations: It should be noted that because insurance proceeds are credited to the capital dividend account (see this prior blog post on the capital dividend account) permanent insurance if very often used by corporations, which can make the policies tax effective.

Uses of Permanent Insurance

As noted previously, unlike term insurance which typically covers temporary needs, permanent insurance if often used for longer term needs, such as the following:

1. Estate planning – Upon death, 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 (typically in a much more tax effective manner than self-funding), estate equalization with your family or even 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. As noted above, permanent insurance if very often utilized where corporations are involved because of the capital dividend account.

3. 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.

4. 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.

5. Alternative for Fixed Income – I have seen some sophisticated investors use a permanent insurance policy to replace the fixed income component of their portfolio, as even when you factor in the cost of insurance, the return of a permanent policy may exceed the return from fixed income investments.

When you use the word insurance most people wince and only focus on the premium costs. But as discussed above, insurance can protect you short-term or be used to assist with longer term business and estate planning needs. In addition, with permanent insurance, the after- tax returns of an insurance policy versus alternative investments are often higher even after accounting for paying the insurance premiums.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.