What the Wealthy Know about Life Insurance

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If you have ever thought that life insurance was something you wouldn’t need after you reached a certain level of financial security, you might be interested in knowing why many wealthy individuals still carry large amounts of insurance. Consider the following:

  • A life insurance advisor in California recently placed a $201 million dollar life insurance policy on the life of a tech industry billionaire;

  • Well-known music executive David Geffen was life insured for $100 million;

  • Malcolm Forbes, owner of Forbes Magazine, was insured at the time of his death in 1990 for $70 million.

While life insurance is most often looked upon as a vehicle to protect one’s family or business, the question that springs to mind is why individuals with wealth need life insurance?

The most common factor connecting people of wealth is that they have a substantial amount of deferred income tax that must be paid upon death. In addition, they often have a strong desire to make a substantial donation to a favourite charity or educational institution.

“Life insurance is an efficient way to transfer money to your heirs.” – Malcolm Forbes

In Canada, individuals are deemed to have disposed of all their assets at fair market value when they die, which often results in taxable capital gains and other deferred taxes coming due. Paying premiums for insurance that will cover these taxes is almost always less expensive and more efficient than converting assets.

When allocating your investment dollars, it is helpful to understand what investments have the highest exposure to income tax.

Fully Tax Exposed

Investments which are taxed at the highest rate of income tax:

  • Interest-bearing instruments such as bonds, savings accounts and guaranteed investment certificates;

  • Rents;

  • Withdrawals or income from registered plans such as RSP’s or RPP’s.

Tax-Advantaged

Investments which are taxed at lower rates of income tax:

  • Investments which are taxed as a capital gain;

  • Dividends;

  • Flow through share programs;

  • Prescribed annuity income.

Tax-Deferred

Investments on which income tax is deferred until the asset is disposed of or the investor dies:

  • Registered Savings Plans;

  • Individual and Registered Pension Plans;

  • Investments producing deferred capital gains.

Registered plans, in addition to having the growth tax-deferred, also have the added advantage of the contributions being tax-deductible.

Tax-Free

Certain investment assets are totally free of income tax:

  • Principal residence;

  • Tax-Free Savings Accounts;

  • Death benefit of life insurance policies.

Life Insurance as an Investment

While the death benefit of life insurance policies is tax-free, it is important to recognize that this also includes the investment gains made on the cash value portion of the policy. With this in mind, many investors have discovered that by allocating a portion of long term investments to a Universal Life or Participating Whole Life policy, the results can be significant when compared to tax exposed or tax-advantaged investments.

Life Insurance for Estate Planning

One of the main objectives of estate planning is to maximize the amount we leave to our families or bequeath to our favourite charities. What many wealthy families have learned is that one of the easiest ways to accomplish this is to reduce the portion of the estate which is lost to the government to pay taxes at death.

While this helps explain why many individuals of wealth maintain life insurance, it also underscores the advantages of life insurance to anyone who will have taxes or other liquidity needs at death. In addition, using life insurance as part of a charitable giving strategy can provide significant benefits to both the donor and the charity.

As Malcolm Forbes alluded to, for providing capital to protect your family’s future financial security, paying taxes at death and creating a charitable legacy, nothing is more efficient or effective than life insurance.

Please feel free to share this article with anyone you think would find it of interest.

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Protecting Your Family

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Let’s face it, raising a family today can be financially challenging. The cost of living continues to increase, housing costs are rising along with education and extra-curricular activities for our children. It is tough to make ends meet and still have something left over at the end of each month.

Most families today require both parents to work to afford the lifestyle they enjoy. Losing one of those incomes through premature death, illness or a disability is a real risk that many families would have a difficult time facing emotionally and financially.

How do you protect your family?

  • Life insurance is designed to protect your family by providing the resource to replace income, pay off debt, and fund future education costs in the event that one of the parents dies.

  • Disability, or income replacement insurance, is designed to replace lost income if an individual is not able to work due to accident or sickness.

  • Critical Illness insurance will pay a lump sum benefit in the event of a diagnosis of many major illnesses.

If you and your spouse work for a company that provides employee benefits, you may already be insured for both life and disability insurance and in some cases critical illness. Be aware that for the most part, employee benefit programs provide only a minimum amount of life insurance, usually based on one or two years of income. If long term disability coverage is provided it may be enough for personal needs but that is not always the case. Each situation is different, so it’s important that you and your spouse review your respective plan information to ensure that you have sufficient coverage in place. There are options to top up your coverage either through your group insurance or individually.

How much life insurance do you need?

If you or your spouse dies, the family will require a lump sum of capital to replace earned income. You should aim to have enough cash for the following needs:

  • insurance to pay off any outstanding debts and mortgages

  • enough income from the invested capital to replace the lost income

  • an amount to cover future education costs

Think life insurance premiums are too expensive?

Term insurance is an affordable solution for a growing family with a tight budget. A 35-year-old non-smoking male can purchase $1,000,000 of ten-year renewable term insurance for less than $40.00 per month. A non-smoking female of the same age would pay less than $30.00 per month for the same coverage. A relatively small cost to protect a family for a total of $2,000,000 of tax free benefit in the event of an untimely death.

Let’s have a discussion about how we can build a program of protection specifically designed for your needs and circumstances. Knowing what the needs are and what protection is in place goes a long way to providing peace of mind.

Copyright © 2023 FSB Content Marketing Inc – All Rights Reserved

Thinking of Cancelling Your Life Insurance?

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Have you found yourself wondering if you really need that life insurance policy you pay for every month? You are not alone.

As time goes on we often forget the reasons behind purchasing the amount and type of coverage we did. For this reason, it is advisable to have regular reviews to make sure you are adequately protected.

Perhaps you are having trouble making ends meet and are looking to trim expenses. Maybe you simply don’t think you need it because the kids are getting older and your obligations to them have diminished. Some may feel that they have enough assets accumulated that insurance is no longer necessary and even a waste of money. Before you make the decision to cancel your life insurance policy, consider these compelling reasons to keep it.

Can no longer afford the premiums?

The most common reason people cancel their insurance is affordability. In times of financial stress, many people start eliminating unnecessary expenses. Consider this – if you think you are having trouble making the life insurance payments each month now, think how difficult it will be on your family if you were to die prematurely, without it.

Will your family be able to pay the necessary living expenses such as; housing, food, transportation and education without your salary?

In times of financial instability, make insurance the last thing to go, not the first. Think of switching to a lower cost plan such as term insurance to get you over the hump. You have to qualify medically to make this change but if you find yourself uninsurable, this is definitely not the time to consider getting rid of it.

So when it comes to trimming expenses, perhaps get another year out of your cell phone, skip dinner out once a month or even take the drastic step of skipping your morning Starbucks. You will sleep better at night knowing your family is protected.

Don’t feel you still have a need?

Are there any lingering debts, unpaid taxes, mortgages or outstanding loans that should be paid off should you die prematurely? The last thing you would probably want to do is to leave your family the financial burden of your unpaid debts.

Or perhaps, your parents are still living and are somewhat dependent on you for financial support. Who would be responsible for them should you die and would there be enough resources?

Your children may have left home to start their lives but the unforeseen does happen and they may return as members of the boomerang generation. Should that happen, and you find yourself with financially dependent children living at home once again, you may want to consider keeping or reducing the insurance to an amount that matches your new requirements.

Will your estate require liquidity when you die?

Even the wealthy may have a need for liquidity in their estate. Often, there may be taxes arising from capital gains, recaptured depreciation, administrative fees and last expenses. Assets may need to be liquidated in order to pay some of these costs but that may take time, or it may not be the right time to sell those assets. Life insurance is the most cost effective way to provide this needed liquidity allowing families to make decisions to sell assets if and when the time is right

Do you want to leave a legacy?

Life insurance has long been a method for charitable minded individuals to leave a legacy to a charity or institution of their choice. Not only does this benefit the recipient but it provides a tax deduction in the amount of the gift to benefit the estate.

What about the adult children?

There is no doubt about it, the next generation are having a lot harder time financially today than at any other time. Rising house prices and education costs not to mention today’s cost of living make it necessary for adult children to depend more on their parents than previous generations.

If you are not in a position to leave a large inheritance to your children, life insurance can certainly be the answer. While continuing to pay the premiums may not be life changing for you, the insurance proceeds when received may certainly be life changing for them. This generosity will likely help your grandchildren be raised and educated at a higher standard than their own parents could reasonably afford.

If you can’t afford the policy yourself as you head into retirement, perhaps your children would be in a position to take over the premiums. It’s important to include your adult children in these discussions as you enter your retirement years.

What about survivor benefits in retirement?

If you and your spouse are soon to retire or have retired already, you understand the risks in outliving your income. Backing up your retirement nest egg with life insurance to protect a surviving spouse is one way to manage risk in retirement when safe investments are yielding lower returns.

Do you have the right type of Life Insurance?

If your renewable term insurance coverage is up for renewal, the substantial premium increase may be causing you to rethink the need for insurance. Renewable term insurance does renew at increasingly higher premiums and will ultimately expire at age 80 or 85. It may be time to consider changing or converting some of your life coverage to a permanent form of insurance that has a level premium for life.

As you can see there are many reasons to keep your insurance for your lifetime. Let’s have a chat to determine if you have the coverage that makes sense for your family’s needs or if some adjustments to amounts or insurance plan are necessary at this time.

As always, please feel free to share this information with anyone you think will benefit from it.

Can Probate be Avoided?

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Executors often find that the probate process can be both time-consuming and expensive. Planning strategies exist that may eliminate or reduce the requirement of having assets probated.

What is probate?

Probate is a legal procedure that validates a deceased’s will and confirms the executor’s authority to carry out the testator’s wishes. This provides assurance to third parties such as financial institutions and land registry offices that the executor has the power to deal with assets according to the will.

Are all wills subject to probate?

There is no requirement that every will must be probated. Proper planning can eliminate the need for probate and also, the type of asset involved will generally dictate whether or not probate is required.

What is the cost of probate?

  • This will depend on the province. At the low end, Alberta has a flat maximum fee of $400, while at the upper end Ontario has a levy of $15 per thousand on estates valued in excess of $50,000. British Columbia has fees of $14 per thousand (estates over $50,000) plus a filing fee;

  • Property which is owned in another province may attract fees based on that province’s fee schedule.

What are advantages to probate?

  • When Letters of Probate are obtained, financial institutions, transfer agents, land registry offices and other third parties can safely transfer the assets to the intended recipients;

  • The time frame for any court challenges to the will or estate is usually measured from when the probate was granted. This limits the period of when legal action might be taken.

What are the disadvantages to probate?

  • The process can be time consuming and complex;

  • Depending on the jurisdiction the cost of probate along with the legal fees can be expensive;

  • The process is open to public scrutiny so information about the estate distribution is made public.

7 Tips to avoid probate

There are a number of strategies to, if not avoid probate entirely, reduce the value of the assets that would otherwise be exposed to probate.

  • Make sure you have a will – Probate fees will be applied automatically if you die intestate (without a will);

  • Gifting prior to death – this can reduce the value of the estate, so it has to be done with care. It is important that all control over the gift must be relinquished. Be careful as there may be income tax considerations, (capital gains etc.), as well as possible property transfer taxes;

  • Use named beneficiaries whenever possible – moving assets to vehicles such as life insurance, annuities, and segregated funds is a great way to avoid probate. The bonus here is that it also allows the proceeds to be paid quickly and directly to the beneficiary. This also applies to registered investments such as RRSP’s, RRIF’s, TFSA’s and pensions;

    To avoid the unintended future inclusion of these assets in your estate if the named beneficiary dies, you should consider naming a successor (contingent) beneficiary;

    Named beneficiaries also provide a confidential transfer. The exception to this is in Saskatchewan where probate rules dictate that beneficiaries to insurance products be listed even though the proceeds are not subject to probate;

  • Use of Joint Tenancy – Holding assets in joint tenancy with a spouse, child or other family member will avoid probate as the asset passes automatically upon death to the other individual. Using joint tenancy to avoid probate fees should involve careful consideration as there will be a loss of control once it is jointly held and the asset will be exposed to the joint tenant’s creditors;

  • Use of Trusts – Transferring assets to a trust will remove the asset from the estate. The use of an alter-ego or joint spousal trust can be very effective for this purpose. Be careful of appreciable assets that may attract a taxable disposition upon transfer;

  • Transferring assets to a corporation – Except for outstanding mortgages on real estate which are deductible, generally probate fees are charged against the gross value of an estate asset. If an estate asset was purchased with borrowed money, it may be beneficial to transfer that asset to a limited company. This will reduce the value of the estate and the company share value will be the asset less the debt used to acquire it;

  • Multiple Wills – Not all assets are subject to probate. It is becoming popular to have two wills – one for those assets that are probatable and one for those that are not. For example, someone who owns private company shares may wish to use a second will to transfer those assets as private company shares are not subject to probate. If assets are held in another province with lower probate fees there may be an advantage to have a separate will dealing with those assets;

    The strategy of multiple wills is not available in all provinces and the use of multiple wills may create problems with the new Graduated Rate Estate tax with respect to testamentary trusts.

Please note that legislation governing probate and the fees that are levied vary by province so not all the ideas presented here will apply to every province. This article does not apply to the province of Quebec. Careful planning is advisable with all estate planning considerations and it is important to seek professional advice when considering these strategies.

We are here to answer any questions you may have on this complicated issue. As always, please feel free to share this article with anyone you think may find it of interest.

Copyright @ 2018 FSB – All Rights Reserved

The Case for Life Insurance

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When it comes to most forms of insurance, many people understand the importance of having coverage. Whether it’s your car, your home, or other valuable possessions, having insurance means that you’re financially protected should disaster strike. One of the first things you do when you buy a new car is to make sure it is protected before you drive it off the lot. Why? Because if you are involved in an accident chances are good you would suffer financially.

But, what about life insurance?

Although this form of protection works the same way as all other types of insurance, many are reluctant to open the conversation. Perhaps one reason is that life insurance involves the planning for the worst-case scenario – your death. The truth remains however, that if someone, your family or your business for example, would suffer a financial loss due to your death, life insurance is the answer. In fact, life insurance is one of the smartest ways to provide for both yourself and your loved ones.

For today, take stock of your current situation and consider these important reasons why life insurance is needed:

Protect your future insurability

Even if you are just starting out, perhaps single, with no immediate dependents, life insurance should still be considered. If your future includes having a family and all the obligations that go with that then your continuing insurability is important. Selecting an insurance plan now that guarantees your ability to purchase more coverage in the future regardless of your insurability will go a long way in protecting your future family. For young people, the cost of life insurance is minimal and could also provide a long-term saving plan growing tax-free that could be utilized later.

Insure your debts

Unfortunately, debt is a natural part of modern life for most Canadians. The Bank of Canada reports that for every $1 of income earned by Canadians, $1.70 is owed. So, chances are good that you have significant debt, whether it’s tied to credit cards, a car payment, or a mortgage. Ideally, you’ll be able to pay off these debts long before you die. However, should the worst happen, much of that debt will pass to your loved ones.

If you don’t want to burden your family with debt, having a life insurance policy is a wise choice. Not only can the death benefit cover any debt you already owe, but it can help alleviate additional costs, such as funeral expenses.

Provide for your family

If you are married and/or have children, then you owe it to your family to have life insurance. This is especially true if you are the primary breadwinner in the household. Although most people don’t want to think about what may happen if they pass on at a relatively young age, the fact is that you need to make sure that your family is still looked after financially if that does occur. A life insurance policy can offer peace of mind, knowing that your spouse and children will be provided for no matter what.

Benefit from the tax advantages

If you want a more pragmatic reason for getting life insurance, what about the fact that the death benefit is tax-free? This fact is the reason why life insurance is used to provide estate liquidity in paying taxes that become payable as a consequence of death. In addition, there are several ways that you can make your policy a haven for any funds that you don’t want exposed to income tax.

If you invest in permanent, cash value life insurance such as Universal Life or Participating Whole Life, the investment growth in the policy is tax-free should you die. The cash value may also be accessed while you are living.

Transfer assets to children and grandchildren

Establishing cash value policies for your children and grandchildren is a recognized method of both guaranteeing their insurance future while you control the investment portion which is growing tax-free on their behalf. When the time is right for you to transfer the policy to them, the change of ownership occurs free of income tax. This is truly a tax-free intergenerational wealth transfer.

Save for retirement

Although life insurance is typically paid out when you die, there are options to take advantage of the money in your policy while you’re still alive. If you have exhausted other retirement vehicles (e.g. RSP’s, TFSA’s), investing in a Universal Life or Participating Whole Life policy is a method to augment your retirement savings. Universal Life policies will perform based on the equity or other asset class investment options you select. Participating Whole Life policies provide stable, increasing returns which are favourable compared to the risk.

Using cash value life insurance for building wealth to be accessed in the future, is a strategy consistent with proper diversification of assets. The fact that the investment growth in a life insurance policy is tax-advantaged is a definite bonus.

To protect your business

If you own or operate a business, you most likely are aware of the corporate need for life insurance. All significant corporate debt should be insured. In fact, many lenders will insist upon it. Just like all machinery and fixed assets of a business are insured, so should the key people who contribute to the profits be life insured as well. If the company or partnership has a Shareholders or Partnership Agreement, they should be funded with life insurance to provide for the transfer of shares or partnership interest from the beneficiaries of the deceased to the firm.

Using cash value life insurance in a private corporation avoids the punitive tax levied against any passive investments in the corporation which, depending on the province, could be higher than 50%. Tax-free benefits can be paid out of the corporation upon the death of the insured for the benefit of the surviving shareholders or family.

Remember that in addition to you and your family, there may be employees who are dependent on the continued success of your company for their livelihood. Life insurance owned by the business goes a long way to guarantee this.

To equalize your estate

If your estate includes shares in a business that you may have designated one of your children to inherit in lieu of another child, consider equalizing the bequests by life insurance. Another example of where life insurance could be used for estate equalization is leaving your primary residence or other real estate (such as a cottage) to a specific child instead of one or more of his or her siblings. If the other assets being left are not enough to compensate, life insurance should be considered.

To donate to charity

You can provide significantly for your favourite charity using life insurance. Whether it be by taking out a policy to benefit the charity, by transferring an existing policy you no longer need to a charity, or by just naming the charity as a beneficiary to a life insurance policy prior to your death, you or your estate will benefit from significant tax credits. Your legacy will be remembered by the fact that your generous act contributed to the charity’s humanitarian endeavors.

Consider how life insurance can fit into your financial plan

Even though some people have a reluctance to think about life insurance, no matter how you look at it, life insurance is a necessary part of modern life. Without it, you could be condemning your family to financial instability. Whether it’s debt, last expenses, guaranteeing your children’s education, providing for income for your family, protecting your business, or tax and estate planning, life insurance provides tax-free dollars when it will be needed the most. You buy life insurance, not for what it is, but what it does.

Copyright @ 2023 FSB Content Marketing – All Rights Reserved

The Best Way to Insure Your Mortgage

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If you have a mortgage, it makes good sense to insure it. Owning a debt-free home is an objective of any sound financial plan. In addition, making sure your mortgage is paid off in the event of your death will benefit your family greatly.

The question is, should you purchase this coverage through your lending institution or from a life insurance company? A good rule of thumb to follow when searching for advice? Ask an expert!

So, while it might be convenient when completing the paper work for your new mortgage to just sign one more form, be aware that it might be a costly decision.

8 reasons to purchase your mortgage coverage from a life insurance advisor

Cost

Term life insurance available from a competitive life insurance company is usually cheaper than mortgage life insurance provided through the lender. This is especially true if you qualify for non-smoker rates.

Availability

If you have health issues, the lender’s mortgage insurance may not be available to you. This may not be the case with term life insurance, where competitive underwriting and substandard insurance are more readily attainable.

Declining coverage

Be aware that the death benefit of creditor/mortgage insurance declines as the mortgage is paid down. Meanwhile, the premium paid or cost of the coverage remains the same.

With term life insurance, the death benefit does not decline. You decide how much coverage you want to have. This gives you the flexibility to reduce the amount of coverage and premium when the time is right for you. Or keep it should another need arise or in the event you become uninsurable in the future.

Portability

Term Life insurance is not tied to the mortgage giving you flexibility to shift it from one property to the next without having to requalify and possibly pay higher rates.

Flexibility

Unlike creditor/mortgage insurance, term life insurance can be for a higher amount than just the mortgage balance, so you can protect family income needs and other obligations but pay only one cost-effective premium.

When you pay off your mortgage, you will no longer be protected by creditor/mortgage insurance, but term life insurance may continue. Also, unlike mortgage insurance, you are able to convert your term life insurance into permanent coverage without a medical.

The beneficiary controls the death benefit

With creditor/mortgage insurance, there is no choice in what happens to the money when you die. The proceeds simply retire the balance owing on your mortgage, and the policy cancels.

With term life insurance, your beneficiary decides how to use the insurance proceeds. For example, if the mortgage carries a very low-interest rate compared to available fixed-income yields, it might be preferable to invest the insurance proceeds rather than immediately pay off the mortgage.

Can your claim be denied?

Creditor/mortgage insurance coverage is often reviewed when a death claim is submitted. Creditor/mortgage insurance allows for the denial of the claim in certain situations even after the coverage has been in effect beyond that 2-year period.

Term life insurance is incontestable after two years except in the event of fraud.

Advice

Your bank or mortgage broker can advise you on the best arrangement to fund your mortgage but advice on the most appropriate way to arrange your life insurance is best obtained from a qualified insurance advisor who can implement your life insurance coverage according to your overall requirements.

Your mortgage will probably represent the single largest debt (and asset) you will acquire. Making sure your mortgage doesn’t outlive you is the most prudent thing you can do for your family.

Connect with me if you think it’s time to review your current insurance protection. As always, please feel free to share this article with anyone you think would find it of interest.

Copyright © 2023 FSB Content Marketing – All Rights Reserved

Whole Life Insurance – A Whole New Asset Class

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The recent developments in investment markets and the volatile performance that has resulted have brought about a new appeal to an old workhorse. For investors looking for a diversification in their investment portfolio and a more tax-efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.

Why is Whole Life Insurance a good investment?

  • The tax-advantaged steady growth, combined with significant estate benefits, are the primary reasons why Participating Whole Life is now being thought of as a new asset class.

  • Unlike other accumulation policies such as most Universal Life policies, mutual funds and other equity investments, the cash and dividend value of a Whole Life policy cannot decrease as long as premium payments are made.

Who should consider Whole Life Insurance as an investment alternative?

  • Anyone looking for stable returns on their investment portfolio.

  • For those that have corporations and are accumulating surplus, the use of Whole Life in the corporation not only provides the same stable, tax-deferred returns but also provides opportunities for Capital Dividend Account planning.

What Is Whole Life Insurance?

  • It is permanent life insurance protection – meaning it won’t expire before you do!

  • It has level guaranteed premiums for the life of the policy. (Shorter premium paying periods are often available.)

  • It has tax-advantaged cash value growth.

  • It can pay annual dividends (participating whole life).

  • Dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax-advantaged growth is “paid-up additions.”

  • The assets of the participating pool are professionally managed and largely in fixed-income investments. Management fees are extremely low (some as low as 0.07% management fee), and the funds have very little volatility.

  • This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred. At death, it is paid to the beneficiary tax-free.

Can I access the cash value of the policy?

  • During the lifetime of the insured, the cash values can be accessed by way of partial or total surrender or policy loan.

  • Income tax may be payable on withdrawals. However, one alternative to avoid paying income tax is to use the policy as collateral and borrow from a third-party lender. And if structured properly, the interest on the loan may be tax-deductible.

Favourably compares to a long term, high yield bond

  • Today most portfolio managers recommend that a prudent investor have a diversified portfolio with a significant portion in fixed-income investments, such as bonds, term deposits, etc.

  • Many investment managers suggest one-third to 40% of an investment portfolio be in these types of investments for balanced growth.

Including participating whole life in your portfolio can produce some significant results and reduce overall volatility.

Whether investing as an individual or via a corporation, the significant results that can be achieved by using Participating Whole Life are worth investigating.

Connect with me if you think you would benefit from this strategy, and as always, please feel free to share this article with anyone you think would find it of interest.

Copyright @ 2023 FSB Content Marketing – All Rights Reserved

Estate Equalization for Family Business Owners

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In the planning of their estates, most parents might prefer to leave their assets in equal shares to their children. Often, the only complication in this scenario could be how to divide up the family home.

For owners of a family business, however, the concept of treating the children equally can often be much more problematic. This can especially be the case where one or more children are active in the business while others are not.

For many business owners, most of their wealth is linked to their companies and often there are not sufficient assets left over to equalize the estate. Conflicts often arise from estate plans where the corporate shares are split evenly amongst all the children including those who are not involved and unfamiliar with the business. Burdening children actively involved in the company with a sibling shareholder partner who has no experience or interest in the company can create numerous problems – corporately, financially, and emotionally, which could possibly lead to disputes within the family.

Often, a solution could be leaving the non-business child other assets to compensate. This could result in taxes that might have to be paid (such as in the case of RRSPs, cottages, stocks and other equity holdings) reducing the net value received by that heir. In a perfect world, having the exact amount of cash necessary to equalize the estate would be the ideal situation but often there is not enough liquid cash in an estate to cover taxes and proper equalization of assets, especially where those assets are private company shares.

In this situation, life insurance is often recommended to resolve this problem. Life insurance is a cost-effective instrument that creates tax-free cash and is a widely used vehicle for reducing the total cost of settling an estate.

In Canada, taxes arising when we die can often be deferred by leaving assets to our spouse in our will. Since the taxes become payable when our spouse dies or disposes of the assets, joint last-to-die life insurance is a preferred product in estate planning. By adding an additional amount of death benefit to the joint last-to-die policy used to pay taxes at death, estate equalization can be achieved effectively on a tax-free basis.

Here are reasons why life insurance is extremely beneficial in estate equalization for family businesses:

  • If the first generation did an estate freeze, then the future growth of the company shares passes to the next generation involved in the business. The result is that the non-business children will not participate in that growth. Life insurance could be used to create fair, if not equal treatment, for the children not involved in the business;

  • Life insurance provides a guaranteed result and since proceeds flow via a beneficiary designation the arrangement can be completely confidential;

  • Life insurance proceeds payable to a named individual beneficiary do not result in any probate fees or administrative costs. In addition, the proceeds may be exempt from any creditors or litigant claims;

  • With specific planning, the life insurance designated for estate equalization can be owned and paid for by the corporation;

  • Life insurance proceeds paid to the non-business beneficiary can be received by that person promptly without any delay related to required business filings and elections.

As you can see, for the family business owner who is concerned about providing fair and/or equal treatment in estate distribution to any children not involved in the business, life insurance provides tremendous benefits and advantages.

As always, please feel free to share this article with anyone you think would find it of interest.

Is the Life Insurance Industry in Canada Stable?

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Given the problems encountered by some large financial institutions in the United States, how concerned should we be about the state of the life insurance industry in Canada?

Insurance is one of the most closely regulated industries in Canada. Unlike the United States, in Canada, there is a government organization that supervises all of the federally incorporated and foreign insurers to ensure that these companies operate in a prudent manner. This organization is the Office of the Superintendent of Financial Institutions (OSFI). The major life insurance companies are federally regulated by OSFI (For those companies that are provincially chartered their oversight is provided by the province in which they do business).

Life Insurance companies are decreasing in number

It is a fact that over the past decade the number of life insurance companies operating in Canada has decreased dramatically. This decrease is mainly due to the mergers and acquisitions of the existing companies. For example, those individuals who maintained policies issued by Maritime Life, Commercial Union, North American Life, or Aetna Life, now find themselves insured by Manulife Financial.

The good news? No insured individual has ever lost any contractual benefits due to their insurance company being acquired by another.

Adequate reserves are the key to stability

  • OSFI oversees the stability of life insurance companies by enforcing the requirement that adequate reserves be maintained in order for the companies to meet their future contractual obligations.

  • Reserves are known as “actuarial liabilities” and each company is required to put money aside and to invest that money prudently so that they may pay future benefits on policies that they have sold in the past.

  • These reserves are generated from premiums paid to the insurer and the investment income earned on those premiums. Under the Insurance Companies Act, insurers are required to invest in a “reasonable and prudent manner in order to avoid undue risk of loss.”

  • Also, OSFI requires an amount over and above these reserves, known as the Minimum Continuing Capital and Surplus Requirement (MCCSR) to be maintained by the insurer. OSFI expects that the life insurers maintain an amount equal to 150% of the MCCSR requirement. The MCCSR ratio maintained by member companies of the Canadian Health and Life insurance Association has consistently been significantly higher than the minimum requirement.

More protection for Canadian policyholders

As additional protection afforded a life or health insurance policyholder there are benefits provided to all policyholders through a not-for-profit organization known as Assuris. This organization in a manner similar to the Canadian Deposit Insurance Corporation protects policyholders should their insurance company fail. Assuris guarantees the following:

  • Death benefits – Up to $200,000 or 85% of the promised face value, whichever is higher;

  • Critical Illness – Up to $200,000 or 85% of the promised benefit, whichever is higher;

  • Health expenses (including travel insurance) – $ 60,000 or 85% of the promised benefit, whichever is higher;

  • Monthly income (disability, annuity etc). – $2,000 or up to 85% of the promised benefit whichever is higher;

  • Insurance companies TFSA’s – Up to $100,000;

  • Segregated Funds – $60,000 or up to 85% of the promised guaranteed amount whichever is higher.

So how strong is the Canadian Life Insurance industry?

  • The combination of strong effective oversight and regulation of prudently invested actuarial liabilities have resulted in a robust financial industry enjoying assets of more than $514 billion in Canada, making the industry one of the largest investors in Canada.

  • 10% of all Canadian and Provincial Government bonds and 15% of all Canadian corporate bonds are held by the insurance industry.

  • Canadian insurers also hold $650 billion in assets abroad. The industry in Canada employs over 150,000 people.

Even though the life insurance industry in Canada has gone through significant changes in the past decade or two, the industry remains stable and capable of meeting its contractual obligations in the future.

Don’t Wait Too Long to Convert Your Term Insurance

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If you require permanent life insurance coverage for family, estate planning, business, or tax planning purposes or you just wish to accumulate money in your life insurance program it may be time to look at a permanent, level-cost solution.

Many of us purchase large amounts of low-cost term insurance to cover our needs while we are raising our families or growing our businesses. However, as the saying goes, “there is no free lunch”. Eventually, this low-cost term insurance starts to become expensive and other options should be considered.

If your health has changed and you are no longer able to qualify for a new permanent insurance policy don’t worry, your safety net is the conversion option in your existing policy.

4 reasons to convert your coverage:

  • A change in your health – you are no longer able to qualify for life insurance or you have received a sub-standard rating.

  • A change in your residency – after you obtained your policy you relocated to another country. Most insurers in Canada will not offer new coverage if you are living abroad. Since the conversion feature in your policy is contractual converting to a permanent plan is allowed no matter where you reside.

  • A change in occupation – health is not the only reason an insurer may rate (apply substandard rates) or deny your application for new coverage. If you have changed occupations and now are employed in a more dangerous job, conversion allows you to obtain permanent coverage at standard rates.

  • Convenience – once you have decided that permanent insurance is required converting your existing term insurance is the easiest way of getting it. Usually, just your signature on a conversion form is all that is required.

When is the best time to convert?

  • Sooner rather than later – Over the past few years, insurance companies have been consistently raising their long-term insurance premiums. In this case, age is more than just a state of mind. As you age your premiums increase significantly so it is always best to convert as early as possible. And to add insult to injury, insurance age changes 6 months prior to your birthday!

  • Before your term insurance renews – If you are unable to replace your term insurance at renewal because of health, residency or occupation, your premium to renew will be substantially higher than what you are paying now. Converting to a permanent plan usually makes sense plus the converted premium is locked in and guaranteed for the rest of your life.

  • Before the Conversion Option expires – Conversion options vary but usually policies are convertible up until age 65, 70, or 75. Waiting to convert will cost you more, increasing the risk of it becoming unaffordable when you may need it most. It is important not to let your option pass without full consideration.

The Conversion Option contained in your term insurance policy is a very valuable feature that varies from company to company. It may be appropriate to schedule a review to determine if you have a permanent need for insurance.

Please call me if you think you would benefit from a review of your current insurance. As always, please feel free to share this article with anyone you think would find it of interest.