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Email this5:34 pm
May 30, 2019
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Hi, maybe this is outside the scope of this site, but I was wondering if anyone has experience of purchasing corporate life insurance as an estate planning tool to reduce taxes payable on our kids inheritance or using corporate cash to pay for critical illness policy. I've had both recommended to me recently and not sure if this is a good idea. We recently sold our business and with a substantial chunk of cash within a separate holding company, paying it out personally comes at a high marginal income tax bracket. Any thoughts? Thanks everyone, this site has been invaluable in highlighting great gic rates we've really benefitted from!!
9:29 am
June 28, 2019
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We had this very similar situation 10 years ago and purchased a corporate life insured annuity on two of the principals. so far so good. however interest rates were a lot , lot better than, so not sure this would be useful today. might want to look into it though if you haven't
12:20 pm
February 20, 2018
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A Life agent said to me:
"I have clients dumping big cash into existing life insurance policies. They are paying 4% guaranteed NET of tax!"
Any Comments
1:48 pm
March 30, 2017
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Bud said
A Life agent said to me:"I have clients dumping big cash into existing life insurance policies. They are paying 4% guaranteed NET of tax!"
Any Comments
Assume these are universal / whole life policy, think there is a limit how much extra you can put into the policy each year for it to maintain tax free return. Not like you can dump any amount u want.
2:24 pm
April 6, 2013
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The agent is feeding you fake news, Bud. Just like I would be if I said one can invest in a Bell Canada bond that pays 10% per annum.
The important fact I would be leaving out is that one needed to invest in those Bell Canada Series EU bonds in 1994! 
Same with those whole life and universal life policies. The minimum guaranteed rate for the cash value in them hasn't been 4% for a long time. If one did buy such a policy in the late 1980's, it is possible the policy has a 4% minimum return on the cash value.
Such policies weren't great deals though. I had Canada Savings Bonds around that time with a minimum guaranteed return of 10½%.
3:54 pm
May 30, 2019
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The key benefit outlined to me was the tax free benefit at payout. If I died the holding company is collapsed and all funds paid out to the estate (my kids) at top marginal income tax rate (around45%). If the corporate funds are instead used to purchase life insurance policy with kids as beneficiary, part of the premium pays for the insurance component and part is invested in mutual funds. At death the whole amount is paid out tax free. At least that's how it was presented to me. So sounds like a good deal for the kids. And if I needed that cash, I'm told in later years I could take out a loan from a bank, using the value of the policy as collateral. This allows tax free distribution from company cash. I'm looking at this very closely as with the government spending hundreds of billions on covid19, in the near future I wouldn't be surprised if an inheritance tax was brought in and I'd like to get this setup before Trudeau launches another attack on business owners. Anyone done this before?
4:30 pm
April 6, 2013
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I was presented something like that involving universal life insurance.
It doesn't actually work out because of the fees. I found out, buried in the fine print, that there's a 2% to 3% per annum tracking fee, on top of the MER, for the mutual funds in the life insurance policy. The insurance agent was surprised when I mentioned it to him. Consequently, his "illustration" did not account for that.
For equity funds with expected return of 7% per annum, that tracking fee works out to be like a 28% to 43% tax on the gains.
For the GIC's offered, the rates were 2% to 3% below what I could get rate chasing.
All that is before the cost of the required permanent life insurance one needs to buy.
Just be careful. With many of these things I've been presented from insurance agents, I would end up paying more in fees than in taxes saved.
The challenge is that flaws in their presentations are difficult to spot. Sometimes, it is the very first statement made, like "Lot less taxes if you had made 7% with a seg fund than 7% with a regular mutual fund."
The flaw is that seg funds charge extra 2% to 3% each year in fees. So, if one had actually made 7% with a regular mutual fund, then the equivalent seg fund would only return 4% to 5%.
4:39 pm
April 6, 2013
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Don't fall for the "borrowing from cash value" pitch.
Borrowing is not the same a distributing from a corporation. If one needs to keep that loan going, it will cost interest. If the interest is 3% per year, then it will add up to 30% after ten years.
To pay it off, the corporation would either "forgive" the loan by paying the bank, which is a taxable benefit, or pay out a dividend to the owner so the owner can pay the bank. In both cases, it works out to be worse than if one had paid the money out initially as a salary or dividend. The same income taxes would be owing but now one has paid the bank 30% over the years!
11:49 am
February 20, 2018
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Bud said
A Life agent said to me:"I have clients dumping big cash into existing life insurance policies. They are paying 4% guaranteed NET of tax!"
After reading whats been said in this thread are you all suggesting the 4% net would be less after fees like closer to 2.5 or 3? Is that enough to offset institution risk.
Please write your comments in the forum.