Personal FinanceTax Planning

How to Invest the SAME Money in Two Different Places at the Same Time

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“You don’t buy life insurance because you are going to die, but because those you love are going to live.” — Unknown author

In my new book, Tax-Efficient Wealth, I discuss tax-exempt life insurance as one of the tax-efficient tools for building and accelerating your wealth.

Of the four tax-free options that the Canadian tax law permits, the use of tax-exempt life insurance is one of the least known tax strategies. You’re likely familiar with the other three options — Principal Residence; Tax-Free Savings Account (TFSA); and Lottery Winnings.

Under section 143(3) of the Canadian federal income Tax Act, assets accumulate within a tax-exempt life insurance contract free of annual accrual taxation.

When you pass away, any proceeds of the policy are distributed to your beneficiaries on a tax-free basis outside the scope of your estate, bypassing its associated costs.

Insurance is a no-brainer tool that allows for:

  • Tax-deferred growth, similar to the registered pool of capital in an RRSP (Registered Retirement Savings Plan)
  • Potential for tax-free income during retirement
  • Tax-free distribution upon your death

“Fun is like life insurance; the older you get, the more it costs.” — Frank Mckinney

Below is a quote from the PIVOT Magazine published by the Chartered Professional Accountants of Canada:

“Life insurance is still an excellent investment tool…one of the few investments that allow for the tax-sheltered accumulation of funds and at the same time covers the risk of death. The pretax compounding effect and the tax-free access to this accumulating fund are two of the attractions of life insurance. The tax-free maturity on death is the ultimate plus.”

Let me draw your attention to the bolded text (bolded texts are all mine) because I think this is one of the most understood and understated benefits of tax-exempt life insurance.

Tax-exempt life insurance is the only product that allows you to double-dip your investments.

In other words, by investing in a tax-exempt life insurance policy, you have the opportunity to earn a guaranteed rate of return that compounds year after year.

At the same time, you can withdraw up to 100% of the invested funds and invest the proceeds in another investment vehicle to earn additional returns without any impact on the original guaranteed returns from the insurance policy.

Essentially, you could invest the SAME money in two different places at the same time!

So why is the use of tax-exempt life insurance not as common given the tremendous tax advantages it provides and the fact that you can double-dip?

There are potentially many reasons for this, but here are my top 5 reasons:

1. Lack of Knowledge

This is probably one of the biggest reasons why people don’t consider life insurance as a tax planning tool or even as a tool to protect the financial welfare of their loved ones.

There is so much misinformation about insurance and in the midst of this kind of information, it’s challenging for most to see the real benefits of having insurance as a great financial and tax planning tool.

“I detest life insurance agents: they always argue that I shall someday die, which is not so.” — Stephen Butler Leacock


2. Insurance is expensive

Truth be told, insurance is expensive, particularly the kind of life insurance (whole life and universal life) that is suitable for tax planning purposes.

With the ever-growing costs of keeping up and managing family budgets to pay for things like food, clothing, housing, daycare, car payments, kids’ education, etc., insurance is just outside of those “necessities” when money is tight.


3. Insurance provided through your job

Many people are offered life insurance as part of their employee benefits package and often, decide not to get additional insurance.

They forget that coverage provided by this kind of employer-provided insurance is often not sufficient. In addition, if you leave the job, it’s typically the type of insurance that doesn’t “move on” with you.


4. It is intangible

For those like me, that prefer to buy things that are real, paying for insurance that we don’t see will seem like a waste of your hard-earned money.

All you get from buying an insurance policy is pages and pages of contract that you don’t understand and will likely never read.

A mindset shift is required here to see insurance as an investment, as protection for rainy days, and as a hedge for risk.


5. Life insurance — it’s on my list…eventually

There’s no deadline on life insurance, no mandate from the government on purchasing it.

Your parents may have never talked to you about its importance, and it’s certainly not the most invigorating topic for conversation. As a result, most never get to it.

“If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.” — Suze Orman


Conclusion

Consider the benefits of insurance, particularly as it relates to wealth planning and tax optimization. Start by educating yourself. Review your existing policies, if applicable, and engage a knowledgeable professional that can guide you and provide a plan that will match your unique situation.


P.S. I am on a mission to arm you with financial education. That’s one reason I started writing on medium and that’s why I wrote Tax-Efficient Wealth. This book will help you accelerate your wealth in a tax-efficient way. Grab a FREE eBook version of my new book, Tax-Efficient Wealth, to learn how you can build wealth quickly using strategies that will save you a ton in taxes.

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KGreen

The author KGreen

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