We know you care about your loved ones and having a succession plan in place is important to you; however, at this stage in your life and career, you don’t necessarily want to put money away now, knowing that you’ll never get to touch it again. It’s one of the most common concerns about buying corporate permanent life insurance–paying premiums now that will only benefit the next generation.
The Long and Short of It
There’s nothing wrong with that life insurance paradigm in theory, but what if you could ensure that the next generation benefits in the long term while you benefit now, while you’re still alive? The good news is that you can do just that! There are strategies that allow you to pay premiums and then use those funds for other purposes, like investing in your business!
How it Works
When you buy Whole or Universal Permanent Life Insurance, every deposit you put into the policy creates a “cash surrender” –a value that is available for you to withdraw at any point you’d like. When you buy a permanent policy, it has within it a cash surrender value, a value or percentage of your premium that is, in essence, an asset that you can use.
In a Nutshell: Immediate Finance Arrangements
Putting your premium in, buying the insurance, and immediately (through financing) getting your premium back is, in a nutshell, the nature of an insurance immediate finance arrangement.
Current, Future and Estate Planning Needs
So, whatever you put in, you can then take out through an immediate financing arrangement, which means that you’re basically cash neutral. To be clear, you do have to service the debt (your interest owing on the debt), but if you use the debt for your business or for investment purposes, you are generally allowed a tax deduction. What this means is that you’ve just bought very healthy insurance coverage for your current, future and estate planning needs and you pay after-tax interest for it, which is a lot less than the insurance premiums that you might think you owe.
A Two Step Process
- Obtain your corporate life insurance coverage
- Go to a Canadian bank or life insurance company for a line of credit equivalent to whatever amount you paid.
While you pay the interest on the line of credit annually, you get a deductibility for the interest if you use the proceeds for your business or investment purposes. When the bank or life insurance company lends you the money, they actually take the insurance and collateralize it–in essence, you assign your life insurance a portion of the death benefit to pay the bank off. In other words, you can pay off the bank, plus ensure that key people benefit after you’ve passed. However, because you assign the life insurance, you also get to deduct some of the premium that you pay annually–this is called the “net cost of pure insurance.” So, not only do you get to deduct the interest cost, you actually get to deduct some of your insurance premium too!
Have your Insurance Cake and Eat it Too
As you can see, an insurance immediate finance arrangement is a very tax-efficient way to acquire permanent life insurance that will benefit key people and your buy-sell needs in the future, while affording you the freedom and opportunity to invest in your business, real estate, or investment portfolio now. Indeed, through an immediate financing arrangement, you can buy whatever you want, invest, or put the money back in your business. It’s a very efficient model for a lot of shareholders and a strategy that works.
Consult a Pro
If you think that an insurance immediate finance arrangement is right for you, please ensure that you talk with a qualified professional to help you navigate this option.
Marco Faccone, CPA, CA, CFP has long specialized in the area of corporately held insurance and estate planning, advising and assisting shareholders with succession and wealth accumulation strategies. Marco has worked alongside estate lawyers and tax accountants to offer his clients a professionally tailored and value-added plan. Contact MGF Advisory for more information regarding corporately held insurance and succession planning.Tags: financing, insurance
Categorised in: insurance
This post was written by Marco Faccone