What are some of the key ways in which life insurance enables HNW financial planning strategies?

Typically, life insurance is used by Canadians to provide an estate or to replace the loss of income that occurs upon death so that their families are taken care of financially. However, the unique features of life insurance make it a valuable financial tool beyond these traditional purposes. For example, permanent policies – such as whole life and universal life – provide taxexempt investment growth, along with other significant benefits.

Life insurance can form part of a non-registered investment portfolio, especially for high net worth families. The investment rate of return of the tax-free death benefit is very attractive, providing a way to generate an enhanced intergenerational wealth transfer. The cash value in the policy is an asset, whether the policy is owned personally or by the insured person’s company. If required, this cash can be accessed during his or her lifetime.

The underlying investment fund of a whole life policy has a long history of providing stable rates of return from its conservative mix of bonds, mortgages, real estate and equities. Unlike other investments, the returns in the whole life policy are smoothed over time, resulting in reduced investment volatility. Finally, a life insurance policy can be combined with a life annuity to create a high-yield investment opportunity, known as an insured annuity. This is best suited for people over 65 with non-registered assets.

How is life insurance helpful in the succession planning of family-run enterprises?

Canada’s tax system imposes a capital gains tax at death, based on a “deemed disposition” of assets that are subject to capital gains. If parents want to transfer the shares of their family business to their children, those shares will be subject to capital gains tax. The options to pay this tax liability are to use cash reserves, sell assets, borrow – or use life insurance, which is typically the least costly option.

Aside from funding tax liabilities, life insurance can be used to provide funds to buy out members of the family who no longer wish to remain shareholders, thereby consolidating ownership.

A Sample Whole Life Investment Fund

What are some of the considerations that Canadians should keep in mind when choosing a life insurance adviser to assist with these sophisticated strategies?

Trust is crucial. You want an adviser who provides you with honest, wellthought-out advice, and presents all available options. Look for someone who can provide independent advice, a high level of product knowledge and a track record of excellent policy service. He or she should be able to explain the insurance options in a clear and concise manner and recommend a suitable low-risk strategy.

The best insurance advisers apply both expertise and creativity in designing individualized, insurance-based solutions. Extensive experience in underwriting life
insurance is essential, particularly for larger face amounts, because of the sophisticated nature of these policies.

Finally, sometimes there is a need for advice and counsel on matters other than taxes and investments. An insurance adviser who has a deeper understanding of these complex family issues, such as someone with a Family Enterprise Advisor designation, is a definite asset.