PROTECTING A BUSINESS LEGACY WITH RETIREMENT INSURANCE.
Upon death, income tax can take a substantial bite out of an individual’s estate. Ways of protecting against that possibility include accumulating capital through savings or insurance. In addition, insurance can provide a source of capital during the insured’s lifetime, for example by financing a major purchase or serving as collateral on a loan.
Jerome is a 48-year-old non-smoker and the only shareholder in JD Inc. The company has been successful, resulting in a large investment portfolio. Currently, the fair market value of the company’s shares is $2,510,000. If Jerome died today, his estate could be liable for more than $600,000 in capital gains tax. In addition, he is concerned by the taxes the corporation is paying on its investments.
JErOme
Male, 48, non-smoker
Personal income tax rate: 48.2%
Life expectancy: 82 years
JD inc.
Fair market value: $2,510,000
Adjusted cost base: $10,000
Tax rate: 50%
Borrowing rate: 6%
Borrowing rate if interest is tax deductible: 3%
Insurance coverage required to cover taxes: $600,000
Insurance coverage required to cover taxes: $600,000
Performance credit on life insurance: current scale less 1%
Annual insurance premium and deposit: $39,000 over 15 years
Performance credit on life insurance: current scale less 1%
Annual insurance premium and deposit: $39,000 over 15 years
If JD Inc. takes out a life insurance policy on Jerome, this would provide the liquidity required to pay income taxes upon his death, while taking advantage of a tax-deferred financial product and potentially tax-free investment funds. This solution combines flexibility, security and liquidity.
More specifically, amounts are deposited into a tax-free life insurance policy. This money compounds tax-free, and the policy may have a substantial cash surrender value. If needed, the company can use the surrender value as collateral on a bank loan. With this loan, the company has tax-free access to cash. The interest may even be deductible if the loan is used for investment. The loan can be repayable only upon the insured’s death, using the death benefit for repayment, with the balance available for other purposes, such as a share buyback.
More specifically, amounts are deposited into a tax-free life insurance policy. This money compounds tax-free, and the policy may have a substantial cash surrender value. If needed, the company can use the surrender value as collateral on a bank loan. With this loan, the company has tax-free access to cash. The interest may even be deductible if the loan is used for investment. The loan can be repayable only upon the insured’s death, using the death benefit for repayment, with the balance available for other purposes, such as a share buyback.
PERMANENT LIFE INSURAANCE WITH CAPITALIZATION
Cash surrender value at age 82: $1,769,000
Capital paid out upon death at age 82: $2,403,000
Capital dividend account credit at age 82: $2,403,000
Capital paid out upon death at age 82: $2,403,000
Capital dividend account credit at age 82: $2,403,000
CENARIO: ADVANCE MADE TO THE COMPANY
Advance granted at age 70: $659,000
Advance net of dividend tax: $429,000 (if distributed to the shareholder)
Repayment of loan balance at age 82: $1,327,000
Upon death, amount available after loan repayment: $1,076,000
Advance net of dividend tax: $429,000 (if distributed to the shareholder)
Repayment of loan balance at age 82: $1,327,000
Upon death, amount available after loan repayment: $1,076,000
Note : The above is only an example. Numerous factors affect results, including age, insurability, and the specific insurance product selected.
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