Life Insurance As An Asset Class

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cannew
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Re: Life Insurance As An Asset Class

Post by cannew » 29 Jan 2016 17:51

I always felt Term insurance was needed when I was working and something may happen. But once I retired or stopped working and our investments were in good shape I dropped all insurance. As other have said, Gift while still around and you don't need the money.
Never considered it an asset, just an expense!

Feddar
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Re: Life Insurance As An Asset Class

Post by Feddar » 29 Jan 2016 22:54

Thanks guys. I think I get it now.

He is saying I can take out money I paid on top of premiums, tax free. The rest is taxable. The problem is that as I stop paying premiums, my adjusted cost basis decreases over time because my returns are paying the premiums for me. So my tax free amount decreases over time even if I not withdraw anything.

Right?

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Re: Life Insurance As An Asset Class

Post by Feddar » 29 Jan 2016 23:01

Now, what about using the policy to secure a personal loan outside the corp? This is his main selling point. I read somewhere that the loan itself is taxable if greater than the ACB. Is this correct?

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Re: Life Insurance As An Asset Class

Post by brucecohen » 30 Jan 2016 09:47

Feddar wrote:Now, what about using the policy to secure a personal loan outside the corp? This is his main selling point. I read somewhere that the loan itself is taxable if greater than the ACB. Is this correct?
Have you read this and this?
Shareholder Benefit Issue

The first issue is whether a taxable benefit is conferred on the shareholder.

Subsection 15(1) of the Act applies to require an amount or value of a benefit that has been conferred on a
shareholder by a corporation to be included in the shareholder’s income. The shareholder benefit issue must
be considered while the loan is outstanding as well as at repayment on death.

A benefit may be assessed during the time the loan is outstanding and incrementally if that loan increases due
to interest being added to the loan amount. A benefit may be received if a more favourable interest rate is
obtained or if the terms of the loan are more favourable because of the corporate security supporting the loan.
CRA has addressed the issue of whether a corporation’s guarantee of a bank loan made to a shareholder gives
rise to a taxable benefit. At the 1986 Canadian Tax Foundation Round Table, question 62, CRA addressed this
issue as follows:

In theory, a benefit could very well arise as a result of a corporation guaranteeing a bank loan of a
shareholder or an employee. For instance the benefit could be the difference in rates charged with and without
the corporation’s guarantee or what the borrower would have to pay to a third party to provide a similar
guarantee. Unless there is some evidence, however, that the shareholder or employee is not, from the outset,
able to repay the loan, it is unlikely that the Department would attempt to assess such a benefit. Should the
corporation be called upon to honour the guarantee, this would of course, clearly be a taxable event.

Since that time, CRA has confirmed this position in subsequent round tables and technical interpretations (see
technical interpretations #2000–0002575 dated March 29, 2000, #2001-0112885 dated January 10, 2002 and
#2006-0174011C6 Question 14, 2006 CALU Roundtable dated May 9, 2006).

To summarize their comments, it appears that during the period when the loan is outstanding, CRA’s general
position is to assess a benefit where the shareholder does not deal at arm’s length with the corporation. The
taxable benefit may be measured as the difference in interest rates charged with and without the pledge of
the corporate security or as the amount that the borrower would have to pay to a third party to provide
similar security for the loan. If the shareholder can demonstrate that sufficient assets are available to repay
the loan personally and borrowing could be obtained using personal assets as security at the same terms and
interest rates received using the corporate security, it is unlikely that a shareholder benefit would be
assessed. In the leveraged life insurance scenario, the shareholder would need to demonstrate that the same
borrowing terms would be applied whether using shares of the corporation or other personal assets as
collateral security or using the corporate owned life insurance policy.

Also a benefit may be assessed is at the time of repayment of the bank loan, usually at death. If the loan is
repaid directly with the proceeds of the life insurance policy, there will be a taxable benefit assessed to the
shareholder. This is because the corporation is entitled to the funds from the life insurance proceeds but
instead the proceeds are used to repay a personal loan of the shareholder. Direct repayment of the
outstanding loan could occur if the loan does not remain in good standing with the financial institution and the
financial institution forces the withdrawal of the cash value from the life insurance policy to repay the loan.
Direct repayment may also occur on death if the life insurance death benefit proceeds are paid directly to the
bank pursuant to the collateral assignment of the policy. In both of these situations, if the insurance proceeds
directly repay the loan, a taxable benefit equal to the loan balance would be assessed to the shareholder,
which could cause severe hardship. In the event of a policy withdrawal there would also be a disposition for
tax purposes which could result in a policy gain to the policyholder.

At the time repayment occurs, the transactions should be structured to ensure that a direct payment from the
policy is not made. This would involve the release of the collateral security by the financial institution in order
to allow the funds to be paid to the corporation. The bank may require the borrower or estate to provide
temporary alternative security to replace the security provided by the life insurance policy. The funds would
then be paid directly to the corporation. If the repayment is a result of a forced withdrawal of the cash value
of the policy, the funds should be received by the corporation and then used to pay a taxable dividend to the
shareholder so the shareholder can repay the outstanding bank loan. If the repayment is a result of death,
the corporation would receive a capital dividend account credit equal to the proceeds of the policy less the
adjusted cost basis of the policy. The corporation would use the capital dividend account credit to pay a tax
free capital dividend to the estate. This would allow the estate to repay the shareholder’s personal borrowing.
If for any reason the bank fails to release its security and requires repayment directly from the insurance
proceeds, a taxable benefit will result at that time. The amount of the benefit will be equal to the amount of
the proceeds used to repay the shareholder’s personal borrowing and could result in a significant tax liability.
It is therefore extremely important that all parties to the arrangement understand the intended structure.
Again, if you're seriously interested in this you should run it by your company's accountant for an objective educated assessment keyed to your particular situation.

Feddar
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Re: Life Insurance As An Asset Class

Post by Feddar » 01 Feb 2016 17:39

All good points.

Here is the main thing in my eyes, as I envision a personal loan against the cash value (not ACB) in the life insurance policy:
"The taxable benefit may be measured as the difference in interest rates charged with and without the pledge of the corporate security or as the amount that the borrower would have to pay to a third party to provide similar security for the loan."

How would this be calculated, assuming you have no other collateral?

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Re: Life Insurance As An Asset Class

Post by brucecohen » 02 Feb 2016 09:03

Feddar wrote: How would this be calculated, assuming you have no other collateral?
I don't know. CRA's website might have an interpretation bulletin.

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ghariton
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Re: Life Insurance As An Asset Class

Post by ghariton » 02 Feb 2016 13:31

Feddar wrote:How would this be calculated, assuming you have no other collateral?
If you're a big corporation, you would probably look at the CDS market. If you're a small guy, like most of us, you would go to your friendly banker for quotes with, and without, the security. Given that your banker might not exactly be unbiased, it would be prudent to get such quotes from at least one other banker. But, unless there is some prospect of getting your business, it's not clear why the second banker would bother.

Perhaps a loan broker, analogous to a mortgage broker, if such exist in Canada?

One other source would be Tax Court precedents. But searching is expensive unless you are tooled up to do it. The typical tax lawyer is, but charges for it.

George
The plural of anecdote is NOT data.

Feddar
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Re: Life Insurance As An Asset Class

Post by Feddar » 09 Feb 2016 00:50

Ok, so after all the advertising and back and forth, I have no reasonable response from the salesmen. I've decided to not get the life insurance.

Now, I have a tax question. If I make interest or dividends in the corp, can I dividend all of the returns out to myself and just pay taxes personally, or does the corp get taxed too?

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Re: Life Insurance As An Asset Class

Post by kcowan » 09 Feb 2016 06:57

The corporation must pay tax on all profits, even those paid out on dividends. Of course, you must pay taxes on everything you receive.
For the fun of it...Keith

Feddar
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Re: Life Insurance As An Asset Class

Post by Feddar » 09 Feb 2016 09:44

But don't you get the corp tax back once it is dividend end out of the corp?

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Re: Life Insurance As An Asset Class

Post by kcowan » 09 Feb 2016 12:04

They are separate returns so it depends on your corp tax situation.
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DavidR
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Re: Life Insurance As An Asset Class

Post by DavidR » 09 Feb 2016 12:51

Feddar wrote:But don't you get the corp tax back once it is dividend end out of the corp?
Somewhere on the site there is a long thread about how Investment income is taxed in CCPCs, and how some of the tax paid by the corp is recovered when dividends are paid to individual shareholders. It's a very long thread.
Short version:
(1) when a CCPC holds Canadian corporations in its investment portfolio, and receives dividends from those Canadian corporations, the CCPC pays a 33.33% Federal income tax (known as "Part IV" tax) on that income. No provincial tax is charged. The CCPC recovers 33.33 cents of that tax for every $1 of taxable dividends paid to an individual shareholder. (this recovery mechanism is known as the 'dividend refund'.)
(2) Income from bonds or foreign stocks held as investments by a CCPC is taxed differently. The income is taxed under "Part I" of the [federal] Income Tax Act (not Part IV), and also taxed by the provinces. Some (but not all) of the Federal tax is also recovered when the CCPC pays out dividends.

**NOTE Federal gov't is planning to increase the Part IV tax rate to 38.33% in 2016, and the dividend refund rate will be 38.33 cents per $1 of dividends paid. And there will be other changes...

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Re: Life Insurance As An Asset Class

Post by Peculiar_Investor » 09 Feb 2016 16:24

DavidR wrote:Somewhere on the site there is a long thread about how Investment income is taxed in CCPCs, and how some of the tax paid by the corp is recovered when dividends are paid to individual shareholders. It's a very long thread.
That would be Investment income in a CCPC, 549 posts and counting.
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Re: Life Insurance As An Asset Class

Post by adrian2 » 09 Feb 2016 20:05

DavidR wrote:
Feddar wrote:But don't you get the corp tax back once it is dividend end out of the corp?
Somewhere on the site there is a long thread about how Investment income is taxed in CCPCs, and how some of the tax paid by the corp is recovered when dividends are paid to individual shareholders. It's a very long thread.
Short version:
(1) when a CCPC holds Canadian corporations in its investment portfolio, and receives dividends from those Canadian corporations, the CCPC pays a 33.33% Federal income tax (known as "Part IV" tax) on that income. No provincial tax is charged. The CCPC recovers 33.33 cents of that tax for every $1 of taxable dividends paid to an individual shareholder. (this recovery mechanism is known as the 'dividend refund'.)
Even shorter version: as long as you pay enough dividends out of the CCPC, any eligible dividends received by the CCPC flow through it untaxed (and they can maintain their character as eligible dividends).
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Feddar
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Re: Life Insurance As An Asset Class

Post by Feddar » 09 Feb 2016 21:05

Great. Thanks, guys.

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Re: Life Insurance As An Asset Class

Post by tdiddy » 20 Jul 2017 21:25

Was reading through this thread after announcement of changes to CCPC passive taxation (as a few of us have been discussing in that thread). Seems corporate permanent life may have become a decent option for funding retirement for owners of CCPC? It is alluded to here and some great links, thanks.

I had initially stayed away due to concerns of high admin/MER expenses within the plans and just invest within CCPC myself. That and the fact that I don't really require life insurance (no kids, wife has similar earning potential)

I know there were changes Jan 1 2017 but still seems like it may come out ahead of unreg investing in CCPC/personal top tax bracket for individuals with CCPC + maxed out RRSP/TFSA

Any thoughts? Am I missing someone or on right track

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Re: Life Insurance As An Asset Class

Post by BRIAN5000 » 08 Oct 2017 13:01

I wonder how many people on here have Life Insurance as an investment?

Are many using it as an alternative to fixed income, as an estate multiplier any other use?

Seems very illiquid and loss of control to me.

eg - $104,000 per year will generate $3.5 million on both our deaths, I think our daughter might prefer that we just pay her $104,000 a year now, this slowly lowers our tax burden over time, she gets the use of it now instead of in 20-30 years etc.. Even if we give her $500,000 to buy a small condo we could do it on a promissory note with some income back to us seems like about the same liquidity.
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Re: Life Insurance As An Asset Class

Post by kcowan » 10 Oct 2017 01:12

I have an investment account at Industrial Alliance. Earnings on my investment are tax-sheltered and it pays the premium on a level term policy. I have had this since 2002 when I retired and the earnings cover the premium so far (50% Canadian equity and 50% bonds). I would not select IA today (MERs too high) but it was sold by National Life then and is grandfathered.

When you consider the frictional costs (sales commision and high MERs), I think I would consider the alternatives. Money or benefit today would count much more than a distant future inheritance.
For the fun of it...Keith

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Re: Life Insurance As An Asset Class

Post by Penquin007 » 21 Dec 2017 15:24

Two articles about Wholelife insurance from the "Blunt bean counter" Blog:

The “Hole” in Whole Life Insurance
http://www.thebluntbeancounter.com/2017 ... rance.html

The "Hole" In Life Insurance - Part Two
http://www.thebluntbeancounter.com/2017 ... t-two.html
We always advise clients to consider the permanent life insurance policy in concert with their overall asset mix as an estate bound investment, whether it is UL or Par. As with any investment, it is essential to fully understand the associated risks. Mark comment: I have been told by some very astute investors, that they consider "investment" money they put into a life insurance policy as a fixed income component of their portfolio. i.e. They don't worry about the insurance cost of the policy as long as the return after policy costs/funding is superior to that in which they can receive on other fixed income products.

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