So, thank you Brian.

You were right in saying that it is more complex than the bit you were able to get into wrt the strategies that can be implemented with a UL. And it is not for everyone, but it certainly can work for many, if used correctly, as with any other investment strategy.

Is 4.25% still a good rate for GIC’s in a UL policy? I quoted 4% in my case but I think anything above 4% is good.

I forgot to point out each account is protected up to $100,000 by Assuris see http://www.assuris.ca/ it is a not for profit organization that protects Canadian policyholders in the event that their life insurance company should fail.

regards,

Brian

Here is the part that might help you from the case study.

The holdco uses these excess funds to buy the UL policy. The same growth occurs within the insurance policy and this transfer of funds to buy the insurance essentially reduces the FMV of the holdco for the purposes of calculating capital gains tax due upon death.

You can not do this with buy term and invest the difference.

Brian

Please read the case study again. Chuck Jones is 55 years old. He puts in over $72,000 per year for five years. One can assume if he buys insurance and looks at his age he is conservative.

Term to 100 seems like a good idea, but the money must be withdrawn from a side account every year which would be taxed first. Money cannot be put into GICs or it will be taxed unlike a UL policy;

regards,

Brian

One short term bear market and you are advocating GIC’s? Do you know how many times higher stock market returns are than GIC’s over the last 30 years? This argument makes sense short term, but not for a 30-year term.

In your article above, when you compared investment returns to universal life insurance, did you assume the investments are taxed every year or only at the end? I quick future value of 5 investments of $72,157 @7% for 30 years, I get a future value of $2,410,000. After capital gains tax in the estate, I get $1,939,000. This is almost double your figure and far higher than the UL death benefit of $1,167,903.

Did you also assume the premium tax withdrawn from the estate value in the UL, but not with regular investments? I guess the higher MER would not apply if you are only investing in GIC’s?

What would happen if the client bought a term 100 and invested the difference? This would definitely give them the $1 million tax-free payout at death, plus a decent investment portfolio.

Ed

Now that the markets have gone down around the world, 4% guaranteed vs. investing the difference with term, sometimes being more conservative with extra cash in a holding company is better. Also, term becomes more expensive later in life. So you have investments which may take years to recover…

Brian

If I understand your question… when is the best time to set up a holding company? When you have extra money you do not need in your operating company. That’s when you set up a holding company.

Until you reach this point, looking at UL, doesn’t make much sense. Get some term insurance and replace it when your cash flow is better and when the holding company is set up.

regards,

Brian

Before I answer your questions, here is a brief review of the holding company scenario. The purpose is move extra money not needed in the operating company.

“The business owner can benefit in much the same way through the effective use of a holding company which is typically used to hold the shares in the operating company and store retained earnings not required to run the operating company. The hold co uses these excess funds to buy the UL policy. The same growth occurs within the insurance policy and this transfer of funds to buy the insurance essentially reduces the FMV of the hold co for the purposes of calculating capital gains tax due upon death”

Question #1 & 3.
Looking at my example again, Male, age 55, sole owner of a growing business. A term policy for $1,000,000 will cost $3,000 per year. At age 65 the policy will renew at roughly $20,000 per year. At age 75 he will pay $72,000.

Alternatively, he can apply for a NEW term policy at age 65 and prove his insurability again. If, and I stress IF, he is healthy, this new term policy will cost him $8,900 per year. Since most companies will not issue a new term policy beyond age 70, he can no longer go through the underwriting process again.

While the initial term cost might be favourable, the renewals grow significantly. If the individual is not able to support the renewal, it is unlikely that we will be able to “invest the rest”.

So now he is 75 years old and is paying $72,000 per year until age 80 when the insurance expires. But his business did well and he has a sizable estate that he would like to pass intact to his heirs. There is still an insurance need that might have been addressed with a UL policy when he was 55.

In most situations, the goal at age 55 is “estate preservation” as there are no longer dependant children. The cost of UL can be lessened by the use of a JLTD (Joint Last to Die) policy between husband and wife, which is not available on term. A joint equivalent age is calculated which is less than the premium for the single life policy because the death benefit is not paid until the second death. Assuming the husband dies first, the holding company can elect to receive a fund value payout as a tax-free death benefit. That amount minus the policy’s ACB is credited to the holding company’s CDA (capital dividend account) and can be paid to the Canadian-resident shareholder tax-free.

Another benefit with the JLTD: If our 55 year old is not insurable due to recent cancer history, he can still be included in a JLTD policy and still be able to take advantage of the Universal Life tax benefits.

Question #2. The same tax treatment is available with the corporate class funds but in the end you have no lump sum insurance payout.

Universal Life investments include GICs. These types of investment appeal to the older individual and pay much higher interest rates than the corporate class money market account. GIC’s are not available in the corporate class funds.

There are probably other ways to defer your tax but it is beyond the scope of this article.

4. Fees: Some insurance companies charge the same MER on funds you would to sell to your clients. Is there a choice of 4,000 funds, no, usually 50 funds or more. Some “fee only advisors” could get some of these funds cheaper, but would of course charge a fee for their advice.

regards,

Brian

Participating Life Insurance is when the life insurance company looks at expenses like mortality, taxes, etc. If there is a “surplus” the insurance company as approved by the board of directors gives a dividend to the policy owners, this amount can change from year to year. Policy owner doesn’t manage investment component.

The big advanatage I see with Universal Life is the flexibility of premium payments which could go up or down. Plus ability to manage investment mix.

Please note this is a big subject and I have given only a snapshot of the two products.

regards,

Brian

Informative article. A couple of questions.

1. Can a business owner get a similar situation with the classic “Buy term and invest the difference” in his corporation?

2. Can the investment part get the same tax treatment while you are alive by, for example, putting it into a corporate class fund? Are there other ways to essentially defer tax until death or withdrawal?

3. Are you still ahead with UL even after the tax saved on the death benefit (in a buy term and invest the difference scenario) when you include the tax on insurance premiums into the UL?

4. Are there ways to address the lower investment returns in UL’s resulting from the limited investment options in UL’s and higher MER’s in most seg funds?

Ed

Thanks for taking the time to answer my question. I realize I didn’t have all the facts and that I was referring to the story that was widely publicized in the media.

Good luck in your practise!

DGI

Thank you for such a informative article, I have been hearing more lately about Participating Life Insurance being a better choice than Universal, wherether its’ held in a Holdco or not, can you explain what situations and settings that a PAR may be a better choice than Universal?

I will try to answer your question “universal life policy premiums will be deemed a taxable benefit if your corporation is holding them”

The premiums are paid by the Holding Company for the life insurance, excess monies go into investments like GICs, Index funds,etc. The Holding Company is named beneficiary. The death benefit is paid and the tax-deferred cash value will go to the Holding Company. The beneficiaries receive ownership of the shares of the Holding Company.

The death benefit, minus the Adjusted Cost Basis (ACB) of the policy, flows to the capital dividend account of the Holding Company and the ACB is paid out as a taxable dividend. Over time the ACB will be zero, meaning the entire death benefit and investments can distributed to the beneficiaries as tax-free dividends.

regards,

Brian

I think the question is “The Dark Knight” actor died of an accidental drug overdose in January this year, but Reliastar Life Insurance is investigating whether he committed suicide.

Every insurance policy includes a 2 year suicide and contestibility clause because, let’s face it, there are people who take out insurance with the intent to defraud or to commit suicide. If this provsion was not in place, you and I would not be able to afford the cost of insurance. In the U.S. insurance companies cannot deny a claim after this 2 year period. One can only assume that Heath Ledger’s policy was issued within the 2 year period and the company has every right to investigate. Let’s not lose sight of the fact that the majority of claims are paid in good faith, these are the success stories that no one talks about…regards Brian

Some of these policies have the loan guaranteed when you sign up for the policy. The thing that worries me about this strategy, though, is that if you access the money earlier in your life (i.e. for a longer time) that the costs of servicing the loan might outweigh the tax deferral and reduced income tax benefits. Apparently the policies can be set up so the investments service the debt when you take the loan.

For sure, having the independent advice of an accountant would help greatly before committing to such a strategy.