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MOMENTUM NEWSLETTER
| CONTACTLIFE INSURANCE
In its simplest form, life insurance is meant to provide safety and security
for the ones we love.
Types of life insurance include Term, Permanent,
Universal Life, and Whole Life.
Life insurance is commonly used to:
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Cover last expenses and immediately provide cash for surviving family
members
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Pay off mortgages and other debts
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Eliminate tax liabilities triggered at death
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Replace lost income for the surviving spouse and dependant children
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Provide education funds for children
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Provide a charitable testamentary gift
In addition to meeting your personal planning needs, life insurance can also
play a large role in addressing business risk management and succession
planning. You work hard for your money.
Isn't it time your money worked for you?
You probably have life insurance. After all, it is a
cornerstone of a good financial plan. But did you know that rather than just
gathering dust in a filing cabinet, your life insurance policy can be out
making money for you?
It’s a relatively simple idea. First you need a life insurance policy on
yourself that builds cash value, like a universal life policy. (The owner
and insured person have to be the same unless a company owns the policy.)
Once you have built up value in the policy, you use it as collateral for a
loan – and voilà – your policy is working for you.
Okay, that’s a bit oversimplified. Here’s an explanation with more detail:
Under current tax law, the cash value in a life insurance policy accumulates
tax-free, up to certain limits. As the owner of the policy, you can use the
cash value in the future as collateral for a bank loan.
How do you get cash value in your policy? By depositing more money into the
policy than is required to cover the insurance and other policy costs.
Once you have enough value in your policy, you can assign the policy to the
bank as collateral for a loan or line of credit. This loan provides the cash
you need ... and you receive the cash tax-free. As long as you keep the
policy in effect, you don’t repay the loan until death. The insurance
policy’s tax-free death benefit is used to repay the loan. And once the loan
is repaid, any remaining death benefit is then paid to your named
beneficiary, tax-free.
Jeff is the perfect example of how this strategy works. He’s 40 years old,
healthy, and a non-smoker. He wants to purchase $1 million of life insurance
and plans to put $25,000 into the policy over the next 15 years. Jeff is on
target to retire at age 65 and he wants to have an after-tax yearly income
from non-registered sources of about $40,000. Based on the assumptions in
the chart, by using his life insurance policy as collateral for a loan, he
can receive tax-free loans each year from age 65 to 84, for $46,766.
As you can see in the chart, it’s the same annual tax-free payout he might
have received if he used some other kind of investment on which growth is
taxed each year. But at the end of the day, by using life insurance he also
has a life insurance death benefit and a net estate value over $1 million.
Sounds great! What’s next?
If you already own a universal life policy or other permanent policy
that has cash value, contact your advisor for details on how your policy can
work for you.
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Using insurance policy as loan |
Taxable investment |
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Annual deposit for 15 years |
$25,000 |
$25,000 |
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Rate
of return |
5% |
5% |
|
Annual tax-free payout from age 65 to 84 |
$46,766 |
$46,766 |
|
Death benefit at age 85 |
$3,735,237 |
$0 |
|
Loan
balance at age 85 |
$2,051,399 |
$0 |
|
Net
estate value |
$1,683,838 |
$0 |
These
calculations assume that Jeff buys an insurance policy with
level cost of insurance set at $5,428 per year, 2% of each
deposit is used to pay provincial premium taxes, and the policy
has fees of $12 per month. They also assume that, if current tax
rules continue in effect, Jeff’s personal tax rate is 47%, he
gets a 5% rate of return on the money accumulated in each
investment, he obtains a loan against the policy at 7% and he
lives to age 85. Rate of return is for illustration purposes
only. Results will vary depending on actual conditions. |
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