Permanent life insurance can help clients achieve their goals and leave a legacy.
With files from Vern Lunz, Insurance Specialist, Manulife Securities.
Many wealthy clients stand to be worth more money at the end of their life than the value of their net worth today. These are ideal candidates for a permanent life insurance policy – an alternative investment option for some of the money they’re not likely to spend during their lifetime. Permanent insurance can provide sizable tax savings by reallocating taxable investments into a tax-sheltered environment and maximizing the amount of assets clients leave behind for beneficiaries and charities.
See how the advantages of permanent insurance can work in a client’s favour, as illustrated in the following case study.
Mary is an affluent client in her late sixties, who doesn’t have a spouse, partner, or children. She spends much less than she earns in investment income every year. She owns a non-registered portfolio, a Registered Retirement Savings Plan and a substantial stock portfolio, and has maximized her Tax-Free Savings Account contributions to date. Considering her spending habits, Mary’s net worth could almost double (in today’s dollars) if she were to live to age 95.
Among Mary’s assets is a cottage that she wants to leave to her nieces and nephew, to ensure it remains in the family. But given their current financial circumstances, she wonders whether they can manage the expenses that come with owning and maintaining this type of property. She’s not clear about the taxes payable on the transfer of the cottage, nor the most efficient way to provide funds to her nieces and nephew that will enable them to manage the costs of owning the cottage over the long term.
Option 1. Mary can give money to her nieces and nephews
Mary could simply give her beneficiaries money, but she’s unclear about the tax consequences associated with the transfer and growth of her gift, and how to ensure those funds would be well managed and used to maintain the cottage.
Option 2. Mary can invest in permanent insurance on her life
Mary’s excess cash flow could fund a permanent product that would pay out at the time of her death to cover the taxes owed by her estate. It would also leave money behind for her beneficiaries and charitable donations. But unfortunately, Mary has health issues that make her uninsurable.
Option 3. Mary can invest in permanent insurance on her heirs’ lives
Insurance could still play a role in helping Mary achieve her objectives. She can purchase permanent life insurance policies on behalf of her nieces and nephew that would provide them with tax-exempt growth of funds within the policies. Although Mary would pay for the policies, the nieces and nephew would independently own the contracts.
Before implementing those policies, approval from the underwriter would be required to ensure they meet all the suitable underwriting criteria. In most cases, a clear insurable interest is required for insurance to be utilized. The insurance and deposit amounts need to be reasonable and reflect each of the insured’s unique circumstances. Mary’s nieces and nephew would also need to agree to the underwriting process and understand that the policies could impact their purchase of other insurance in the future.
Benefits of this solution
- Protection: Mary’s nieces and nephew would obtain life insurance without paying for it themselves.
- Lower costs: Insurance on younger, healthier lives would cost much less than insurance on Mary’s life (in the event that she were eligible).
- Tax-free growth: Funds inside the insurance policy would grow tax-free.
- Professional money management: If a whole life policy is purchased, funds inside the policy would be professionally managed.
- Greater potential growth: Since taxes are not payable on the growth of funds inside the insurance policy, the funds could grow to a larger amount than if they were invested in a taxable environment.
- Access to the cash value of the policies: Mary’s nieces and nephew could access funds in each policy in the future by making withdrawals from its cash value (which could be taxable) or by leveraging against the policy (which would not be taxable). The cash value of the policy could help pay for ongoing maintenance of the cottage or supplement her nieces and nephew’s retirement.
- Control over funds in the policies: If Mary is listed as an irrevocable beneficiary on each policy, even for a very small percentage, she could maintain control over the policy and the funds inside it while she’s alive.
- Creating a legacy: When Mary’s nieces and nephew pass away, significant death benefits would be available for their own children. The death benefits could help fund the capital gains tax if the cottage were passed on to their children, enabling Mary’s legacy to carry on for the next generation.
Decision
Mary decided to purchase permanent insurance on the lives of her nieces and nephew. She felt comfortable knowing that during her life, she will have control over how the policies and funds generated from the policies will be used – to help her nieces and nephew manage the costs of maintaining the cottage. And knowing the policies’ death benefits would help keep the cottage in the family for another generation gave her a tremendous sense of fulfilment. Unsurprisingly, Mary’s nieces and nephew were very appreciative of their aunt’s generosity.
Implementation and next steps
Mary met with her nieces and nephew and explained that she wanted to leave the cottage to them with the intention of keeping the cottage in the family. She explained how the insurance policies would provide funds to manage the taxes payable on the transfer of the cottage, as well as the maintenance and other costs associated with owning the property.
This example is just one of the many creative ways that various insurance products can be used to help clients achieve their goals, as diverse as they may be. Reach out to your insurance representative to learn more.
