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11/07 - W. Michael Thomas

     Looking For Another Tax-Efficient Way To Invest?

There may be an opportunity within your life insurance program.
If you’re looking for an opportunity to shelter more of your investments from tax, your life insurance program might be the answer. 

Here’s why.
There are two components to a universal life insurance plan: an insurance component and an investment component.   A fixed amount of the premiums you pay goes toward covering the cost of insurance, fees and provincial premium taxes.  Any excess is deposited into an investment account.  You can invest as much as you want (up to certain limits prescribed by law) in the investment portion of your policy and not pay tax on any growth of the investments until you withdraw from this account.  This could allow your investments to accumulate faster than if you earned the same income in a fully taxable account.
Not only can you choose how much to invest (with limits as noted above), but some universal life plans also allow you to choose the investments.
If you’re looking for a way to boost your cash flow or cover emergency needs, you can withdraw from the investment component of your policy, although taxes, and in some instances, early withdrawal penalties may be triggered.  The cash value of your plan may also be used to secure a line of credit.
Another advantage is that all of the proceeds of the policy will pass to your beneficiaries at death - tax-free if you have named a beneficiary - and your estate will not have to incur probate fees associated with the investment.  If the same investment were held outside the universal life policy, taxes would typically be payable by your heirs or your estate on the growth in these investments, and probate fees may also be incurred if the investment becomes part of your estate.
So how can you take advantage of the tax deferral opportunities within a universal life insurance plan?  First and foremost, if you haven’t recently reviewed the adequacy of your life insurance coverage, do so.  It’s quite likely your coverage is in need of an overhaul if your earnings have increased substantially, or if your personal circumstances have changed since the purchase of your existing coverage.  This may entail the purchase of additional coverage or converting an existing term insurance policy to a permanent product such as universal life. 
While the ability to defer taxation of investment growth inside a universal life insurance policy is appealing, it’s critical that you address the basics before considering this strategy.
Unlike RSP contributions, additional premium payments to a universal life contract are not deductible.
Talk with us today to determine whether there may be an opportunity for you to shelter more of your wealth from tax.

W. Michael Thomas is a Partner at The Investment Guild (the Investment Guild is a People Corporation company)

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