Permanent Life Insurance

You’ve got a growing business, and have some investments owned by your company -real estate, stocks, and ETFs.  You want to minimize your tax bill and are wondering if there are other ways to get money out of your company tax free.  

In Canada, there are only four true tax shelters left – your principal residence, Tax-Free Savings Accounts (TFSAs), lottery winnings, and permanent life insurance. Permanent life insurance may be a tool that could benefit you. Most people know what life insurance is, but they’re not sure why it can help them.  

As a business owner, you may not need life insurance, but it may be an opportunity compared to what you are doing right now. There are tax benefits of permanent life insurance that are similar to those of a TFSA on death (see below). Your company would own and pay for it which has tax advantages over owning it personally. 

Benefits 

Permanent life insurance offers the following benefits: 

Tax-Free Growth: The accumulated savings within permanent life insurance grows tax-free, similar to a TFSA but without contribution limits. 

Tax-Efficient Payout: For business owners, life insurance proceeds minus the Adjusted Cost Basis are then credited to an account called the Capital Dividend Account (CDA). The amount credited can then be paid out as a tax-free capital dividend to the surviving shareholders.    

Effective Estate Planning: This strategy can be an important part of estate planning, ensuring a smooth and tax-efficient transfer of wealth to your heirs. Let’s now walk through a real-world example of how this could work: 

Jane Jett 

We’ll take Jane Jett – she’s 60 years old and owns Jett Enterprises which is a successful jet engine parts manufacturer. Her company holds investments totaling $10 million, including real estate, stocks, and ETFs. She has maximized her TFSA and owns a home personally. She’s married with one adult daughter, and continues to grow her business. Jane wants to explore ways to move more money out of her company in a tax-efficient way, ensuring her husband and daughter benefit. 

The Strategy

Jane’s Holding Company (Jett Holdings Inc.) purchases a permanent life insurance policy on Jane’s life.  Her holding company is both the owner and the beneficiary of the life insurance policy. Jane decides to contribute $100,000/year for the next 10 years from the company’s investments into the policy. This accumulated savings grows tax-free within the policy over time and upon Jane’s passing 25 years later, the death benefit is credited to Jett Enterprises’ Capital Dividend Account.  A net amount of $2.2M can then be distributed to the surviving shareholders (Jane’s husband and/or adult daughter) as a tax-free capital dividend. 

In summary, the permanent life insurance strategy provides tax-free growth, a tax-efficient payout, and effective estate planning. When we build financial plans for clients, we often work with your trusted accountants and lawyers to ensure the right strategy gets put in place. Please reach out if you think this could be of help to you.

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