Robert Carducci, RRC®
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Life insurance can ensure estate-planning tactics
Prominent in the ’90s, the term “estate bond” is an old concept of the life insurance industry that mathematically proves how life insurance can protect and transfer certain assets that may otherwise be left vulnerable to market-related erosion or taxation.
Although investment assets and life insurance are indeed different parts of your strategic financial goal-setting. They can work in unison to create wealth. How they work together goes far beyond the adage “buy term and invest the difference,” which simply uses term insurance at the level of basic financial protection, unlike the alternative, advanced features of the estate bond, built right into a tax-planning manoeuvre.
How does an estate bond help to defer taxes?
This concept is an estate’s all-encompassing wealth preservation strategy because it is designed to work upon the death of the insured. Although an estate bond is not an investment designed for short-term financial planning, it can increase the tax-free wealth that you pass on to heirs.
The estate bond is ideal for the investor who has already maximized his or her tax benefits using an RRSP or has significant investments in vehicles to defer capital gains tax. This investor may enjoy a thriving business enterprise, hold a large fund or stock portfolio, and want to maximize some of the capital that will be left to heirs.
Consider a situation in which a couple of age 65 would like to leave funds to their grandchildren to help them purchase their first homes as well as enhance their future.
How does it work? For example, with an initial investment of $150,000, you can acquire a joint last-to-die life annuity. This life annuity will pay $7,000 per year after tax (after the marginal tax rate is paid). This $7,000 payment is then used to purchase a permanent joint last-to-die life insurance contract – on either one spouse’s life or both spouses’ lives – with a face value of $350,000. At this stage of the financial planning, the $150,000 of estate value grows to $350,000, which will one day pass to the estate tax-free! Note: The figures vary based on circumstances and interest rates.
Note: Note: Joint last-to-die Life Annuity based on a male, age 65; female, age 65, single premium non-registered deposit of $150,000, joint survivor annuity. Life insurance is based on a male age 65, non-smoker, female 65, non-smoker, joint last to die for $350,000 death benefit (with a level cost of insurance, and increasing death benefit). Ask your financial advisor to compare the projected growth of permanent life insurance (some use tax-sheltered GICs and tax-advantaged segregated funds to enhance the face-value growth) versus taxable investments (such as equity investment funds and/or GICs). In most cases, the estate bond, along with certain guaranteed benefits, will far outperform the initial capital invested with respect to the after-tax value passed on to the estate.
The estate bond is definitely an estate-planning tool to maximize wealth payable to heirs after death. It is true that there is far less liquidity in the life insurance contract. Therefore, consider this advanced planning concept if you have already amassed enough money to guarantee a good retirement lifestyle. Because life insurance proceeds are paid to your beneficiaries tax-free, you can be assured that the government can’t take any tax bite out of this wealth bequeathed to your loved ones.
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