Life insurance and taxes: everything you need to know. LIFE INSURANCE

Life insurance policies have tax savings, but these savings are often misunderstood. To understand how you can best use your savings in tax-protected life insurance, we spoke to Cory Budovitch, owner of Budovitch Legacy Planners Inc., and Brent Swatuk, Advanced Case Consultant at Equitable Life. Both men are highly regarded in the Canadian financial services industry and are happy to help Canadian entrepreneurs minimize taxes and maximize investment.

Lifetime versus life – tax relevance

Risk life insurance is referred to as a “pure” insurance product. That means it offers coverage for a set period of time and nothing else. However, life insurance offers a savings component. Part of the premiums you pay go into a savings portion, and these savings increase with interest-free taxes – provided you don’t exceed the MTAR (Maximum Tax Accrual Rules) limit. Your life insurance agent or broker is contractually obliged to ensure that your investments do not exceed this limit.

This is the difference between risk insurance and life insurance when it comes to tax relevance. The term does not provide an additional tax incentive, while the whole life increases tax protection and at the same time offers lifelong coverage. For many people, these attractive features are worth the investment due to the additional premium cost of life.

Participating in Life Insurance – What You Need to Know

The main attraction of all life insurance, besides the fact that it never needs to be renewed, is how an investment works with dividends. As a rule, the present values ​​of the entire life insurance increase between 5% and 8% for the duration of the policy. The investment mix is ​​usually very stable; An insurance company has paid a positive dividend for over 165 years! It is a great, low-risk product that gives policyholders a high level of control and consistency.

So what happens if you like the features of life insurance but don’t want to pay for a policy for your whole life? You can pay a little more for the premium if you pay the policy earlier.

As you can see, this is a fairly complicated insurance product. In order to maximize your investment, not to exceed the MTAR limit and to have access to your cash reserves, it is important to choose a consultant who understands all the nuances of this product.

Life insurance and its tax benefits

Let’s take a closer look at the tax benefits of life insurance as a whole.

In Canada, our government allows us to add about ten times the premium to the tax-free investment portion. If certain strategies are used, you can also withdraw the funds tax-free (discuss this strategy with your advisor).

One of the most important factors to look out for is the erosion of your investments due to taxes, as taxes play a massive role in how fast your investment will ultimately grow. This can also be managed with the right strategy and monitored by the right consultant.

Despite a few things to watch out for, there is no other investment in the market that allows such high tax-free contributions.

Life insurance owned by a company – tax benefits

It is not just individuals who benefit from all of life insurance and the tax benefits associated with it. This is also a great product for companies.

Life insurance paid with corporate dollars means that you don’t have to take any income and pay no income tax and then have to invest. The product is a corporate investment that must be paid in corporate dollars, but can still be passed on to relatives tax-free (under certain strategic scenarios).

In addition, if owned by a company, this type of insurance creates a dividend account, which is a fictitious account and a tax credit that can be used to offset other corporation tax owed after death. Any entrepreneur who owes taxes on marketable securities, RRSPs, company shares and / or second homes should use this strategy to reduce their final tax burden.

Leveling tax on investment through life insurance: basics

The corporate tax hike is a strategy to recover the lost wealth that is transferred from a company. In most cases, the company doesn’t know where the money is lost.

Consider this scenario.

A business owner, let’s call him Joe, worked very hard and took a huge risk to get his business up and running. Now Joe sees and keeps profits regularly. We know that Joe takes risks in his business because he feels confident that he can control many of the risk factors to get a great return on his time, energy and effort.

So how can Joe make his money work harder for him to relax a bit and reap the rewards of his hard work and risk taking?

As consultants, we come across many fixed income investments within operating or holding companies, and this is just a really punishing place to keep retained profits. Under this model, Joe receives a nominal or very low return and is taxed with 50.17%!

Like most hard-working business owners, Joe is heavily invested in managing his business and is mindful and accountable for his passive investments. If the closing balance of the investment is greater than the opening balance, Joe feels like he’s making progress.

Usually, Joe then pays the taxes owed on the annual return on income, and the remainder is reinvested in fixed income. Sounds good? Remember what Joe is looking at is the opening, then the closing, and ensuring that the balance is up. What ignores this, however, is the wealth that he has transferred to the helmsman, and especially the missed opportunity not to be able to invest or earn the wealth transferred.

For customers like Joe, we are introducing the graduated tax strategy. What the customer will do is pay the annual net income after taxes and instead of investing them again in the fixed income investment, he will invest them in another vehicle, namely in our high quality early life insurance policy.

The entire life insurance provides an environment that is extremely friendly to the client’s balance sheet, as the present value within the policy increases, the tax is deferred, the annual tax burden is reduced and the business owner’s assets are increased. As time goes by, you see less tax being transferred away and the business owner’s balance sheet being supported with the Cash Surrender Value (CSV), which provides and promotes liquidity, use and control. If required, the CSV can easily be taken back into business to cover cash needs in the crisis or to take advantage of opportunities in the areas of business / real estate / etc.

Should the business owner die, the entire life policy really shows its brilliance compared to the alternative pension model, as it provides a multiplier over what has been deposited over what can traditionally be achieved through the alternative investment scenario. This life insurance policy is unique in that it leads to a credit balance in the company’s capital distribution account and enables the tax-free payment of most, if not all, of the capital to the beneficiaries.

For CEOs like Joe, this strategy can maximize their hard work and investment, giving them more financial rewards for doing business and more financial security for their beneficiaries.

Let us examine another example in more detail.

  • Male, 50 years old, non-smoker
  • With an opening balance of $ 3,075,000 for fixed income securities of 5%, a passive corporate tax rate of 50%, a personal marginal tax rate of 50% and a dividend tax rate of 45% are assumed.

With an opening balance of $ 3.075 million in year 1, the $ 857/35 year balance of $ 7,297 million looks like an overall winner on the balance sheet, but ignores the $ 4.222 million tax payable and the lost opportunity cost completely.

Position the annual net return in an entire life insurance policy.

We pay the first $ 75,000 in advance in all life insurance, leaving $ 3 million left, and reposition the $ 75,000 after tax in the policy annually. From a balance sheet perspective, the chart above looks like a loser if you start with $ 3 million and end with $ 3 million. However, keep in mind that we must take into account the CSV and estate benefits of the Whole Life policy. Also note that the tax column shows the taxes payable in this scenario of $ 2.625 million, which is a reduction of approximately $ 1.6 million in taxes owed.

Here is another way to look at the tax benefits of an entire life insurance policy.


Premium payment

Total present value6

Death benefit6


$ 75,000

$ 56,735

$ 1,189,241


$ 75,000

$ 781,390

$ 2,967,375


$ 75,000

$ 1,940,406

$ 4,093,338


$ 75,000

$ 4,868,360

$ 6,539,648

We see strong deferred tax assets and a sharp increase in estate benefits from year one, but let’s examine the overall picture at age 85 / year 35.

The tax increase in this scenario means that 38% less is removed and the wealth is recovered back into the company or the family. This corresponds to an increase of 32% in death. On the way there the CSV is in our balance sheet and offers liquidity as well as use and control for the business in times of opportunities or crises.

This is convincing enough, but let’s take a look at the additional efficiency benefits that we achieve when we put the company’s values ​​in the hands of the family. Here, the tax benefits granted to life insurance shine over traditional fixed income investments due to the credits that create life insurance revenue on the company’s capital dividend account.

The family is ahead with a tax increase of 57%! They transfer less tax away and keep more of their hard-earned fortune for the risks they take.

What are some distinguishing features of Equitable Life’s Whole Life product?

Equitable Life is one of the last mutual life insurance companies remaining in Canada and the only offering that offers traditional participating life insurance or PAR life insurance. Mutual means that it works for the benefit of its customers.

Most airlines in Canada used to be mutual, but they demutualized and became shareholder companies. Therefore, they must not only benefit the customers who buy the policy, but ultimately respond to the shareholders / investors who want a constant return on their investment. If this sounds like a similar but different sentence, it is; But most airlines have done a great job for Canadians by helping them build wealth, save taxes, and efficiently transfer more wealth to their families.

In 2020, Equitable Life turned 100. It is a very experienced and solid company that Canadians can rely on. It usually has one of the highest LICAT (Life Insurance Capital Adequacy Test) or capital adequacy reserves in the industry, so it’s old, profitable, and asset-backed, which are three amazing things together.

As a mutual company, it belongs to its customers. When you buy PAR life insurance, you are a partner in the participating fund. Although our company’s Par Fund is not the largest in the industry, it offers a nimble way to maneuver in and out of the market in a somewhat silent or invisible manner. The company is small enough to be nimble, but big enough to sit at the institutional desks and share with big players in bond and private placement opportunities.

When you combine this with the exceptional fund managers and returns they have generated year after year, you get a feel for what supports the company’s illustrations and commitment to being good managers of people’s money in the long run. To top it off, Equitable Life also offers excellent options in the areas of risk insurance, universal life, critical illness insurance, pensions and special funds. The company has a strong team of management, regional sales managers, experienced case consultants, and tax and estate resources.

We hope you find this detailed article helpful. If you have any unanswered questions, our experienced insurance experts will be happy to help you with all inquiries and offers on life insurance.

About the authors

Brent Swatuk

Advanced Case Consultant at Equitable Life – one of Canada’s oldest and most respected insurance companies. He has worked in insurance, investment and estate planning for over 20 years. He started his career at London Life as a consultant. He has held various management / advisory functions in the area of ​​employee benefits as well as in the Health and Welfare Trust area. He joined Equitable Life as a Regional Sales Manager in the fall of 2017 and helped some of the top MGAs and their brokers in the Toronto area. In January 2019, he joined MGAs and brokers in Eastern Canada to solve large and complex corporate succession and estate planning cases.

Cory Budovitch

Owners of Budovitch Legacy Planners Inc., a boutique consultancy that helped thousands of professionals and business owners build their way into retirement based on proven financial models, experience, and knowledge. We develop special strategies to increase wealth and retirement income, minimize taxes, enable tax-efficient transfer of generational wealth, and ensure that your estate and family are protected.

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