Tax expert, Jamie Golombek, Managing Director, Tax and Estate planning, at CIBC Private Wealth Management is photographed on Feb 14 2011 in the lobby of bank's headquarters at 199 Bay St.. (Fred Lum/The Globe and Mail)Fred Lum/The Globe and Mail
Two facts stand out when it comes to insurance. One, Canadians rarely think about it. And two, there's a good chance they don't have enough of it.
Polls and industry statistics consistently find a large percentage of us don't have enough basic life insurance to support loved ones in the event of an unexpected calamity.
Canadians also seem to ignore the fact that insurance can be a wealth-management and estate-planning tool, said Jamie Golombek, managing director of tax and estate planning for Canadian Imperial Bank of Commerce's private wealth management arm.
Using insurance to pile up wealth or pass it on to the next generation works best for those who are already in great shape financially. That means people who have excess money to invest after maximizing their tax shelters such as registered retirement savings plans, tax-free savings accounts and registered education savings plans.
Typically, people put that excess cash into fixed-income investments such as guaranteed investment certificates and bonds. While such investments are extremely safe, they are also highly taxed, said Mr. Golombek.
The tax efficiency of insurance as an investment is pretty clear. Mr. Golombek recommends two strategies to clients, depending on their age and investment objectives.
One is purchasing a universal life or whole life policy and using the tax sheltering of investment income "to build significant wealth and accumulate it completely tax free and ultimately be able to leave that to kids or a charity, completely tax free at the end of the day."
Here's how it works. An individual buys a universal life policy that provides a guaranteed annual return, say 3 per cent a year, in the example that Mr. Golombek provides. "When you run the math on that, depending on the age of the client, in some cases we have seen that you would have to find a GIC paying 12 per cent to be able to match the after-tax rate of return on the policy when that person dies and the money is left, tax free, as a death benefit to the estate."
This is a strategy for those who do not, and will not, need the money and are looking to safeguard it and pass it on to a spouse or children.
The one caveat to this and other insurance strategies mentioned here is that the insured individual has to be in relatively good health to make the numbers work.
The other insurance tactic Mr. Golombek likes to employ is an insured annuity, which is useful for retirees who require regular monthly income but want something more tax-efficient than safe but low-interest paying non-registered GICs, or bonds which are taxed like regular income.
"What we do is we combine an annuity with a life insurance policy," said Mr. Golombek. This means there is money available as long as the individual is living, in the form of an annuity, and yet beneficiaries receive funds after the person's death.
Insurance is also a useful tool for business owners, said Tina Tehranchian, a certified financial planner and chartered life underwriter with Assante Capital Management Ltd. of Richmond Hill, Ont.
"One of the most versatile and flexible plans that can be used for retirement planning and tax planning are universal life policies," she said.
Ms. Tehranchian illustrates this with a company purchasing a universal life policy through a holding on the life of the owner and funding it over time. The policy is owned by the corporation and it is the beneficiary should the owner die. Excess cash inside the holding company could fund the policy and grow tax free inside it. "At death it can be paid on top of the death benefit of the policy into the capital dividend account of the corporation and paid out on a tax-free basis, minus the adjusted cost base of the policy, to heirs of the owner."
She warned that corporately owned insurance can come with complications. "The proceeds would be open to the claims of the creditors of the company, so that needs to be taken into account."
One drawback to using insurance as a wealth or estate building strategy is that insurance premiums are not tax deductible in Canada. They are tax-deductible in the United States, but as Ms. Tehranchian noted, insurance benefits are taxed in the U.S. unlike in Canada. "I would rather not deduct my premiums and have a tax-free lump sum benefit."
Frank Wiginton, a certified financial planner with TriDelta Financial of Toronto, regularly recommends insurance as a wealth planning tool for baby boomer generation clients who find that they have more income than needed and are looking to pass it on to the next generation.
He has used insurance to do that for himself, though in a somewhat unusual way, through a permanent life insurance policy for his infant daughter. He estimates that the plan will cost him less than $60,000 in premiums over a 20-year span to provide her with $750,000 of guaranteed insurance.
"Effectively what I'm doing is giving her a bit of her insurance now," he explained. "By the time she is 25 or 30 and plans to start a family, she doesn't have this expense every year because she already has her insurance. At the same time, I'm ensuring that I am leaving a legacy for her."