Stay up-to-date with the latest news for Alberta Wealth Management Inc., financial trends, and much more. Check back on this page often to see the most recent newsletters posted. You can find lots of information on tax strategies, accounting, credit, investment solution, and many more topics. Take a look through this season's newsletter for more information. If you have any questions, please do not hesitate to contact us.
What the Wealthy Know about Life Insurance
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:
While life insurance is most often looked upon as a vehicle to protect ones family or business, the question that springs to mind is why would 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:
Investments which are taxed at lower rates of income tax:
Investments on which income tax is deferred until the asset is disposed of or the investor dies:
Registered plans, in addition to having the growth tax-deferred also have the added advantage of the contributions being tax deductible.
Certain investment assets are totally free of income tax:
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 who may find it of interest.
Disclaimer and Limitation of Liability
You assume all responsibility and risk with respect to your use of our website, which is provided “as is” without warranties, representations or conditions of any kind, either express or implied, with regard to information accessed from or via our website, including without limitation, all content and materials, and functions and services provided on our website, all of which are provided without warranty of any kind, including but not limited to warranties concerning the availability, accuracy, completeness or usefulness of content or information, uninterrupted access, and any warranties of title, non-infringement, merchantability or fitness for a particular purpose. We do not warrant that our website or its functioning or the content and material of the services made available thereby will be timely, secure, uninterrupted or error-free, that defects will be corrected, or that our websites or the servers that make our website available are free of viruses or other harmful components.
The use of our website is at your sole risk and you assume full responsibility for any costs associated with your use of our website. We will not be liable for any damages of any kind related to the use of our website. In no event will we, or our affiliates, our or their respective content or service providers, or any of our or their respective directors, officers, agents, contractors, suppliers or employees be liable to you for any direct, indirect, special, incidental, consequential, exemplary or punitive damages, losses or causes of action, or lost revenue, lost profits, lost business or sales, or any other type of damage, whether based in contract or tort (including negligence), strict liability or otherwise, arising from your use of, or the inability to use, or the performance of, our website or the content or material or functionality through our website, even if we are advised of the possibility of such damages.