Rethinking Wealth Wisdom

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With over 40 years of experience as a Certified Financial Planner? and more, I was initially trained to accept certain industry-recommended practices as the gold standard. However, three years ago, I began to question these teachings and embarked on an investigation into how these practices genuinely served my clients.

Eye-Opening Research

This inquiry revealed a concerning trend: the industry frequently over-promises and under-delivers. Clients end up investing their own capital, bearing all the risks, and covering all the fees and all the taxes, yet often find themselves in a position comparable to risk-free alternatives.

For instance, one of my clients, a dentist from Ontario, holds a 33-year-old tax-exempt insurance contract, among other assets. Intrigued by its performance, I compared the cash value of his policy against his stock market investments using the S&P/TSX Composite Index as a benchmark.

Astonishingly, after accounting for fees, taxes, and risks, his tax-exempt insurance contract performed better.

During this time, I rethought what I believed to be true about RRSPs and RRIFs:

RRSP & RRIF Rethink

• You contribute the capital, cover the fees, pay taxes on those fees, take on all the investment risk, and then also pay taxes on any gains achieved from that risk.
• Investments in the stock market, real estate, and similar assets do not inherently utilize compound interest—the concept Albert Einstein famously referred to as the “8th wonder of the world.” Current industry norms tend to marginalize the potential of compound interest.
• These plans contradict the principle of maintaining your capital intact.
• They infringe upon the benefits of compound interest since accessing the funds requires redemption.
• Adhering to the 4% safe withdrawal rule is necessary to avoid depleting your funds prematurely.
• These accounts could lead taxpayers to pay taxes equating to up to 23 times the initial tax savings.

This overview underscores the potential disadvantages of these financial instruments, especially concerning the loss of capital retention and optimal compounding.

Read the full article and with charts here https://dofinancial.ca/rethinking-wealth-wisdom/

Tax-Exempt Insurance Contracts

Tax-exempt insurance contracts typically offer a range of valuable benefits. Here’s a general overview of their benefits based on typical features associated with such products:

1. High Rate of Return after Fees & Taxes over Long Term: Tax-exempt insurance contracts, often under certain conditions, can provide competitive compounding returns by eliminating or reducing tax liabilities on the growth phase.
2. High Risk-Adjusted Rate of Return: These contracts may offer investment options that balance risk and return, coupled with tax advantages, enhancing risk-adjusted returns.
3. Consistent Rate of Return: These contracts offer stable returns through guaranteed interest rates and dividends.
4. Conservative (Safe): Many insurance contracts offer safety features, like principal guarantees or minimum rate guarantees, which can be attractive to conservative investors.
5. Liquid: These contracts offer loans or partial withdrawals.
6. Guarantees: Tax-exempt contracts include guaranteed interest rates or certain death benefit guarantees, protecting the value of the contract.
7. Tax Exempt: Offers tax-exempt growth, as mentioned in the income tax act section 148(3), providing a financial edge over taxable investments, as the growth within the contract is not subject to taxes. A significant advantage is the tax-exempt growth within the policy and the potential for tax-free withdrawals under certain conditions.
8. No Contribution Limits: Unlike other government-sponsored accounts, insurance contracts often do not have strict annual contribution limits.
9. No Market Volatility: These contracts offer fixed returns, shielding investors from direct market fluctuations.
10. Yields Income Besides Capital Gains: These contracts offer a combination of dividends and interest in addition to capital gains.

10 More

1. Preferred Creditor Protection: These contracts offer preferred creditor protection for assets, making them preferred vehicles for asset protection.
2. Inflation Friendly: These contracts do not contribute to inflation the way banks do, helping preserve purchasing power.
3. Control: Policyholders have ownership control of these contracts.
4. Easily Transferable: Policies can be transferred to other owners and beneficiaries relatively easily upon the policyholder’s lifetime or passing.
5. Easy to Manage: Once set up, these policies require no ongoing investment management from the policyholder.
6. Low Fees: These contracts have the lowest ongoing investment management fees.
7. No Hidden Fees or Penalties: Transparent fee structures are a hallmark of reputable insurance providers.
8. Reputable (Legal): Offered by well-established insurance companies, these contracts are legally sound and backed by company guarantees.
9. Private: Insurance contracts provide a level of privacy not available through other financial accounts.
10. Guaranteed Borrowing with No Invasive Credit Check: Policies include provisions for borrowing against the cash value capital with no credit checks required. Other financial products do not.

Even More

Here are more benefits of tax-exempt insurance contracts:

1. Lifetime Compound Interest: Accumulates interest over a lifetime, allowing your returns to grow exponentially over time without interruption from tax detriments.
2. Tax-exempt Income: If the contract is structured correctly, it can provide tax-free income distributions, optimizing your financial efficiency, especially in retirement.
3. No Loss of Compound Interest During Retirement Years: Safeguards your interest earnings from being disrupted by withdrawals in retirement, ensuring your capital continues to grow.
4. Retains Your Hard-earned Capital: Protects the principal investment, unlike some government-sponsored accounts (such as RESPs or RRSPs) which require capital liquidation, maintaining personal wealth.
5. The Perfect Financial Asset to Leverage: Allows policyholders to borrow against the contract’s value without hindering the compound growth, providing income, liquidity, and financial flexibility.
6. Income Exceeds 4% Safe Withdrawal Rule: Offers potential income that surpasses the conservative 4% rule often recommended for retirement withdrawals from stock market investments, potentially sustaining your lifestyle better.
7. Greater Generational Wealth: Enhances the possibility to pass greater wealth to beneficiaries, with growth and tax-free death benefits contributing to long-term family financial planning.
8. Finance Within Household and Business: Enables financing personal and business needs internally, reducing reliance on traditional credit and preserving capital and growth. These benefits combine to make such insurance contracts an attractive option for those seeking long-term financial growth, stability, and strategic wealth management.

Complementary

Now, I’m not saying don’t invest in the stock market—I do, myself. I’m just suggesting that people reconsider what they believe to be true. During a time of increasing taxes, there has never been a more valuable time for tax-exempt insurance contracts. This infographic compares tax-exempt insurance to RRSPs/RRIFs.

Investigate for Yourself

For specific product details, legal considerations, or other personalized advice, consulting with one of only about 50 financial advisors in Canada knowledgeable about these specially designed instruments is recommended, of which I am one. If you need further assistance on this matter or other business-related inquiries, please feel free to reach out!

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