Most of us are familiar with two tax-efficient ways to invest in Canada; RRSP’s and TFSA’s. These are programs were setup by the government to encourage Canadians to invest for retirement. These programs do have maximum limits for contributions, once you max out your limits, you cannot put anymore money into these tax vehicles. You may wonder if there is a third option to invest money tax-free if you have maxed out your limits or just prefer not to invest in RRSP’s and TFSA’s? In fact, there is; through permanent life insurance!

How does it work?

First its important to understand how life insurance works. Most people think of term insurance, where you pay a certain amount of fixed premium every month and the policy pays out a lump sum death benefit to your beneficiaries if you pass away.

Term insurance is just one type of life insurance product. It is called term because it is in effect for a certain period of time with an expiry date. There is also something called permanent insurance, which lasts your entire life and will not expire. These types of insurance also have an investment component built into them, where part of the premium you pay into these policies are invested and growing tax-free. Term insurance is purely insurance with no investment component.

With permanent insurance, you can overfund the policy, which means that you can pay more than the minimum premium required to provide you the death benefit, the excess is put into the investment component and grows tax free just like an RRSP or TFSA.

The other great benefit is that any amounts accumulated are distributed tax-free to the estate or beneficiaries if the life insured passes away. With RRSP’s, any amounts accumulated would have to be transferred by withholding some tax.

Permanent Insurance is another way to help you achieve your financial goals

  • Maximize your estate
  • Add to your retirement income
  • Protect the value your estate
  • Leave money for charity

The main types of permanent insurance

  • Whole life insurance: The insurance company determines what to invest your premiums in. They typically choose a conservative portfolio of bonds, equities, mortgages and real estate. It requires less decision-making from the policyholder. Whole life insurance can also be participating where policyholders can received dividends based on the performance of the insurance company. These dividends can be paid in cash, applied to premiums, purchase additional coverage or reinvested to earn more interest.
  • Universal life insurance: With universal life insurance, you choose the investments. The insurance company will provide an extensive list investments to choose from, including equity funds, fixed income funds, GICs and balanced funds. The policyholders face the same market risks that they would face with RRSP’s and TFSA’s. The policyholder can choose how much premium to pay and the final death benefit amount.

Life insurance as a third option for tax-free investing

Whether you choose Whole Life or Universal Life, permanent insurance is an effective way to invest your money tax-free just like RRSP’s and TFSA’s. You also get the added benefit of life insurance coverage to preserve your estate, provide for retirement or leave money for charity.

In some cases it may be the only option for you, for example if you are self-employed, you may not have any RRSP room or if you are in a low income tax bracket then RRSP’s may not benefit that much.

Business owners that have retained their profits in their company may not have TFSA’s as an option but can use permanent insurance to invest the company’s excess cash in a tax-efficient manner.

Choosing the right investment vehicle is a major decision since its long term. Karma Financial is at your side to either make a recommendation or provide you with all the information you need to make an informed decision.