Aug 2021
Planning in the Age of Covid
Planning in the Age of Covid
Life Insurance Can Help
Mark Halpern CFP, TEP, MFA-P
Just a few months ago, Canada’s vaccination rates lagged most developed
countries. Now that we’ve caught up, many of us are double-vaccinated
and anxious to resume normal life activities like eating in a restaurant or
visiting friends and family.
Unfortunately, the latest COVID news from around the world is not
reassuring. Despite our best efforts, outbreaks continue in many places
and new variants are reported. Mandatory masking is making a comeback,
even for the double-vaxed, and new shutdowns loom in many places.
It’s too early to predict what that means for us in the Great White North, but
many experts say that living with a pandemic is likely going to be a part of
our lives for decades to come.
Aside from lurking COVID dangers, who would have predicted unforeseen events like the recent deadly collapse of a condo building in Florida, or unpredictable flooding in Western Europe that killed hundreds and destroyed communities that have been around for centuries?
We must adjust to living in a world with more risk and unknowns than we’ve
grown accustomed to.
Although we can’t predict the future, we all wonder what we can do now to
protect our families if something bad happens.
Well, after 30 years of professional practice in insurance and estate
planning, I do know the future. And I want to share it with TaxLetter®
readers so you are prepared for what’s coming and can plan accordingly.
What my crystal ball says: Income tax rates will rise sharply. Taxes will
be payable on principle residence sales. There will be an inheritance tax
and a wealth tax. And estate taxes which currently are at 25 per cent-70 per cent without proper planning, will continue to rise, leaving even less for your family.
Life Insurance: Get it now
Insurance rates are going to rise as insurance companies need to produce
profits for their shareholders. Claims due to pandemics will impact profits.
And with investment returns reduced, coupled with less disposable income
for average tax payers, the insurance companies will have to increase
premium rates. We may even get to a time where premiums are “not
guaranteed” and could become variable, so the best time to lock in those rates
is now.
Underwriting for life insurance will become more difficult due to the
pandemic – more people won’t qualify, and life insurance will become
something that is only available to the youngest and healthiest Canadians.
If you put off applying for Life Insurance, you have no guarantee that you
will still be insurable when you want it most. In the past month alone, I
have had two successful families that I was doing estate planning for the; suddenly parents and successor children became uninsurable. Call it bad luck, bad timing or just a fact of life. We can never take good health for granted.
It’s not a question of “if” It’s just a matter of “when” all of the above will
take place. The time to start thinking about how you will mitigate those
taxes is now, while the sun is shining, while you are alive and healthy, and
options are available to do the necessary planning.
Why Life Insurance?
In a world of growing uncertainty, aside from getting basic planning
together like up-to-date wills, two powers of attorney and having an
updated Estate Directory, there’s never been a better time to review your
Life Insurance. Getting Life Insurance will NEVER be this easy or less
costly.
The primary purpose of Life Insurance is to provide your family with the financial
certainty they need to carry on when you are no longer around.
When doing estate planning around estate taxes, we often recommend
joint and last-to-die insurance, which covers both spouses and is paid out
after the second death. It is much less costly than single-life coverage (by
up to 40 percent) and can provide relief from capital gains taxes and other
expenses related to the estate for pennies on the dollar.
In fact, Life Insurance is one of only four tax-free investments Canadians
can still access. The other three are TFSAs, your principal residence and –
you should be so lucky – lottery winnings.
The COVID plague made it easier than ever to buy life insurance. It
wasn’t so long ago (pre-COVID) that people who wanted life insurance
had to meet with an insurance advisor to complete an application, have a
nurse come to their home to obtain blood and urine samples, and patiently
await completion of the insurance underwriting process.
Out of necessity, Canada’s life insurance companies responded quickly to
COVID by reducing underwriting requirements and streamlining the entire
process. In many cases, clients can get up to $5 million of Life Insurance
(any type) with no medical underwriting, no blood or urine samples and no
in-person meetings. All it takes now is a 15-minute phone call.
Many clients are taking advantage of the opportunity by topping up their
own coverage or getting new term and permanent policies for spouses,
children, and grandchildren.
The policy beneficiaries can include a spouse and other family members,
as well as a charity – which is a lot better than leaving half or more of your
savings to the government in the form of taxes.
Many Canadians who are single, widowed or divorced don’t know that the
government discriminates against them. When they die - without a spouse -
they leave the government up to 53.5 percent of their RRSPs and RRIFs,
and another 25 per cent on the growth of non-registered holdings.
There are several ways to use Life Insurance. The main one of course is
for the executor of an estate to use the death benefit of the policy of the
deceased to pay off taxes owed before distributing the remainder to family
or charity.
As a tax-exempt investment you can overfund a policy (pay more than the
premium required) and build up cash surrender value (CSV).
For business owners, high income professionals, real estate investors and
people with substantial investment portfolios, we often recommend the
Immediate Financing Arrangement (IFA) strategy. It allows them to buy Life
Insurance without tying up their money paying premiums, while securing
their Tax and Estate Planning needs.
One such client, a 65-year-old real estate investor had built a $50-million
property portfolio he wanted to pass on to his children. Because he had
done no estate, tax or insurance planning, we had to give him the bad
news that his estate would face a $10-million tax bill on his death.
We suggested he use life insurance to cover those taxes so his family
wouldn’t be forced to sell assets to pay the tax bill. He was reluctant to use
his money to buy Life Insurance but loved the idea of getting it while still
having access to his premiums for other investments.
The insurance policy’s CSV serves as collateral to secure a loan with a
Canadian chartered bank. He paid the initial premium with his own money,
then used the policy cash surrender value to secure the loan to reinvest in
his real estate business. He pays only the loan interest, which is tax-
deductible. The loan is typically paid off at death with the life insurance
proceeds. The balance goes to family and charity, virtually tax-free.
Business owners enjoy the advantage of using corporate dollars to pay the
premiums on their Life Insurance. Corporations get taxed at a lower rate
than an individual shareholder’s personal tax rate. For example, in Ontario,
the corporate tax rate applicable to active business income is about 13.5
per cent, and 50 per cent on investment income. The top individual marginal
tax rate in Ontario is about 53.5 per cent.
Corporate-owned life insurance is used by wealthy business owners to
accumulate passive wealth inside a company in a tax-effective way. They
can also access that wealth and transfer it tax-free to surviving
beneficiaries.
But life insurance goes even further. Long-time readers of the TaxLetter®
know how important charitable giving is to me, helping those less fortunate
and creating a legacy of community goodwill that your children and
grandchildren can carry on.
For business owners particularly, life insurance can protect a family or
business against the sudden loss of a key person in the business. It can
also be used to fund a shareholder buy/sell agreement so that heirs have a
guaranteed buyer for their shares and a guaranteed market value with life
insurance proceeds, for pennies on the dollar.
Along with proper estate planning, life insurance can give you the peace of
mind that comes from knowing you have looked after your family and
supported a charity of your choice – all crucial during the pandemic.
In every generation there seems to be one or two milestone events like
war, famine, depressions, and recessions. If you plan now while you and
your family are well and your business is steady, your planning ideas will
work as intended.
Don’t do this alone There are many ways to help reduce taxes now and
in the future, but they require comprehensive estate planning and working
with experienced, knowledgeable people.
Our advisors across the country are available to help you – on the phone,
Skype or through Zoom.
Do not hesitate to contact us for a no-obligation consultation.