Tax Sheltered Investments With Life Insurance

by Tax Guy - Burlington Accountant on May 29, 2009 Print This Post Print This Post

Life insurance products are complex animals used to account for certain risks or to provide funds in case a specific event occurs. Certain insurance policies allow you to put a portion of your premiums into an investment pool with the remaining portion covering your actual insurance.

Tax Deferred Investments

The investment portion of the insurance policy will grow tax-free and upon your death, will be paid out to your beneficiaries tax free along with the value of your insurance policy. For example, assume you purchase $100,000 of Life insurance a portion of the funds is placed into an investment pool. If after, 30 years, this pool grows to $300,000 your beneficiaries will receive the original $100,000 and the $300,000 tax-free.

Uses For Life Insurance

Many of us may think insurance is only used to provide funds for their family in the event of their death. Everyone’s situation is different, but insurance can be used to cover a variety of other situations.

Tax Liability At Death

If you have accumulated a large RRSP or RIIF or have large business investments that you with to pass to your heirs, insurance can be used to pay your tax bill at death. Assume you have a rental property that you wish to pass to your heirs. Without Life insurance to cover the tax bill, the property (or other assets) may need to be sold to pay the tax bill.

Key Person or Buy-Sell

If you are a business owner, Life insurance can be used to provide funds to the business if you pass away. These funds could be used to hire a replacement manager (if you were the key owner) or to buy or redeem your shares at death and thereby preserve the business.

Accessing The Investment Pool

What if you need the funds invested inside the insurance contract? You can access the funds by making a withdrawal during your lifetime and there would be tax consequence for doing so. Another option is to borrow against the value of the policy. When you die, the insurance policy pays out the loan.

Life insurance is an often over-looked strategy that provides alterative strategies to managing your wealth.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

Print This Post Print This Post

Comments on this entry are closed.

Previous post:

Next post: