March 23, 2013


flower varietyErnst & Young’s most recent research shows 88% of global survey respondents across a wide number of industries agreed that innovation was the one genuine differentiator and advantage they have over the competition.
The Globe and Mail (Mar 22, 2013)

It’s Spring. One of the saddest songs is Flowers Are Red. It’s not just because Harry Chapin died early but because innovation gets punished. A child starting school gets forced into conformity. What a loss.

The 2013 federal budget punishes innovation in life insurance by wanting to remove the tax advantages of “10-8” insured leveraging strategies which were first introduced in the 1990s.

The Problem

Besides a tax-free death benefit, life insurance offers other advantages such as tax-sheltered growth (to learn why, see How Pink Floyd’s insights on mortality help you). Unfortunately, investing inside life insurance has consequences.

With term life, you can’t invest. With whole life, you can’t choose the investments (among the perils of whole life insurance). With universal life, you pick the investments but face two major drawbacks: limited choice and high investment expenses like mutual funds (see what are you doing about your high investment expenses?).

If only you could invest in the “real world” with options like ETFs, stock, bonds and real estate.


Insured leveraging provides a solution:
  1. Deposit cash into a universal life insurance policy (tax-sheltered growth)
  2. Borrow against the savings (secure collateral that continues to earn tax-sheltered growth)
  3. Invest the proceeds (investment flexibility)
This process allows tax-sheltered growth on the loan collateral, the flexibility of investing in the “real world” and deductions on the loan interest. If your investments earn more than the after-tax cost of the loan, you’re ahead.

There’s a risk. The gap between what you pay on the loan and earn on the collateral fluctuates. With “10-8 leveraging”, the gap is guaranteed at 2%.

Several insurers introduced “10-8” strategies (RBC Life, BMO Life, National Life, Industrial Alliance, Transamerica). Before becoming independent in 2009, I worked for two. The strategies were endorsed by leading accounting firms and sold by top advisors across Canada.


Insurance products are essentially commodities (similar designs, similar prices, similar compensation). Strategies (packaged solutions to specific needs) offer a competitive advantage to the insurers. Since there are oodles of advisors, the ones who master new strategies have an edge too. Innovation brings rewards.

“10-8” strategies became the flagship offerings for the life insurance sector — much like the S-Class in automobiles (see Mercedes’ next flagship does the commuting for you in Wired, Dec 2012). Few advisors had the skills to sell “10-8” or suitable clients. Even so, the attraction of “10-8” opened conversations. There was demand for presentations that insurance advisors, accountants and clients could understand. Communication became the battleground for innovation.


Strategies which help you can hurt tax collections. The Canada Revenue Agency was unhappy about “10-8” strategies. This lead to legal challenges which ended in 2011:
During the court proceedings, the CRA was forced by the court to produce some documents of its own — material revealing that the CRA, apparently in conflict with some of its public statements, believes that 10/8 products probably conform with the formal requirements of the Income Tax Act, if not its spirit. — CRA rebuked for ‘fishing expedition’ (Investment Executive, Dec 2011)
The future of properly-implemented 10-8 strategies looked good, though Jamie Golombek warned, "We have to wait and see whether Finance issues a comment, announces legislation or just stays out of it." (Investment Executive, Dec 2011)

The 2013 Budget

Two days ago, the March 2013 federal budget proposed changes to eliminate the appeal of “10-8” leveraging and leveraged insured annuities. You’ll find the details in Investment Executive.

The Future

Vast resources were committed to “10-8 leveraging” prior to the introduction and ever since. I invested years and did countless presentations to advisors, accountants and clients. I prepared many proposals too.

When innovation gets punished, there’s less innovation in the future. We all lose. We soon see flowers as red and leaves as green. To quote Harry Chapin:
There’s no need to see flowers any other way
Than the way they always have been seen.


Podcast 212

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PS Do you have a fave Harry Chapin song?

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