Life Insurance

Life Insurance – Why Millionaires are Buying as Much of it as Possible

If you’re in your sixties, you’ve most likely had a need for life insurance in the past. Whether it was when you purchased your first home and wanted to protect your spouse and children, or when the bank required it as a condition of lending you money. These were situations when life insurance was a need. However, there is a point when some people go from needing insurance, to wanting insurance.

Insurance as a tax-free investment

Let me explain. Today, there are only three ways to invest in Canada tax-free. You can shelter money in a tax-free savings account (within your limit), you can buy a home, or you can purchase a life insurance contract. Any growth or withdrawals from your TFSA are tax-free. Any increase in the value of your principal residence doesn’t attract capital gain taxes when you sell, and life insurance contributions grow tax-free and then go directly to your beneficiaries tax-free upon death.

Let’s say you have lots of cash because you just sold your business and you’re looking at ways to invest it without increasing your tax bill. You’ve maxed out your TFSA and you own a home. Your last tax-free investment option is investing via a life insurance contract.

Here’s how it works

Some insurance contracts allow you to make extra payments over and above the annual premiums. These extra payments are invested and grow tax-free inside the insurance contract. Upon your death, the life insurance contract pays out its death benefit, plus the investment portfolio to your beneficiaries tax-free.

This is how wealthy families maintain (and grow) their wealth over generations. They are purchasing as much life insurance coverage as possible because the more they own, the more cash they can shelter inside of these policies. We’ve all heard the saying, “the rich just keep getting richer.” Now that you’re aware of this strategy, you can understand why.

For as long as the Federal government and Canada Revenue Agency continue to allow Canadians to invest tax-free inside a life insurance contract and eventually receive the proceeds tax-free, this is an excellent option to shelter excess cash. It’s no wonder that at a certain point, insurance goes from a need to a want. Let’s just hope you’re healthy enough to get approved for coverage.

Colin Sabourin is a Winnipeg-based investment & financial advisor with Harbourfront Wealth Management. His specialty is working with farmers who are planning to sell or transition their farms within the next 5 to 10 years. 

Disclaimer: The views expressed are those of Colin Sabourin, Certified Financial Planner, and Investment Advisor, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund.

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