Okay. Welcome to our webinar. The topic is the federal budget and life insurance
strategies. As a reminder, the content here is simplified for clarity. We can
provide a lot more detail afterwards. Here we want to give you an overview.
On your screen - if you're at your desktop - you'll see that there is a box where you
can type information. So you can type in things here: questions, comments etc and
then you click on this Send arrow here and then the message will appear here. If
you're using a different device such as a tablet or your smartphone, then the
screen would be set up differently but you'd have the very same capabilities.
The mortality curve is really the key to the tax advantages that life insurance
provides. If you look at this, you can see that if you pay for your insurance for
one year at a time, the cost will get more and more expensive. If you have a
million dollars of insurance, you get to the point where you're spending $200,000
for a year of coverage and then four hundred thousand, eight hundred thousand.
Basically insurance becomes less and less affordable and that doesn't make a
lot of sense. Tthe only way to deal with this is with another compound growth
curve and that is compound interest. What you do is you put in extra money in the
early years when the insurance charges are low and then that grows to provide
enough to cover the charges later on. Insurance as a result has a number of
unique tax advantages. First of all, the death benefit is tax-free. This is very
much like your principal residence. And you have an envelope for the tax-
sheltered growth because that's the only way to cover the charges in later years.
This is something like your RRSP. Now you may find that when you reach retirement
you no longer need the insurance. You could take withdrawals and as with your
RRSP there would be tax. And with an RRSP you're forced to take withdrawals. With
life insurance, you or not. But with life insurance you can
do something else which would be even better. What you can do is you can access
tax-free income. And the way this works is you use the equity inside your
insurance policy as collateral for loans. Now you have something which has the
effect of a Tax-Free Savings Account. And finally, if you want, you can use the
equity inside your policy as collateral for investment loans and now you're able
to get tax deductions. You have something which is like a Home Equity Line Of
Credit. So life insurance is able to combine these unique advantages but
there are limitations. There are three key rules that limit the tax benefits.
First of all, there's a limit on how much money can go inside the policy. That's
called the Maximum Tax Actuarial Reserve which governs that. Then there's also a
limit on investment growth called the "8% Rule". The idea is to have relatively
stable returns inside insurance rather than fluctuating returns that that go up
really high and then really low. And finally there is a restriction on the
timing of deposits. The "250% Rule" essentially says that you want to make
deposits to your life insurance in the first seven years. Those are the rules
that apply and life insurance products are tax optimized. When I was
developing products, we would always look at competitiveness (of course) but we
would also make sure that the products worked in the tax regime. This wasn't
that difficult because we had the same tax rules for life insurance from 1982
until the end of 2016. That was very good in that sense [that] we were able to focus
on improving competitiveness and features without having to worry so much
about the tax implications. But on New Year's Day 2017, a new set of rules
came into effect. These were not quite as good as what we had before.
There was less deposit room or there is less deposit room now.
There is a smaller Capital Dividend Account credit, which is something that
matters for life insurance policies that are owned corporately.
Finally, there are smaller tax deductions on premiums. But that's what
happened, so what can you do? To help people understand these things, we
created various content including a range of YouTube videos. The good news is
that the old rules continue to apply to policies issued before the new rules
came into effect. The not-so-good news - and the challenge - is adapting to these
new tax rules. The challenge is that what worked before does not necessarily work
now. What this meant is that we had to carefully re-examine everything that
we were doing. Were we using the right tools? Were using them in the right
way? The [2017] federal budget came out last year - about this time last year - and for
whatever reason they used a YouTube video. So we're using YouTube also, though
we may not get as many views as the federal government did. As we expected,
the budget did not say anything about life insurance - and that made sense
because the changes that took effect on January 1st of 2017 took years to
develop and years to implement. CALU did a special report and confirmed that
there was no impact on the taxation of life insurance policyholders. That meant
we could get back to our work and could continue to re-examine life insurance
products and the tax strategies. We found that if you wanted to go from
Point A to Point B, then sometimes the path was a little bit different or the
method of transportation was different. As we thought things figured out, we
started doing public speaking. We spoke to various groups like Chartered
Accountants. And we spoke to financial planners, investment advisors, lawyers etc.
A lot of these discussions were private. So we don't have content that we can
share regarding them. We also got interviewed in various publications and
talked about how to take advantage of the new rules for life
insurance. When companies introduce new products, we did quick overviews based on
the marketing pitches that we got about how amazing the products were. And
then we did our own detailed analyses afterwards to see how the products
really worked. When products were being changed in terms of prices etc, we
gave timely warnings so that there would be opportunities to lock in what was
already there. Everything we did took more time but
that was okay. It's important to invest in your practice and we were getting to
the point of stability where we knew how things worked under the new regime. The
products were getting stabilized etc. It looked like it was time for a
vacation but on July 18th - when everyone should have been relaxing - the government
came out with a set of proposals which they said would improve fairness in the
tax system. The way they defined "fairness" is not necessarily the way that
Canadians defined "fairness". There is no mention of life insurance in these
proposals and that was not unexpected because life insurance was already
changed so much as of January 2017. But clients were concerned about what was
taking place and the big issue was the taxation of corporate passive investment
income. As we know, life insurance is a vehicle that is used to shelter
investment income, especially in corporations. There was no reason to
think that life insurance would not operate the way that did before but
there were concerns. We belonged to - and still belong to - various organizations
that stepped forward to let the government know that their proposals had
consequences that Canadians were not willing to accept. We also engaged in our
own campaigns. We had one to defend doctors. That was a group that was
getting stigmatized by the changes. We also had a letter-writing campaign.
The organizations we belonged to were saying that since the government was not
listening much, the best course of action was to talk to local MPs and
have them talk to the government on our behalf. Following that was a lot of
waiting to see what the government would decide to do. Finally, last week we got a
new budget and as expected life insurance was spared once again. CALU
did another Special Report. They noted that there were no changes related
to: exempt life insurance policies; no changes to the Capital Dividend Account
which is important in corporations; no changes to tax rates for individuals or
corporations; and there was no change to capital gains either. There was concern
that the portion of capital gains that gets taxed would increase from 50% to
67% or maybe even 75%. So all of this was good and that meant it was time to get
back to life. A reminder: what we're talking about here is simplified for
clarity and you can share your thoughts and comments using the chat box on your
screen. We created lots of new content to help people understand how life
insurance works. This is one of the things that Jeevan put together to
help people understand. With insurance, what happens is you
take a deposit and you put it into the insurance policy and then charges
come out. If you like, you can stop right here and you essentially have term life
insurance because that's all it does. If you want to go further, then you can make
additional deposits and now you have growth in a tax-sheltered fund.
What's great about this is that the growth is compounding in a tax-sheltered
vehicle. That's very good. Not all products have this sheltered fund and
not everyone who has a sheltered fund uses it effectively. The money inside
the policy can be used in different ways. A classic solution - especially for
business owners - is to supplement retirement income. What you do here is
take the cash-rich insurance policy and you assign it as collateral to a
lender. Then you get tax-free retirement income by taking loans.
There is loan interest to be paid but what's really good here is that the
lenders will often say that you don't need to pay the interest on an ongoing
basis. They know that the loan is secured by the cash value of an insurance
insurance policy backed by a multi-billion dollar
insurance company. That's pretty secure. So the loan interest can keep
growing and growing within limits and then the tax-free death benefit can
repay the loan. This is a classic strategy. Something else that can
be done is to use insurance as an investment strategy. Here you take the
cash-rich insurance policy to the lender again but instead of waiting
years and years to take loan - say at retirement - you take loans right away and
you invest in qualified investments. Here you generate taxable traceable
investment income. What happens in this strategy is that you do pay the loan
interest on a regular basis. That means the loan interest
is not growing and growing
because it keeps getting repaid. That's one thing that happens and then
also there is deductibility on the loan interest. As you can imagine, with a
strategy like this, it is essential to get guidance from your accountant to
make sure that things are being done properly. And for the investments, your
investment advisor is really key. You may also want help from your financial
planner to help make sure all these things are done properly. So you've got
the tax deductibility on the loan interest, and in some cases you can also
get tax deductions on some or all of the insurance charges. This is a pretty
effective approach to using insurance for people who want to invest in the
kinds of vehicles that are not available inside insurance policies. Finally the
tax-free death benefit repays the loan. Leveraging can create very large tax
deductions. Because each year, your collateral is growing in value and
if you borrow against that increase then the deductions keep growing and growing.
It's really important to get advice from your accountant
and other parties to make sure that the structure is suitable. You can see
that there are lots of different things that insurance can do. We tend to
talk about the different building blocks. The way the industry normally works is
they put labels on everything. So they call things "Immediate Financing
Arrangements" or "Corporate Insured Retirement Plans" etc - which tends to
simplify. But also tends to distort because the reality is that there is a
lot of complexity. Life insurance is at the intersection of five distinct worlds.
There is the world of planning. This is the place where the financial
planner comes in to get the soft facts and also the hard facts. There's the world
of risk which is where actuaries step in to look at the probabilities of risks
and the severity. There's the world of taxation. Where should the premiums come
from? Where should they go? Are tax deductions required? If so, what is the
size of deductions required? Are they needed corporately or personally? There's
the world of investing. That relates to investing inside the insurance policy
and - in the case of leveraging - outside. Finally, there's the world of law
because you are buying a contract and a contract has rights and obligations. To
make this work. it's essential to have an independent team where the advisors are
proactive so they bring ideas when they're fresh - as we are right now.
They're collaborative so they work with one another rather than in silos. And
they're specialized in their own areas. When it comes to corporate strategies
these days, what can be done in the new environment is to improve protection.
Have tax deductible business expenses that provide tax-free benefits for
employees. One approach is to have a Wage Loss Replacement Plan — and we just went
to a presentation on this earlier this week. Here what you do is you have a
combination of group Long Term Disability insurance and you add to that
personal disability insurance. What's good about that is that the personal
coverage is portable. That means it can be
taken with you. And because you're dealing with this kind of structure
where you have two or more lives, the underwriting requirements are reduced —
making this easier to get. Also there's health, dental and travel insurance.
This is also important. The options available depend on age and factors like
pre-existing conditions. The thing to remember is that you can only qualify
for insurance before you need it — and you never know when you're going to need it.
Another strategy is for retirement income. You can [get] it in
a couple of different ways. You can use pre-tax corporate dollars to generate
taxable personal income. The two ways of doing this: one is using a Retirement
Compensation Arrangement or RCA. Or an Individual Pension Plan. Those are good
ways of doing it. Another approach is to use insurance. You take
after-tax corporate dollars to create tax-free personal income income. You
have a corporately-owned life insurance policy. In this [structure] you may
need to pay a guarantor fee because you're using a corporate asset for
personal use. This is - again - a place where you want guidance from your
accountant to make sure this is right. We have the capabilities to compare
all three of these options for you. Just to let you know how the environment
keeps changing: we got an invitation yesterday for a webinar that Manulife
Bank is doing on the very topic of personal borrowing using corporate life
insurance. The issue is that unless this is done properly, the entire loan could
be deemed as income to the borrower. Manulife has taken some steps to
help prevent this. In their webinar, they'll be covering Bill C29,
the whole issue of how much clients understand about these strategies, and
also the very important topic of what happens when the borrower dies. There's
also the strategy to shelter passive investment income which we looked at
earlier. Here you get cash value life insurance. There are a number of
questions. Do you want the growth to take place early on or do you want it to be
later on? Risk tolerance: are you dealing with someone who is risk averse or
seeking risk. Then the investment style: active or passive. Based on
those things we can come up with different kinds of solutions. It's
important to note that not everything changed. For example,
critical illness insurance is the same as it used to be. Disability
insurance has not changed either. Ditto for long-term care insurance — though
there are fewer companies offering this product and there were a year ago or
even a few months ago. Change is relentless and it's important to keep
track of what is taking place. Some of the things that we are watching are: the
effects of last year's ban on genetic testing. This can have an
effect on prices. Also there are rules around the capital that an
insurance company needs to keep in place. The current rules were in effect
since 1992. There's a new regime taking effect this year. The
questions are: will this have an effect on prices, and will this have an effect
on the guarantees inside products. That's what we wanted to cover in the
prepared portion of the presentation. Now it's time for the discussion where you
can ask us questions. The way you can do this is with the chat
box on your screen. Please let us know what you would like us to answer.
Jeevan will tell us what questions we've been receiving.
Just what the first question is. We also got some questions that people
submitted earlier. What are some of the other questions that we got?
What are some of the main considerations when deciding if someone should leverage
their cash value life insurance. Okay and thanks for that question. The
question is what are the main considerations when deciding to leverage
cash value life insurance. There are a number of them and we've actually got a
whole presentation on that topic. Key things: first of all you need to have a
need for insurance. When leveraging — because you are creating tax deductions —
you need to have high enough income to use those deductions. Not just today but
on an ongoing basis. And you do need guidance from your accountant to make
sure that things are structured in a proper way. There are a few things
like that. And the person needs to be comfortable with the
whole idea of leveraging and not everyone is. If tax rules change again,
will that affect any current insurance or will those be grandfathered as well?
Okay. That's a another great question. Thanks for asking that. If the tax
rules change — and luckily for insurance they don't change very often — what would
happen to the policies already sold?Generally speaking, insurance
policies that have already been sold are grandfathered or grandmothered or
grandparented under the old rules. That's because of lobbying done
on behalf of the consumers — the insurance-buying public. The expectation would
be that the government would allow grandfathering as they just did on for
policies issued before 2017. We can't guarantee this, but that is
certainly what the industry does strive for. Last year, when there was all this
concern about what was happening with the tax rules, one of the messages was to
buy insurance before the tax rules changed because that would be a way to
likely grandfather the rules. We have one more. Can you explain the overall
benefit of purchasing life insurance and taking a loan against the cash surrender
value to then purchase investments versus not using the life
insurance and just investing directly. Okay. That's that's a great question.
You could invest directly. So why go through all these extra steps of using
life insurance. The reason is that if you need life insurance then you can't get
it by investing directly. Also you've got very secure
collateral inside life insurance. By structuring things in a proper way, you
are able to get tax deductions on the loan interest and also on a portion of
the premium. This can have the effect of reducing the cost of insurance well
below what it would be normally if someone was not using the strategy.
Also when you're investing, you are able to invest in the same kinds of
investments that you would have invested in before. There isn't much loss
in what you can do. But there are some significant gains by going
through these extra steps. Again, we're generalizing here. Each situation is
unique and requires careful discussion to make sure the strategy does make
sense for that particular person. Those are the the questions that we
have. We'll go to the wrap-up. If you have other questions, you can
always contact us. We do want to keep things on schedule for you because we
know that you are busy. Closing thoughts. Protection and tax strategies
still matter. And that means that life insurance still matters because there
are significant tax advantages available with the products. What's different now
is that it's ever more important to make sure there's enough knowledge when using
the strategies, to be creative based on the new environment, and — in particular — to
collaborate. It's very important that advisors not work in silos but work
together to come up with solutions that are integrated and work overall.
Since we are talking about insurance, while there are amazing tax
advantages, it's essential to always start off with a need for the insurance
itself. You can explore more by contacting us by going to our website
and chatting with us. We'd be glad to to help you further. Thank you very
much for attending this live stream — this is our very first. We are now done.
Thanks again. [Promod and Jeevan Sharma at taxevity.com]
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