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Buy An Insurance Tax-ShelterYes, the life insurance industry is a tax haven, and will likely always enjoy that
status, because of all the special laws created, just for it. You can spend time
wondering why, or you can use their heavily favored status to your advantage!
One popular strategy is the life insurance tax-shelter. In the last 10 years
Canadians have stuffed millions and millions of dollars into these programs.
The reason is that they allow either tax-deferred or TAX-FREE treatment of your investment dollars, with no risk.
What Is An Insurance Tax-Shelter?Simply put, an insurance tax-shelter is a plan issued by a life insurance company
that allows you to deposit any amount of money and shelter all of the growth
of the investment from income tax.
How Does It Work?Revenue Canada allows insurance companies to issue these plans and maintain their tax-sheltered status as long as they satisfy certain conditions.
The insurance company must maintain a minimum amount of insurance on each
plan to keep it tax exempt. This insurance, however, can and should be low cost decreasing coverage, only enough to keep the plan tax exempt.
The amount is based on a Revenue Canada formula and each plan must meet
an annual test.
What Makes This Strategy Work?Why do these plans out perform other non-sheltered investments?
First, Your earnings build-up TAX-FREE within the plan.
And second, the annual expense charges of the plan cost less than the tax
which would have to be paid, on the investment earnings of a similar investment
such as GICs, bonds, mutual funds,etc.
Example: Assuming a 10% annual rate of return. A couple, both age 45, in a 50% tax bracket would have to pay a total of $43,244 of income tax on the earnings of an investment of $10,000 per year for 10 years.
By contrast, if they invested $10,000 per year for 10 years into a tax- sheltered insurance account, earning the same rate of return, they would pay only $10,701 in total expense charges (including Insurance
costs) to the insurance company over the 10 years.
The plans are flexible; allowing you to vary the amount of your deposits, and
choose the investment type of the plan from GICs to investment fund indexes.
How Do You Get Your Money Out?
When it comes time to take income, you can take income from your plan one of three ways. Here are two income strategies for Canadian residents (for tax purposes) and a strategy for non-residents:
Make direct withdrawals from the tax-deferred account and receive part of your income TAX-FREE.
Under a special arrangement, you can lever the account with a bank.
The bank will take your plan as security on a loan. You can then make a single loan or a series of loans as income. The bank will capitalize the interest, so you never have to make payments. The loan is repaid from the TAX-FREE insurance pay-out, when you die. The insurance is then paid out TAX-FREE to your beneficiaries. Since a loan is not taxable, you can
Earn All Of Your Income TAX-FREE!If you’re a non-resident when you take income from the plan you can simply make a complete withdrawal of all funds in your tax-sheltered account. These
plans are currently exempt from withholding tax. Therefore, 100% of the money
would be given to you directly from the life insurance company within days. By comparison, if you tried this with your RRSP, your financial institution would be forced to withhold 25% and send it to Revenue Canada.
BONUS- If you die before you can spend or withdraw all of the money in your
plan, the balance of the tax-sheltered account plus the insurance amount are paid TAX-FREE to your beneficiaries. And, insurance pay-outs avoid probate.
Look at it this way--20 years from now, you’re wither dead or alive. If you’re alive, no other plan will pay you more after tax income. And if you’re dead, no other plan will pay more money to your family--and do it TAX-FREE!
Who Else Says So?
Accountants are recommending these plans to their clients. This is what they are saying:
"Tax-sheltered insurance accounts are an excellent way of building assets for retirement. At retirement, borrowing tax-free income, is a strategy that will maximize spendable income while avoiding benefit clawbacks and reducing or eliminating tax payable."
Terry Laughren, Chartered Accountant
Laughren & Associates, Saskatoon.
"Individuals looking for tax shelters or deferral mechanisms may wish to explore the benefits that may be derived form an ‘exempt’ life insurance policy. Such policies may be a powerful tool in the tax planning arsenal, particularly when many other tax shelters appear to have been curtailed."
"The returns from virtually tax-free accumulation after the deduction of the
insurance costs, compared to taxable accumulations, can, over a long
period, can be quite remarkable."
Excerpt from: Tax Planning Checklist
Coopers & Lybrand
Chartered Accountants, Canada
"The life insurance industry has developed attractive products that allow you to build up cash in a tax-sheltered environment. An exempt life insurance contract can help you meet two planning objectives: having insurance coverage, and providing retirement income from tax-sheltered growth. The investment fund can be borrowed against or paid out in later years."
Excerpt from: Personal Tax Planning Guide
KPMG Peat Marwick Thorne
Chartered Accountants, Canada
These plans are recommend to a wide age range of clients. From young people in their early 20's, starting their first investment plan, to seniors in their late 60's.
It’s hard to find a situation where these tax-sheltered insurance accounts aren’t
superior to other types of comparable investments.
However, not all products offered by insurance companies are the same, and you
should make sure the person you are dealing with works with sound institutions. Assuming that is the case, you will be amazed at how much extra money you could end up with, down he road, and not by paying taxes as you go!
Life insurance tax-shelter investments have very unique positions in the tax laws, and should be investigated at every opportunity.
from The 10 Secrets Revenue Canada Doesn’t Want You To Know About, by David M. Voth
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"A Strategy for Tax Deferral and Investment Diversification"
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Tax Sheltering (The Financial Post )
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