— 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 ProblemBesides 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.
LeverageInsured leveraging provides a solution:
- Deposit cash into a universal life insurance policy (tax-sheltered growth)
- Borrow against the savings (secure collateral that continues to earn tax-sheltered growth)
- Invest the proceeds (investment flexibility)
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.
FlagshipInsurance 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.
CRAStrategies 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 BudgetTwo 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 FutureVast 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.
- Test your life insurance literacy
- Where does your insurance advisor get advice?
- The lure of “exclusive” financial strategies
- The pros and cons of financial leveraging
- How to leverage your philanthropic giving
- Key changes for 10-8s and leveraged annuities (Investment Executive, Mar 21, 2013)
- What small business should know about the 2013 federal budget (The Globe and Mail, Feb 22, 2013)
- Party’s over for tax-advantaged investing (Advisor.ca, Mar 21, 2013)
- What to do about the insurance turmoil
- Secret 7: The best tax sheltering in Canada
- Five signs you may have bad insurance (Thicken My Wallet, Jul 2009)
- image courtesy of Jane Sawyer
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PS Do you have a fave Harry Chapin song?