USING WEALTH WISELEY

Why do wealthy individuals, those who have no need for more insurance, sign up for the largest whole life policies issued inCanada?  Did they meet a high pressure insurance salesperson who convinced them to buy something they don’t need?  Are they unsophisticated investors who have purchased policies believing they were something they were not?  Not likely!

These wealthy individuals are no longer trying to create a larger estate – they are now looking for ways to ensure that the wealth they have accumulated over a lifetime is sustainable for multiple generations.

When it comes to Whole Life insurance – in a nutshell – affluent individuals buy this type of policy because, over the long term, this tax-sheltered investment will potentially deliver double or triple that amount that could be achieved by a non-tax-sheltered investment with comparable risk.  Because this return is earned on a tax-free basis it creates a much larger estate value than would result if the same rate of return was earned in a taxable account.

The largest Whole Life policies are issued to individuals who understand that they already have more capital then they are likely to use during their lifetime.  With a remaining life expectancy of 25 to 35 years they decide that, rather than pay tax each year on earnings that are only going to be reinvested, it makes more sense to use an investment vehicle that allows those earnings to grow on a tax-free basis.

With tax-free growth the money that would otherwise be paid to CRA remains in the account and is there to produce more revenue each year.  It is the tax-free growth that makes the big difference and can increase the amounts available for gifts to children, grandchildren, the family legacy or philanthropic interests.  Investors with grandchildren can use “cascading” insurance which enables families to take advantage of tax-free growth for another generation.

 

If Whole Life is so good why does everyone not invest this way?

There are a number of reasons.  One reason is that not everyone can afford to put away money for the long term.  Some people need to create a larger estate to protect their families now and for this need term insurance is the better choice.  Liquidity is also a factor that must be considered.  For a long term investment, short term liquidity should not be an issue – but it is.  There is a front end cost to a Whole Life policy.  If your circumstances change, and you need the money within the first 10 years, there will be no advantage to the insurance.  And if you need the money within the first few years you will incur a significant penalty.

Another reason why individuals avoid Whole Life is because they want to avoid the insurance agents who sell them.  Unfortunately, the reputation of all insurance agents, including those whose practice includes sophisticated estate planning strategies, has been tainted by the high pressure sales tactics used by some agents when convincing clients to sign up for term insurance.

Good insurance advisors help us look at the long term and do what is right – even though it may require short term sacrifice.  The proof is that it would be hard to find anyone who purchased a Whole Life Participating insurance policy 15 or 20 years ago who today would not say it was his or her best investment.

What about the Death Benefit?

The focus of this article is the investment advantages of Whole Life insurance that can accrue to the policy holder while he or she is living.  In the unfortunate event where death occurs before the cash surrender has increased to a significant level then there is a windfall to the estate because the face value plus the additional insurance purchased with policy dividends will be received on a tax-free basis.
You can learn the tricks and generic levitra online browse around this link techniques by having a small course. Older women still have sexual desire, excessive suppression would be order cheap levitra bad for your health. It has been commenced to take one pill in a day, and need not to be taken just few minutes before http://amerikabulteni.com/2011/08/26/new-york-belediyesi-tahliye-bolgelerini-acikladi-iste-sehrin-tahliye-edilecek-semtleri/ cialis no prescription having sex and is effective 4-5 hours after being taken. Online pharmacies now enable men everywhere to purchase cheap sildenafil 25mg, sparing them from the awkwardness of attempting to buy your cologne or perfume.
Although the tax-free death payment is significant, the main reason why wealthy individuals buy Whole Life is to shelter income and enjoy the growth of dividends accumulating on a tax-free basis.

Simplicity

Generally speaking a well-diversified and simple portfolio is better than a complicated portfolio.  And nothing is more simple than a Whole Life insurance policy.  After paying the premium for a certain number of years, there is literally nothing else to manage.  Policy holders will rest assured that their capital is being managed by fiduciaries who have extensive experience and a history of outperformance compared to most balanced investment funds.

Low Volatility

Whole Life policy holders do not see the gains or losses earned or the investment pool.  They only see the dividends which are declared, and which upon receipt, are immediately vested and from that point become part of the cash surrender value of their policy.  It is important to know that the cash surrender value of the policy is guaranteed and can never decrease due to stock market fluctuations.

The actual amount of dividends paid to the policy holders is smoothed through the use of a “Reserve Fund”.  In years when the investment pool has earned a high return some of the income is paid to the policy holders through dividends and some is moved to the Reserve Fund.  In years when the pool has earned a lower rate of income the policy holders receive a dividend, which is larger than it would be otherwise be, by dipping into the reserve.   This is why the dividend rate has shown such low volatility over the past few decades.  For one major company, over the past 60 years, the annual dividends have varied from a high of 9% to a low of just over 6%.

Corporate Owned Insurance

The advantages of Whole Life insurance are even greater if the individual controls a privately held corporation which has sufficient capital to pay the insurance premiums.  In this case the corporation can own the insurance and pay the premiums thereby avoiding the need for the owner to take the money out by way of a salary or dividend.  When the insured eventually dies, the face value of the policy plus the dividends go into the corporation’s capital dividend account and from the capital dividend account the corporation can pay a tax-free dividend.

Conclusion

There is a saying that all good things must come to an end and this is somewhat true with Whole Life insurance.  Because the government feels it must equalize the playing field, draft legislation has been prepared to limit the growth inside a Whole Life participating policy.  However, the government has also said that any policy purchased prior to the enactment of the legislation will be grandfathered.

For the sustainability of wealth both individuals and families benefit by following a wealth sustainability process.  The process involves goal setting, governance, stewardship, risk controls, investment management, proper performance reporting, and income tax strategies.  Whole Life insurance is often a crucial component in managing income tax and in insuring that that the individual’s most important goals are achieved.