Unique Insurance Investment strategies for Children and Adults!
Tax Free investment strategies for Children
I recently had a discussion with an older client about their new Grandchildren. He was telling me that every time, his Grandchildren have a birthday, celebrate a religious holiday, or whenever he sees them, He gives them money as a gift. I asked how often do you figure you give them this money, and what would be the total annually. He suggested that he gives them something once every two or three months and, birthdays are the biggest gift. He says that over the course of a year, each child is given about $1,000.00. I asked, what do they do with the money? His reply was, they buy what they want, clothes, movies etc.
I asked if he might be interested in a different way to give them $1,000.00 every year. He asked what I had in mind. I mentioned I have other clients who give their grandchildren $1,000 every year for just 20 years. The money however is not given directly to the grandchild rather it is invested into an insurance policy and guarantees them $100,000 of life insurance immediately. Over time that life insurance grows a cash value. After 20 years, no more payments are required. The policy remains and keeps growing in value. The cash value becomes fairly significant and the grandchild can at that point, just let it grow. If they let it grow, by the age of 65, they will have $270,000 of cash they can access tax free to enhance their retirement. It also has a death benefit of $500,000 at this time. In most cases, they will never have to purchase life insurance again.
I asked him, what do you think of that idea? He thought for a moment and said I have always been giving them money, but they never save it and now, some are getting married and they want me to help pay for the wedding. If I had used your idea, I might still pay for the wedding, but at least I would know that if I couldn’t, they would have enough cash value when they are 25 or 30 years old in the policy to pay for their own wedding. He also stated if he knew this idea existed 30 years ago, he would have done the same for his own children. That being said, he just gave his newest six month old granddaughter her first gift. He gave her a $100,000 Life insurance policy as outlined above. To him it was a no brainer.
(Enhanced Retirement Strategy) For adults
Over the years, I have talked with many business owners and self-employed individuals. When I mention insurance to them, most say “I have that through work”, “I am good”, “I am not interested” or “insurance is a rip off”. People think insurance is a rip off, because they associate it with Auto and home insurance. Insurance that by law they must have and pay for and that they may never see value in. Only when a family member or close friend dies, do they want to hear about insurance ideas and strategies. The problem for them now, is that they may not be insurable and the premiums are too high. I strongly urge people to at least take the time to understand all their insurance options when they are younger, healthy and can make an informed decision. Most clients invest in Term insurance. For pennies on the dollar they can get millions of dollars of coverage. The problem with this is that after the term, the premiums for this insurance increase dramatically.
Something that a large number of my educated clients are investing in is what I call an “Enhanced Retirement Strategy” It incorporates permanent, or Whole Life insurance.
This is an investment strategy through insurance that people can start at any age. The younger they are, the less the investment will be. It will accumulate a cash value that grows over time. The advantages to this strategy from day one, are that the investments grow tax free, (There are two certainties in life (Death and Taxes) similar to a TFSA, but with a significantly higher investment ceiling. Today, one can only invest a total of $63,500 total into a TFSA, whereas if you can justify $2,000,000 of insurance coverage today, you can qualify for $2,000,000 in this strategy. The investment is required for just 10 or 20 years. After that, it grows itself.
Case Study, John Doe
John Doe is a 50 year old non-smoker. He is self-employed. He has some RRSP’s and some real estate. He has RRSP’s because he wants to reduce his taxes payable in the year invested. Having said that, when John retires and access’s this money, it will be taxed at his marginal rate.
(What about Real Estate?) Joe has real estate investments, upon retirement, they may be hard to liquidate but if he can, significant tax will have to be paid (capital gains)
(What about the family cottage?) Everyone wants it, but without proper tax planning, the capital gains on the cottage are so high that in many cases the kids cannot afford them and end up selling the cottage.
Since most 50 year old people invest in balanced strategies, I urge them to look at what percentage they are invested in fixed income earning low returns that are non-registered.
In my scenario John has $285,000 invested in fixed income earning very low interest. He would like an alternative to this strategy, with the same risk levels, but higher returns.
John was shown that if he invested $12,000 per year, for 20 years, he would have $285,000 of insurance from day one. After 20 years of investing, his insurance death benefit would have increased to about $450,000 and the tax- free, cash value inside this policy would have grown to about $285,000. Joe has other income from RRSP’s but for the next 10 years, he wants to supplement his retirement. In this scenario, he can withdraw a little over $20,400 per year tax free for the next 10 years to supplement his retirement. If he died at age 81, his death benefit would still be a little over $285,000 and would be paid within a week to his beneficiaries, tax free.
So what are the advantages?
Tax free growth on your investment
Less risk than a 5 year GIC, with returns more comparable to a balanced portfolio
Up front insurance coverage for life with a premium that is always the same and a death benefit that grows.
The ability to redeem most of the cash value in the policy tax free to supplement your retirement
The ability to transfer his wealth to his loved ones tax-free
If you have never given these strategies any consideration and are interested to learn more, we are happy to address any questions and concerns you may have.