Budget 2018 and Life Insurance Strategies [recorded live stream]


Okay Welcome to our webinar

The topic is the federal budget and life insurance strategies As a reminder, the content here is simplified for clarity We can provide a lot more detail afterwards Here we want to give you an overview On your screen – if you're at your desktop – you'll see that there is a box where you can type information

So you can type in things here: questions, comments etc and then you click on this Send arrow here and then the message will appear here If you're using a different device such as a tablet or your smartphone, then the screen would be set up differently but you'd have the very same capabilities The mortality curve is really the key to the tax advantages that life insurance provides If you look at this, you can see that if you pay for your insurance for one year at a time, the cost will get more and more expensive If you have a million dollars of insurance, you get to the point where you're spending $200,000 for a year of coverage and then four hundred thousand, eight hundred thousand

Basically insurance becomes less and less affordable and that doesn't make a lot of sense Tthe only way to deal with this is with another compound growth curve and that is compound interest What you do is you put in extra money in the early years when the insurance charges are low and then that grows to provide enough to cover the charges later on Insurance as a result has a number of unique tax advantages First of all, the death benefit is tax-free

This is very much like your principal residence And you have an envelope for the tax- sheltered growth because that's the only way to cover the charges in later years This is something like your RRSP Now you may find that when you reach retirement you no longer need the insurance You could take withdrawals and as with your RRSP there would be tax

And with an RRSP you're forced to take withdrawals With life insurance, you or not But with life insurance you can do something else which would be even better What you can do is you can access tax-free income And the way this works is you use the equity inside your insurance policy as collateral for loans

Now you have something which has the effect of a Tax-Free Savings Account And finally, if you want, you can use the equity inside your policy as collateral for investment loans and now you're able to get tax deductions You have something which is like a Home Equity Line Of Credit So life insurance is able to combine these unique advantages but there are limitations There are three key rules that limit the tax benefits

First of all, there's a limit on how much money can go inside the policy That's called the Maximum Tax Actuarial Reserve which governs that Then there's also a limit on investment growth called the "8% Rule" The idea is to have relatively stable returns inside insurance rather than fluctuating returns that that go up really high and then really low And finally there is a restriction on the timing of deposits

The "250% Rule" essentially says that you want to make deposits to your life insurance in the first seven years Those are the rules that apply and life insurance products are tax optimized When I was developing products, we would always look at competitiveness (of course) but we would also make sure that the products worked in the tax regime This wasn't that difficult because we had the same tax rules for life insurance from 1982 until the end of 2016 That was very good in that sense [that] we were able to focus on improving competitiveness and features without having to worry so much about the tax implications

But on New Year's Day 2017, a new set of rules came into effect These were not quite as good as what we had before There was less deposit room or there is less deposit room now There is a smaller Capital Dividend Account credit, which is something that matters for life insurance policies that are owned corporately Finally, there are smaller tax deductions on premiums

But that's what happened, so what can you do? To help people understand these things, we created various content including a range of YouTube videos The good news is that the old rules continue to apply to policies issued before the new rules came into effect The not-so-good news – and the challenge – is adapting to these new tax rules The challenge is that what worked before does not necessarily work now What this meant is that we had to carefully re-examine everything that we were doing

Were we using the right tools? Were using them in the right way? The [2017] federal budget came out last year – about this time last year – and for whatever reason they used a YouTube video So we're using YouTube also, though we may not get as many views as the federal government did As we expected, the budget did not say anything about life insurance – and that made sense because the changes that took effect on January 1st of 2017 took years to develop and years to implement CALU did a special report and confirmed that there was no impact on the taxation of life insurance policyholders That meant we could get back to our work and could continue to re-examine life insurance products and the tax strategies

We found that if you wanted to go from Point A to Point B, then sometimes the path was a little bit different or the method of transportation was different As we thought things figured out, we started doing public speaking We spoke to various groups like Chartered Accountants And we spoke to financial planners, investment advisors, lawyers etc A lot of these discussions were private

So we don't have content that we can share regarding them We also got interviewed in various publications and talked about how to take advantage of the new rules for life insurance When companies introduce new products, we did quick overviews based on the marketing pitches that we got about how amazing the products were And then we did our own detailed analyses afterwards to see how the products really worked When products were being changed in terms of prices etc, we gave timely warnings so that there would be opportunities to lock in what was already there

Everything we did took more time but that was okay It's important to invest in your practice and we were getting to the point of stability where we knew how things worked under the new regime The products were getting stabilized etc It looked like it was time for a vacation but on July 18th – when everyone should have been relaxing – the government came out with a set of proposals which they said would improve fairness in the tax system The way they defined "fairness" is not necessarily the way that Canadians defined "fairness"

There is no mention of life insurance in these proposals and that was not unexpected because life insurance was already changed so much as of January 2017 But clients were concerned about what was taking place and the big issue was the taxation of corporate passive investment income As we know, life insurance is a vehicle that is used to shelter investment income, especially in corporations There was no reason to think that life insurance would not operate the way that did before but there were concerns We belonged to – and still belong to – various organizations that stepped forward to let the government know that their proposals had consequences that Canadians were not willing to accept

We also engaged in our own campaigns We had one to defend doctors That was a group that was getting stigmatized by the changes We also had a letter-writing campaign The organizations we belonged to were saying that since the government was not listening much, the best course of action was to talk to local MPs and have them talk to the government on our behalf

Following that was a lot of waiting to see what the government would decide to do Finally, last week we got a new budget and as expected life insurance was spared once again CALU did another Special Report They noted that there were no changes related to: exempt life insurance policies; no changes to the Capital Dividend Account which is important in corporations; no changes to tax rates for individuals or corporations; and there was no change to capital gains either There was concern that the portion of capital gains that gets taxed would increase from 50% to 67% or maybe even 75%

So all of this was good and that meant it was time to get back to life A reminder: what we're talking about here is simplified for clarity and you can share your thoughts and comments using the chat box on your screen We created lots of new content to help people understand how life insurance works This is one of the things that Jeevan put together to help people understand With insurance, what happens is you take a deposit and you put it into the insurance policy and then charges come out

If you like, you can stop right here and you essentially have term life insurance because that's all it does If you want to go further, then you can make additional deposits and now you have growth in a tax-sheltered fund What's great about this is that the growth is compounding in a tax-sheltered vehicle That's very good Not all products have this sheltered fund and not everyone who has a sheltered fund uses it effectively

The money inside the policy can be used in different ways A classic solution – especially for business owners – is to supplement retirement income What you do here is take the cash-rich insurance policy and you assign it as collateral to a lender Then you get tax-free retirement income by taking loans There is loan interest to be paid but what's really good here is that the lenders will often say that you don't need to pay the interest on an ongoing basis

They know that the loan is secured by the cash value of an insurance insurance policy backed by a multi-billion dollar insurance company That's pretty secure So the loan interest can keep growing and growing within limits and then the tax-free death benefit can repay the loan This is a classic strategy Something else that can be done is to use insurance as an investment strategy

Here you take the cash-rich insurance policy to the lender again but instead of waiting years and years to take loan – say at retirement – you take loans right away and you invest in qualified investments Here you generate taxable traceable investment income What happens in this strategy is that you do pay the loan interest on a regular basis That means the loan interest is not growing and growing because it keeps getting repaid That's one thing that happens and then also there is deductibility on the loan interest

As you can imagine, with a strategy like this, it is essential to get guidance from your accountant to make sure that things are being done properly And for the investments, your investment advisor is really key You may also want help from your financial planner to help make sure all these things are done properly So you've got the tax deductibility on the loan interest, and in some cases you can also get tax deductions on some or all of the insurance charges This is a pretty effective approach to using insurance for people who want to invest in the kinds of vehicles that are not available inside insurance policies

Finally the tax-free death benefit repays the loan Leveraging can create very large tax deductions Because each year, your collateral is growing in value and if you borrow against that increase then the deductions keep growing and growing It's really important to get advice from your accountant and other parties to make sure that the structure is suitable You can see that there are lots of different things that insurance can do

We tend to talk about the different building blocks The way the industry normally works is they put labels on everything So they call things "Immediate Financing Arrangements" or "Corporate Insured Retirement Plans" etc – which tends to simplify But also tends to distort because the reality is that there is a lot of complexity Life insurance is at the intersection of five distinct worlds

There is the world of planning This is the place where the financial planner comes in to get the soft facts and also the hard facts There's the world of risk which is where actuaries step in to look at the probabilities of risks and the severity There's the world of taxation Where should the premiums come from? Where should they go? Are tax deductions required? If so, what is the size of deductions required? Are they needed corporately or personally? There's the world of investing

That relates to investing inside the insurance policy and – in the case of leveraging – outside Finally, there's the world of law because you are buying a contract and a contract has rights and obligations To make this work it's essential to have an independent team where the advisors are proactive so they bring ideas when they're fresh – as we are right now They're collaborative so they work with one another rather than in silos

And they're specialized in their own areas When it comes to corporate strategies these days, what can be done in the new environment is to improve protection Have tax deductible business expenses that provide tax-free benefits for employees One approach is to have a Wage Loss Replacement Plan — and we just went to a presentation on this earlier this week Here what you do is you have a combination of group Long Term Disability insurance and you add to that personal disability insurance

What's good about that is that the personal coverage is portable That means it can be taken with you And because you're dealing with this kind of structure where you have two or more lives, the underwriting requirements are reduced — making this easier to get Also there's health, dental and travel insurance This is also important

The options available depend on age and factors like pre-existing conditions The thing to remember is that you can only qualify for insurance before you need it — and you never know when you're going to need it Another strategy is for retirement income You can [get] it in a couple of different ways You can use pre-tax corporate dollars to generate taxable personal income

The two ways of doing this: one is using a Retirement Compensation Arrangement or RCA Or an Individual Pension Plan Those are good ways of doing it Another approach is to use insurance You take after-tax corporate dollars to create tax-free personal income income

You have a corporately-owned life insurance policy In this [structure] you may need to pay a guarantor fee because you're using a corporate asset for personal use This is – again – a place where you want guidance from your accountant to make sure this is right We have the capabilities to compare all three of these options for you Just to let you know how the environment keeps changing: we got an invitation yesterday for a webinar that Manulife Bank is doing on the very topic of personal borrowing using corporate life insurance

The issue is that unless this is done properly, the entire loan could be deemed as income to the borrower Manulife has taken some steps to help prevent this In their webinar, they'll be covering Bill C29, the whole issue of how much clients understand about these strategies, and also the very important topic of what happens when the borrower dies There's also the strategy to shelter passive investment income which we looked at earlier Here you get cash value life insurance

There are a number of questions Do you want the growth to take place early on or do you want it to be later on? Risk tolerance: are you dealing with someone who is risk averse or seeking risk Then the investment style: active or passive Based on those things we can come up with different kinds of solutions It's important to note that not everything changed

For example, critical illness insurance is the same as it used to be Disability insurance has not changed either Ditto for long-term care insurance — though there are fewer companies offering this product and there were a year ago or even a few months ago Change is relentless and it's important to keep track of what is taking place Some of the things that we are watching are: the effects of last year's ban on genetic testing

This can have an effect on prices Also there are rules around the capital that an insurance company needs to keep in place The current rules were in effect since 1992 There's a new regime taking effect this year The questions are: will this have an effect on prices, and will this have an effect on the guarantees inside products

That's what we wanted to cover in the prepared portion of the presentation Now it's time for the discussion where you can ask us questions The way you can do this is with the chat box on your screen Please let us know what you would like us to answer Jeevan will tell us what questions we've been receiving

Just what the first question is We also got some questions that people submitted earlier What are some of the other questions that we got? What are some of the main considerations when deciding if someone should leverage their cash value life insurance Okay and thanks for that question The question is what are the main considerations when deciding to leverage cash value life insurance

There are a number of them and we've actually got a whole presentation on that topic Key things: first of all you need to have a need for insurance When leveraging — because you are creating tax deductions — you need to have high enough income to use those deductions Not just today but on an ongoing basis And you do need guidance from your accountant to make sure that things are structured in a proper way

There are a few things like that And the person needs to be comfortable with the whole idea of leveraging and not everyone is If tax rules change again, will that affect any current insurance or will those be grandfathered as well? Okay That's a another great question Thanks for asking that

If the tax rules change — and luckily for insurance they don't change very often — what would happen to the policies already sold?Generally speaking, insurance policies that have already been sold are grandfathered or grandmothered or grandparented under the old rules That's because of lobbying done on behalf of the consumers — the insurance-buying public The expectation would be that the government would allow grandfathering as they just did on for policies issued before 2017 We can't guarantee this, but that is certainly what the industry does strive for Last year, when there was all this concern about what was happening with the tax rules, one of the messages was to buy insurance before the tax rules changed because that would be a way to likely grandfather the rules

We have one more Can you explain the overall benefit of purchasing life insurance and taking a loan against the cash surrender value to then purchase investments versus not using the life insurance and just investing directly Okay That's that's a great question You could invest directly

So why go through all these extra steps of using life insurance The reason is that if you need life insurance then you can't get it by investing directly Also you've got very secure collateral inside life insurance By structuring things in a proper way, you are able to get tax deductions on the loan interest and also on a portion of the premium This can have the effect of reducing the cost of insurance well below what it would be normally if someone was not using the strategy

Also when you're investing, you are able to invest in the same kinds of investments that you would have invested in before There isn't much loss in what you can do But there are some significant gains by going through these extra steps Again, we're generalizing here Each situation is unique and requires careful discussion to make sure the strategy does make sense for that particular person

Those are the the questions that we have We'll go to the wrap-up If you have other questions, you can always contact us We do want to keep things on schedule for you because we know that you are busy Closing thoughts

Protection and tax strategies still matter And that means that life insurance still matters because there are significant tax advantages available with the products What's different now is that it's ever more important to make sure there's enough knowledge when using the strategies, to be creative based on the new environment, and — in particular — to collaborate It's very important that advisors not work in silos but work together to come up with solutions that are integrated and work overall Since we are talking about insurance, while there are amazing tax advantages, it's essential to always start off with a need for the insurance itself

You can explore more by contacting us by going to our website and chatting with us We'd be glad to to help you further Thank you very much for attending this live stream — this is our very first We are now done Thanks again

[Promod and Jeevan Sharma at taxevitycom]

Source: Youtube


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