How to Decrease Your Taxes and Increase Your Estate
What I'm About to Talk About is Going to Sound Too Good to be True... It isn't
Do you want to leave some tax-free money for your kids?
Do you want to pay less in tax for the rest of your life?
If you answered yes to both of the above questions, I think you should keep reading.
This isn't for everyone, but it might work for you
The first thing that has to have occurred is that over the course of your life you worked really hard to create a good life for yourself and you have done such a good job at saving, that you will have more money than you comfortably need to retire.
If that's the case, you are probably in a position where you will have extra money every year and your only real choice is to invest it inside of a non-registered account, a business, or real estate. All of the gains on these investments will be taxed, either as they grow or when you sell them.
What if there was another option?
What if you had another choice and you could choose to invest in another account that would NEVER go down, would NEVER be taxed as it grew, and would pay out to your kids completely TAX-FREE?
An account that could eventually be paid directly to whoever you choose, which would allow it to be paid outside of your Estate, which would avoid Probate Fees (doesn't really matter in Alberta), but is a big deal in other Provinces.
You'd still be saying, "What's the catch, Kent?"
The catch is that you HAVE TO be able to invest the set amount of money into this account every single month or year, otherwise it can backfire and be a complete waste of money. That's why you need to be absolutely certain that you'll have enough extra capital every year to fund this investment.
Let's Look at an Example
I've met with some clients who are 60 years old and just retired. I have done a comprehensive retirement plan for them and it looks like they will have tens of thousands of extra dollars they don't need every year. They also want to leave some money to their children, grandchildren or a charity. To be on the safe side, I suggest we allocate $10,000 (because it's not very liquid, especially in the early years) to this account, every year for the rest of their lives.
How does this look for their estate if they pass at 70, 80 and 90 years old?
Obviously anyone would take a 19% return in a 10-year span, but that's not very likely, so the return drops as time goes on. I think most retirees, or investors today would take a 5% return for the next 30 years if they knew they could.
Now What's the Actual Catch?
The actual catch, if you want to call it one, is that this is an insurance product called Participating Whole Life Insurance.
This is not the only reason why someone would use a policy like this, but it is by-far my favourite use for it.
In the case noted above, I have used a Joint-Last-to-Die policy for a 60 year old married couple, where both people are in relatively good health. Some people cannot qualify for insurance and others will be rated, which means the rate-of-return will be lower as the insurance costs will be higher.
How Does This Work?
This product can become complicated, but in the case of just increasing your estate and decreasing your taxes now, it's pretty simple.
You choose an amount of insurance, or an amount you can contribute to this policy every year.
If you are approved, then you fund it for a specified number of years, or for the rest of your life.
Each year you are paying more money for the insurance than you would have to, so the extra money gets invested in a pool owned by the insurance company. They invest this money in a fairly conservative manner and this pool of money is huge.
Based on some factors (that are above my pay grade), they decide on a dividend rate each year, which is how the account grows. This dividend is NOT guaranteed, but it's never not been paid. Since it's in an insurance policy, the growth is tax-deferred and if it's paid out on death, the benefit is TAX-FREE. The death benefit can be designated to whoever you want as a named beneficiary.
Inside the account you will have a Cash Value and a Death Benefit Value.
The Cash Value takes years (close to 20) to show any real gains, which is why I so strongly pointed out that you need to know you have enough money to fund it, because if you can't after 5-years and want to cash out, you will lose a lot of money. This is often the case, which actually benefits people who hold onto the policies.
The Honest Truth
I love this use for Participating Whole Life Insurance and I love it when the opportunity presents itself, because I think it is a good idea, but it also pays very well.
That is why insurance products like this are way too often oversold to people who are not in a position to fund one of these for a long period of time. I've seen it backfire too many times to count. Not due to my recommendation.
So, if you want to consider this as a part of your overall financial plan and estate plan, I would strongly encourage you to be absolutely certain that your budget will always be able to withstand this premium payment. If it can, it's a great addition to any estate plan.
If you would like to have a comprehensive retirement plan completed to ensure that your funds will last through retirement, please feel free to contact me for more information at firstname.lastname@example.org
If this is a recommended strategy for you, I will actually completely disclose the potential commission I would make on the sale of your insurance policy and the management of your portfolio.
Please share with your friends, or with your parents if you want them to leave you with more money.