Tax Planning: The Top Five Insured Strategies

Last time we looked at life insurance sales in Canada. This time we'll dive deeper to see what permanent insured wealth management strategies affluent Canadians use. As you'll see, the main reason is tax planning.

The Top Five

Here are the perennial top five strategies based on research from the Newlink Group, which surveys major national firms selling insurance across Canada, including members of the Investment Dealers Association (IDA) and Mutual Funds Dealers Association (MFDA).

The ranking is by cases sold (highest to lowest):

1. Legacy Bond (31%)
   
2. Insured Retirement Strategy (19%)
   
3. Estate Protection (12%)
   
4. Income Shelter (10%)
   
5. Insured Annuity (10%)
   

Only Estate Protection has a traditional insurance focus --- and that's only 10% of cases. The rest target investment growth, after-tax income and tax reduction. Do these strategies address the six financial fears of Canadians? Not exactly. Those fears were for the general population. The wealthy have different concerns.

Fans of the 80/20 rule may notice that we're close with 82/18. Naturally, the suitability of a strategy depends on various factors such as age, health, investment style, time horizon and tax rates.

#1: Legacy Bond
Situation: You have set aside money to create a financial legacy for your heirs. As a prudent custodian, you require that the capital is preserved. So you invest in conservative, highly taxed investments like GICs. You'd like to maximize your gift by minimizing tax.

Strategy: You use the money to buy the largest possible tax-free death benefit and pay the least for it (e.g., the monthly minimum premium) to minimize the cash flow.

#2: Insured Retirement Strategy
Situation: You are investing to supplement future income (e.g., during retirement). You want to minimize tax on your investment growth and would welcome creditor protection.

Strategy: You transfer liquid invested assets or income into universal life insurance for tax-free growth. You get tax-free income later by assigning the cash rich policy to a bank as collateral for tax-free loans. The loans are repaid with the tax-free death benefit.

#3: Estate Protection
Situation: You want to maximize your estate for your heirs by eliminating or offsetting the effect of taxes on your investments, RRSPs, RRIFs, etc.

Strategy: You buy life insurance for the projected tax liabilities and other expenses due at life expectancy (if you have a spouse, this would be at the time of the second death).

#4: Income Shelter
Situation: You understand the effect of tax on investment growth (see $1 million after taxes) and want your investments to grow tax-free using the original Tax-Free Savings Account.

Strategy: You transfer a portion of your nonregistered assets or income to a universal life contract. Should you want tax-free income later on, you can transform your solution to an Insured Retirement Strategy.

#5: Insured Annuity
Situation: You want the assurance of income guaranteed for the rest of your life but you don't want to erode your capital. So you invest in GICs and spend the after-tax income.

Strategy: You buy a life annuity for guaranteed lifetime income --- only a portion is taxable. You use a portion of the annuity income to buy permanent life insurance to replace the investment in your annuity. This gives you more after-tax income and restores your capital upon death.

Links

• Canadian life insurance sales in 2007
• $1,000,000 After Taxes On Investment Growth
• The Six Financial Fears of Canadians
• The Original And Overlooked Tax-Free Savings Account
• "10-8" Leveraging: Turbocharging the Top 5 Insured Strategies (new)