DAILY FINANCIAL TIPS – DAY 34 – INSURANCE AS AN INVESTMENT
These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.
Many/most people think if insurance as a protection plan/strategy. In many cases, this is true, however, insurance can also be an effective and tax efficient investment strategy. One of the biggest advantages insurance policies have is proceeds are paid out tax free.
Insurance policies that build cash values such as Whole Life or Universal Life insurance policies can be effective tax efficient strategies for individuals and businesses. The biggest difference between Whole Life and Universal Life insurance policies is the investment decisions within Whole Life policies are made/controlled by the insurance company. With Universal Life insurance policies, the policyowner controls the investment decisions. Overfunding and investing surplus corporate cash in Universal Life policies can be a highly effective tax planning strategy for business owners.
With both Whole Life and Universal Life policies, the proceeds (both the insured values and cash values) are paid out to beneficiaries tax free, making them highly effective tax and legacy planning strategies. Should cash proceeds be withdrawn by the policyowner, they will be subject to tax. For cash needs during the policyowner’s lifetime, leveraging the cash proceeds or taking loans using the cash value of the policies for security can avoid taxes. It is best to speak with a licensed insurance advisor to explore which strategies are most effective for your personal or business situation.
In addition to using life insurance as investment strategies, Critical Illness policies can be structured with Return of Premium options. This means that should no Critical Illness claims be paid, all insurance premium payments are returned to the policyowner tax free. Unlike life insurance policies which have increasing investment values, Return of Premium options are a refund of payments made without investment gains. While not an investment gain in the purest form of definition, a Return of Premium is in exchange for a small premium surcharge (Return of premium cost), entitles the Policy Owner to a return of the insurance premium payments as well.
If you have maximized your TFSA contribution limits and are seeking tax efficient strategies for families or businesses, insurance planning may be an effective tax and legacy planning strategy. Discuss options with a licensed insurance advisor to understand which is most effective for your individual situation.
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