Be Like Tiger
Published in April 2019 by Don Anderson
When I was growing up, my badminton coach Abdul Shaikh wanted us to move smoothly on the court, as he did. His expression was "move like tiger." Abdul meant the panther in the jungle, not the Master's winning golf athlete of today.
How can we play smoothly and smart today in the game of life? We need our investments and savings so we can raise a family, have some fun, and retire in the future. Let's look at what "successful" people do.
Instead of randomly driving down the road of life, which could take them anywhere, most successful people plan their lives. They typically own a business or real estate that produces ongoing income, and they invest in permanent life insurance.
For the purposes of this article, let's focus on the latter. Successful people and successful families understand and incorporate the long-term benefits of life insurance, of which there are many:
- Financial protection of a family or business for when the unexpected in life happens. Wear sunscreen and buy travel insurance, too.
- The choice of obtaining insurance can be done either personally or from within a corporation or holding company. Holding companies can own a variety of different assets including real estate, segregated funds, GICs, term deposits and life insurance policies.
Note that making an investment inside a permanent life insurance policy (called PAR), which is based on a bond from the individual insurance carrier, is deemed to be quite low risk. It's not intended to replace your Apple, TD or mining stocks but rather to make better use of the 5% to 20% of your portfolio that has likely been placed into assets like GICs or lower risk bonds.
- Using the policy as collateral for a bank loan immediately, or after the policy has been in force for at least five (5) years and the life insured has "matured" to 50+: the golden years. There are a variety of outcomes of the loan interest with respect to each choice. One option, for example, includes blending the loan interest back inside the policy.
- When the policy pays out on the passing of the life insured, the value of the policy jumps significantly with the payout of the death benefit.
- Even using a life insurance policy for personal investing can produce a reasonable, lower risk yield. The industry calls this an Estate Bond; the simplicity and long term benefits attract many successful people.
If a corporation or holding company purchases a life insurance policy, several additional advantages occur:
- Premiums can be paid from income or earnings that have been retained through the small business tax rate, which is much lower than personal tax rates in Canada.
- The annual yield of the investment portion of the insurance policy is not counted towards the annual passive income total, which may help reduce the threat of the operating company losing its small business tax rate under the new TOSI rules implemented in 2017.
- The value of the policy jumps significantly with the death benefit payout, which goes tax-free to the beneficiary. Typically, corporate-owned policies name that business or holding company as the beneficiary so these funds go directly back into that entity.
- Unique to life insurance, the death benefit payout of a life insurance policy creates a capital dividend credit (CDA). This extra dividend room allows the payout of that policy to flow as dividends to a shareholder(s), or their estate(s), with little or no taxes. What does all of this mean? It means having the funds in the Estate to pay the taxes owed to the CRA, like capital gains tax, without being forced to sell some or all of the assets of the corporation. Now, that's good planning.
Legato's top client has seven (7) life insurance policies in force protecting his family and his business interests. His parents placed his first policy when he was just one year old. Life insurance can start while a minor, and multiple policies can be on the same "life insured."
There, that's all you need to know to be "successful" and move smoothly through life like a tiger. Kidding!
Don Anderson
Legato
How can we play smoothly and smart today in the game of life? We need our investments and savings so we can raise a family, have some fun, and retire in the future. Let's look at what "successful" people do.
Instead of randomly driving down the road of life, which could take them anywhere, most successful people plan their lives. They typically own a business or real estate that produces ongoing income, and they invest in permanent life insurance.
For the purposes of this article, let's focus on the latter. Successful people and successful families understand and incorporate the long-term benefits of life insurance, of which there are many:
- Financial protection of a family or business for when the unexpected in life happens. Wear sunscreen and buy travel insurance, too.
- The choice of obtaining insurance can be done either personally or from within a corporation or holding company. Holding companies can own a variety of different assets including real estate, segregated funds, GICs, term deposits and life insurance policies.
Note that making an investment inside a permanent life insurance policy (called PAR), which is based on a bond from the individual insurance carrier, is deemed to be quite low risk. It's not intended to replace your Apple, TD or mining stocks but rather to make better use of the 5% to 20% of your portfolio that has likely been placed into assets like GICs or lower risk bonds.
- Using the policy as collateral for a bank loan immediately, or after the policy has been in force for at least five (5) years and the life insured has "matured" to 50+: the golden years. There are a variety of outcomes of the loan interest with respect to each choice. One option, for example, includes blending the loan interest back inside the policy.
- When the policy pays out on the passing of the life insured, the value of the policy jumps significantly with the payout of the death benefit.
- Even using a life insurance policy for personal investing can produce a reasonable, lower risk yield. The industry calls this an Estate Bond; the simplicity and long term benefits attract many successful people.
If a corporation or holding company purchases a life insurance policy, several additional advantages occur:
- Premiums can be paid from income or earnings that have been retained through the small business tax rate, which is much lower than personal tax rates in Canada.
- The annual yield of the investment portion of the insurance policy is not counted towards the annual passive income total, which may help reduce the threat of the operating company losing its small business tax rate under the new TOSI rules implemented in 2017.
- The value of the policy jumps significantly with the death benefit payout, which goes tax-free to the beneficiary. Typically, corporate-owned policies name that business or holding company as the beneficiary so these funds go directly back into that entity.
- Unique to life insurance, the death benefit payout of a life insurance policy creates a capital dividend credit (CDA). This extra dividend room allows the payout of that policy to flow as dividends to a shareholder(s), or their estate(s), with little or no taxes. What does all of this mean? It means having the funds in the Estate to pay the taxes owed to the CRA, like capital gains tax, without being forced to sell some or all of the assets of the corporation. Now, that's good planning.
Legato's top client has seven (7) life insurance policies in force protecting his family and his business interests. His parents placed his first policy when he was just one year old. Life insurance can start while a minor, and multiple policies can be on the same "life insured."
There, that's all you need to know to be "successful" and move smoothly through life like a tiger. Kidding!
Don Anderson
Legato