Tax Advantages of Insurance
Life insurance policies sold in Canada receive preferential tax advantages that have been enshrined in the income tax act for over a century. Quite simply, death benefits paid on a life insurance policy are received by planned beneficiaries tax-free and the funds accumulating in plans with the cash value component also grow tax-free.
The compound effects of this tax advantage are profound when life insurance proceeds either death benefits or the cash surrender value are viewed as a financial investment. Deposits or investments upfront receive a tax-free payout many years down the road.
To illustrate the effects of this tax advantage, consider deposits in a life insurance policy to create an eventual payout, yielding a 4% annual rate of return – a very realistic rate for policies available today. A tax-exposed investment would need to generate an 8% rate of return for investors facing high-income tax rates. Considering that many life insurance policies are historically as low risk as a bond or G.I.C., you can see how powerful these tax benefits are for a savvy investor.
The century-old tax advantages of life insurance exist not only for policies owned by individuals personally but for policies owned by corporations or trusts too. There are special tax rules for corporations that allow insurance proceeds to be distributed to corporate shareholders tax-free through a mechanism called the capital dividend account.
To learn more about the capital dividend account, we have a video focused solely on that topic on our website.
The tax benefits to business owners are even greater considering that the growth of capital in a life insurance policy does not count as passive income. Small businesses with more than $50,000 of passive investment income face a reduction and possibly complete loss of the small business deduction, one of the biggest tax advantages available to business owners.
But because capital in a life insurance policy does not count as passive income, business owners can use life insurance strategies to grow more of their retained wealth inside the business without chewing away at the valuable tax savings created by the small business deduction.
Whether you’re a business owner or interested in growing and protecting your wealth personally, Unity can help put the tax advantages of life insurance to work for you.