Most people think the only purpose life insurance serves is providing a tax free lump sum to their loved ones in the event they pass away prematurely, however, there are life insurance products that can be (and are) used as an investment vehicle. This does not take away from the primary purpose of purchasing life insurance, which is to provide a death benefit and protect the ones you love.
Life insurance is one of the best kept secrets with respect to the availability of an investment vehicle that can be used to accumulate wealth in a tax deferred environment, and it is a secret because many investors are unaware of the existence of life insurance policies that can help them accomplish their goal of enjoying tax deferred growth. If you have mutual funds, the growth in those funds are subject to capital gains taxes and have to be reported to the CRA as income annually.
How can you use life insurance to tax shelter your investments? It’s really quite simple actually! Purchase a permanent life insurance policy (Universal Life) that also allows you to deposit money into it. You can select the funds that you wish your money to be invested in (just like you would in a mutual fund) and the money in your policy grows tax-deferred (subject to the CRA Exemption Test Rules which sets out the amount of savings that can grow tax deferred in a life insurance policy).
Another advantage of using life insurance to tax shelter your investments is that in addition to the death benefit flowing to your beneficiaries’ tax free, the accumulated growths will also flow to your beneficiaries tax free. If you are maximizing your RRSPs and TFSA and need another vehicle to grow your money tax deferred, maybe it’s time to consider using life insurance to help you accomplish your goals.
There are limits to the amount of money that you can put into this plan for the policy to retain the tax exempt status, and there is legislation on the horizon (new rules are likely to take effect by 2017) to further limit the amount of money that can grow tax deferred in a universal life policy, so the time to act is now.
Call me at 416-554-0892 and I will help you implement this and other tax efficient investment strategies using insurance products.