FAQ

Permanent life insurance is more than insurance: it’s an asset. Like any life insurance policy, your beneficiaries will receive a lump sum tax-free death benefit when you die. But permanent life insurance also has important benefits you can take advantage of during your lifetime. Here are some of the most common questions about this uncommon solution.

DOES IT MAKE SENSE TO OWN PERMANENT LIFE INSURANCE AND TERM LIFE INSURANCE?

Absolutely.

Term life insurance and permanent life insurance are answers to different questions. Term life insurance answers the question, “What happens if I die too soon?” and permanent life insurance answers the question, “What happens when I die?”

Let’s suppose you have two competing financial priorities: paying off your mortgage and growing your practice. Term life insurance will protect the people you love from having to take on your debt. And permanent life insurance (particularly when held within your corporation) can add a level of tax efficiency to your business and help you build wealth.

Insurance is personal. Book a pro bono financial planning meeting to learn about coverage that meets your specific needs and goals.

WHAT’S THE DIFFERENCE BETWEEN WHOLE LIFE INSURANCE, PARTICIPATING (PAR) LIFE INSURANCE, UNIVERSAL LIFE INSURANCE, AND TERM-TO-100 LIFE INSURANCE?

There are three types of permanent life insurance (with four different names): whole life (including participating life), universal life, and term-to-100. We sponsor all three and believe powerfully in their benefits. Here are some of the key differences that can help you decide which one’s right for you.

• Whole life insurance offers consistency. These policies have fixed premiums, a guaranteed death benefit, and a guarantee that your cash value will grow over time. You can also borrow against your policy or withdraw its cash value. So, what’s participating life insurance (PAR)? This is a type of whole life insurance that offers all the above and gives you the opportunity to grow your wealth by participating in a professionally managed account with other policyholders.
• Universal life insurance offers flexibility. Like PAR insurance, these policies have two components: insurance and investments. And like whole life insurance, you can borrow against your policy or withdraw its cash value. Unlike whole life insurance, with proper planning, you’ll have the flexibility to increase, decrease, or pause your premiums, and you decide where to allocate your over-funded premium dollars.
• Term-to-100 life insurance, also known as T100 or Term 100, is insurance that lasts a lifetime. Unlike traditional term life insurance, T100 doesn’t need to be renewed at the end of its term. Your premiums stop when you turn 100, but your coverage lasts as long as you do.

WHAT MAKES PERMANENT LIFE INSURANCE AN ASSET?

In addition to the tax-free death benefit you might expect from any life insurance policy, participating permanent life insurance (PAR) has a tax-deferred savings and investment component.

How does this work? A portion of your premiums go into a pooled participating fund (a PAR account) with other policyholders. This account is managed by the insurance company and typically holds a conservative, long-term mix of stocks, fixed income, and other credit securities. You participate in the profits of the PAR account and the financial success of the insurance company by receiving policyholder dividends. While dividends are never guaranteed, the companies we partner with take pride in coming through for Canadians, year in and year out.

The paid-up additions option (PUA) can help build wealth and increase your coverage.

To take full advantage of the benefits of PAR insurance, most clients choose the PUA option. With this option, dividends are paid directly into your policy, increasing your cash value, and resulting in the purchase of additional blocks of insurance.

This increased insurance has a leveraged effect on your dividends.

For example, let’s say $1 of dividends is paid into your policy. With the PUA option, that dollar may purchase $20 of tax-free paid-up insurance for you, which will be added to your death benefit. This is done automatically, without medical evidence.

Over time, this results in dramatic growth for both the death benefit and cash value of your policy, as all these increases are tax-free as long as you leave them within the plan.

Not all dividend options are created equally. Rather than using dividends to buy paid-up additions, some people take them as cash, use them to reduce their premiums, or allow them to accumulate with interest. These last three options may result in taxable consequences.

WHAT ARE SOME TAX ADVANTAGES OF OWNING PERMANENT LIFE INSURANCE INSIDE MY PERSONAL CORPORATION?

You’re the insured person but your corporation owns the policy, pays for it, and receives the death benefit when you die. Here are four tax advantages of that arrangement:

1. Corporate tax rates are generally lower than personal rates. When your corporation pays the premium, it does so with more tax-efficient dollars than if you paid for it yourself. This can yield significant tax savings over the life of the policy.
2. Permanent life insurance can help preserve your annual small business deduction. That’s welcome news if you have a growing amount of retained earnings or accumulated profits within your corporation.
3. During your lifetime, the cash value of the policy grows on a tax-deferred basis. Your corporation doesn't pay taxes on the growth unless the money is withdrawn.
4. Permanent life insurance can be a tax-efficient part of your estate plan. At death, your corporation receives a tax-free death benefit that can be passed on to shareholders (your heirs, for example) as a tax-free capital dividend, while the policy’s adjusted cost base (ACB) can be paid to shareholders as a taxable dividend.

Here’s an example from Sun Life Canada, one of the underwriters we’ve partnered with for Lawyers Financial permanent life insurance:

A private corporation is the beneficiary of a life insurance policy with a death benefit of $1,000,000. The ACB of the policy at the time of the insured shareholder's death is $150,000. The amount that will be credited to the corporation's capital dividend account (CDA) is $850,000 ($1,000,000 - $150,000). This amount can be paid tax-free to the shareholders of the corporation as a capital dividend. The balance of $150,000 can be paid to the shareholders as a taxable dividend.

WHY DID CORPORATELY OWNED LIFE INSURANCE BECOME MORE ATTRACTIVE ON JANUARY 1, 2019?

That’s the day the Federal Government introduced a passive income restriction of $50,000 for small businesses. Before that, Canadian small business owners—including incorporated lawyers—had no limit on the amount of passive income they could hold and grow within their corporation.

For many, this change came at a cost—mostly in the form of a loss in tax deferral. Every dollar of passive income over the $50,000 limit eroded five dollars from the corporation’s $500,000 small business deduction.

What is passive income and why is permanent life insurance a solution?

Passive income is money earned from sources other than a traditional job. For lawyers, your billable hours represent active income. But you might also earn passive income from investments, rental properties, and maybe even from royalties.

Unlike traditional investment vehicles, the dividends earned and held within permanent life insurance aren’t considered passive income and therefore have no impact on your small business deduction.

Permanent life insurance effectively acts as an alternate asset class that allows you to earn tax-efficient wealth within your corporation—while also protecting your business and loved ones from life’s left turns.

The pros and cons can be complex. That’s why we’re here to help. Book a pro bono meeting with a certified financial planner. Together with you and your insurance advisor, a financial planner can recommend a winning strategy for your family and business.

Book a meeting now.

DO MY PREMIUMS INCREASE AS I GET OLDER?

It depends on the type of permanent insurance you buy.

If you purchase whole life insurance or term-to-100 insurance, your premiums will never go up and can even be paid off in full—much like a mortgage. Depending on the pay schedule you choose at the beginning of your plan, your permanent insurance can be fully paid up in 10, 15, or 20 years—at which point it truly becomes a paid-up asset you own.

Universal life insurance is more variable. Some people choose term-to-100 life insurance as the base for their universal life plan. In these cases, your premiums are fixed for life. But many people choose an annually increasing insurance as the base of their plan. In these cases, the overall premium outlay shouldn’t change (given careful planning), but by design, the cost of your insurance will increase year over year.

HOW MUCH COVERAGE DO I NEED?

The amount of coverage you need depends on your full financial picture. Key factors to consider include your income, assets, liabilities, existing insurance coverage, future liabilities (the cost of your children’s education, for example), estate planning assumptions, and emotionally driven goals, such as legacy gifts to a charitable organization or religious affiliation you’re passionate about.

Insurance is personal. Book a pro bono financial planning meeting to discuss coverage that meets your specific needs, goals, timeline, and budget.