Are there any tax shelters left?

When we hear the words "life insurance", we instantly think of more expenses. However, life insurance can be a key element of any financial plan, providing protection for you and your family. It is becoming increasingly appreciated for its unique tax advantages that could help you preserve your family's wealth and enhance the value of your estate.

Who can benefit from tax-exempt life insurance?

From a financial planning perspective, you should only consider tax-exempt life insurance if you:

• need the protection and security offered by a life insurance policy;
• have used up your RSP contribution room and are looking for another method of tax-deferred saving;
• want to augment your retirement income with tax-free payments;
• would like to create a reserve fund that can be used for any number of things, including paying capital gains tax, funding buy-sell agreements or providing charitable or philanthropic gifts;
• wish to enhance the overall value of your estate for your family;
• want to provide estate equalization to several family members or beneficiaries (being fair to your beneficiaries in your asset dispersion).

Tax-deferred growth

With traditional insurance products, you pay an annual expense for the coverage; this is the cost of protecting yourself (and more importantly your family). However, tax-exempt life insurance is merely the price of admission. You can actually deposit amounts well in excess of the cost of insurance and invest the difference in a variety of investments-many similar to your other portfolio assets-within the insurance contract. Those investments are able to grow on a tax-deferred basis similar to an RSP (without the upfront tax deduction), resulting in greater long-term growth (helps with compounding your investments).

You have a wide range of investment choices, depending on the type of insurance policy you choose-participating whole life (PAR) or universal life (UL).

• With a PAR policy, your insurance company invests your additional deposits for you within a large pool composed of similar deposits from other policyholders. Based largely on the investment performance of this pool, you receive performance credits, which you can take in cash or add to your insurance policy for greater coverage. A PAR policy also offers a guaranteed, annually increasing cash value.
• An alternate choice is UL, which gives you greater control over how your funds are invested within the policy. You can invest the funds over the cost of providing the insurance coverage as you see fit, and choose from a wide range of options, including guaranteed investment, equity and bond indexes and mutual funds.

Generally, UL is a better choice for individuals who want more control and are comfortable with a higher level of investment risk, while PAR is more suitable for those who prefer less control in exchange for less risk. We can help you determine the best choice in your situation with a simple evaluation.

A tax-free benefit

In addition to tax-deferred investment growth, tax-exempt insurance offers other tax advantages, including a tax-free benefit paid to the beneficiaries of your estate. If you don't need the policy's cash value during your lifetime, you can simply allow it to accumulate on a tax-deferred basis. When your estate is settled, the cash value is transferred to your beneficiaries as part of a tax-free death benefit, bypassing probate and its associated costs.

For more information about tax-exempt life insurance do not hesitate to contact our offices for a consultation.