Accumulating and Transferring Wealth Through the use of Life Insurance

By Michael Bronstine

The personal Perspective
Life insurance is well known for its ability to provide liquidity to fulfill financial obligations arising on death. What is less well known is that life insurance is a versatile financial instrument that can also be used to accumulate wealth, preserve assets and increase estate values to heirs. With careful planning, an exempt life insurance policy and strategies designed to maximize the use of tax-deferred accumulation within an insurance policy can also provide substantial tax benefits. At GBK we call this strategy the “GBK Bond Concept”.

Protection and Savings Elements of Life Insurance
Life insurance is by nature, a hedge against the risk of death. It is a cost-effective method of providing tax-free lump sum at death to meet liabilities, or to compensate for the financial loss arising as the result of a person’s death. This protection element is generally the reason why life insurance is purchased.

The premium payable in respect of the protection element of a life insurance policy will generally consider the insurer’s estimate of expected mortality rates, investment earnings, policy lapses and terminations, as well as administrative expenses and profit margins.

However, life insurance can also be used as a tax-effective savings vehicle.

Conventional savings investments are exposed to tax, whether under the accrual rules on an annual basis or as income received by way of interest, dividends or as capital gains realized on the disposition of capital property. Exposure to tax reduces investment returns and ultimately, what is received at death by heirs.

As an alternative, a policy owner can deposit funds into an exempt life insurance policy more than what is needed to fund the current policy premiums. These extra funds can grow tax-deferred within the policy and be used to fund future policy costs, buy additional insurance coverage/or accumulate as cash values that can be accessed during life or paid out as a death benefit. As a result, life insurance can be structured to provide pure protection as well as a savings element or cash value.

The “GBK Bond Concept” compares the net estate value arising from a life insurance policy to an alternative investment assuming the same amount of funding. Note that the tax-sheltered investment component should not be the only motivation for purchase of a life insurance policy. The need for the pure protection element and the costs thereof should be factored into the comparison to a taxable investment alternative.
When compared to taxable investment alternatives, an exempt life insurance policy is an effective wealth accumulation and transfer tool. The combination of both protection and investment elements of life insurance can deliver higher estate values.
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Summary
For many people, life insurance can act as an effective savings and investment device aimed at estate creation or estate preservation. Many high net-worth individuals have maximized the benefits of all the other tax-preferred vehicles available such as RRSP’s and TFSA’s. By investing funds into an exempt policy rather than a typical taxable investment, more funds may be provided to heirs than would have otherwise have been the case. The attractive alternative benefits to a taxable investment are:

• A large, immediate estate value
• Tax sheltered growth of cash values
• A tax-free death benefits
• Reduced estate settlement costs
• Increased creditor protection
• Liquidity, if required