Build Serious Wealth in Life Insurance Owned by Your Company

I know...I know...nobody likes to hear the word insurance. Just uttering the word is often followed by ...zzzzzzzzz......

But when it comes to investing, it can provide a lot of benefits both today and tomorrow. And for business owners, it often begins and ends with one word...TAX.

As a company grows its revenues, its corporate tax rate could be considered reasonable, especially up to certain income thresholds. The owner of that business starts to see the fruits of all that labor and maybe even allows themself to think of a better lifestyle and a better retirement.

Over the years they have only paid themselves enough in the way of salary or dividends to live on, in an effort to minimize personal income tax. An increased lifestyle may require pulling out more which equals more tax. Want personal investments too? You guessed it. Have to pull out even more = more tax. It starts to feel very much like double taxation for small to mid-sized companies. Because it kind of is.

So what happens. Money becomes "trapped" in the business in the form of retained earnings because the business owner will do almost anything to avoid more tax.

Whats next? Maybe the business owner is informed that the company can make investments with retained earnings. Not a bad idea. And that can be ok for a while, until those investments generate interest income (which is...you guessed it....taxed) or capital gains are triggered when needing to make adjustments (which is better...because only half of the gain is taxed...but it is still taxed). Then, with new legislation passed in 2018, the passive income that these investments generate could cause additional taxation if the business owner does too good of a job growing his business, which creates more retained earnings, which creates larger investments, which generate more passive income, which could eventually exceed certain thresholds and thus, more tax. Again.

Feels like one is being penalized for growing the economy and creating jobs. Almost makes one want to go hide in the mountains and start their own country.

The answer to some of these issues just might be insurance. Yes....insurance.

The same company could use those same retained earnings to to fund a permanent life insurance policy with a cash value component. So no personal income tax. That cash value investment can grow tax-deferred just like an RRSP. Those dollars can be invested in basically all the same types of investments as RRSPs, TFSA, or Non-registered investments and therefore get the same types of returns. The earnings in these policies is not considered passive income and therefore cannot trigger additional taxation.

There is often a need for insurance anyway. And if something unfortunate were to happen, all proceeds from a death benefit are paid to the corp tax-free. Which can usually then be passed down to shareholders tax-free as well. It can serve a very valuable function when it comes to estate planning and succession planning.

One more nice perk of this arrangement is that the cash value investment of these programs can usually be used as collateral for borrowing. One scenario may be if some retained earnings have been plugged into such a policy, but now some additional funds are needed for expansion,etc. - additional funds can be generated from this collateral feature in a few different ways, thereby affording some "liquidity".

Another scenario would be in regards to retirement. A cash value policy could be assigned as collateral to a financial institution in return for TAX-FREE loans or advances on a line of credit. All the dollars would eventually be paid back to the institution from the tax-free death benefit paid out at some point in the future. There are a handful of strategies that can be employed here, but the net effect is to get retirement income into the hands of the business owner/shareholder without having paid that extra layer of personal income tax.

Is there a catch? Absolutely. Not everyone can qualify from a health perspective. And no, this strategy is not right for everyone. Is it worth at least exploring for any business owner? Probably.

|If you want to learn in more detail how this works and if it could be a good option, don't hesitate to reach out at any time for a free consult at (403)852-7816.

Warm regards,

Jay