If your advisor asked you to describe the ideal financial asset, you could probably come up with quite a wish list. It should have guaranteed returns, have no contribution limits, and be fundable using corporate dollars. Oh, and make it tax-free while you’re at it.
It turns out this dream scenario exists, and in one of the oldest asset classes of all: life insurance.
“Whenever we explain this to people, the reaction is the same: ‘why don’t I know about this?’” says Chris Karram, Founder and Managing Partner of SafeBridge Private Wealth. “It really does sound too good to be true.”
Even the savviest people can overlook life insurance, unless their advisor lays it out for them, Chris says. “People tend to think of it the way they think of other kinds of insurance – as something you need when bad things happen,” he says. But, he explains, things look different when you view life insurance as an asset.
For starters, life insurance is one of only three ways to earn money tax free. (Well, Chris acknowledges with a grin, four: if you count winning the lottery.) The other two are your principal residence and your Tax-Free Savings Account.
But unlike TFSAs, life insurance has no maximum contribution level tied to your income or an arbitrary number chosen by the government.
It can also be purchased by your company on your behalf. “That’s a huge benefit,” Chris says. Ontario’s top personal tax rate is 53.53 percent; the corporate rate is 12.2 percent. “Using corporate funds to buy life insurance is like getting a 41 percent benefit.”
That 41 percent then compounds within your insurance policy tax free. “The power of tax-free compounding growth is absolutely massive,” Chris says.
Perhaps the most elusive benefit of all, though, is the certainty that comes with life insurance. “Every year, you earn a dividend from the insurance company. And they’ve been paying those dividends annually since 1847.” Over the past 30 years, dividends have averaged 7 percent, which – you guessed it – can be allowed to grow tax-free inside the life insurance policy.
You can even access the funds with little or no tax penalty. “There are multiple ways to access the capital, whether you need it all at once or would like it paid out annually for the rest of your life,” says Chris. “We will set up the appropriate method for each person.”
Once you start seeing life insurance as an asset rather than as something that only pays out when you die, he says, a world of possibilities opens up. “It’s life insurance for the living.”
TEXT A. WAGNER-CHAZALON | PHOTOS ANDREW FEARMAN