Tax Shelter |
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| The life insurance industry is a tax haven, and will likely always enjoy that status, because of all the special laws created just for it. You can spend time wondering why, or you can use their heavily favored status to your advantage!
One popular strategy is the Universal Life Insurance. Over the last 20 years Canadians have placed millions and millions of dollars into these policies. The reason is that they allow tax~deferred treatment of your investment dollars, with minimal risk. It's the best onshore tax investment strategy, other than RRSP’s available |
| What Is Universal Life Insurance ? |
| A Universal Life Insurance Policy is a plan issued by a life insurance company that allows you to deposit an amount of money and shelter all of the growth of the investment from income tax. Each insurance company gives their plan its own unique name. |
| How Does It Work? |
| CRA (previously Revenue Canada) allows insurance companies to issue these plans and maintain their tax~sheltered status as long as they satisfy certain conditions. These plans are considered "exempt" by CRA under sections 12.2 and 148 of the Income Tax Act. The insurance company must maintain a minimum premium. |
| How Do You Get Your Money Out? |
| When it comes time to take income, you can generate income from your plan one of two ways: |
| 1. You can make direct withdrawals, from the tax~sheltered account, up to the adjusted cost base (ACB) of the plan without incurring any tax. Simply stated, the ACB is equal to your deposits less the cost of insurance. Once you have withdrawn the portion of the account, CRA will consider any further withdrawals to be taxable. Your insurance company can tell you what the ACB is for your account
so that you don't withdraw more than you want to. |
| 2. Under a special arrangement, you can leverage your account with a bank. This is the real benefit of the Insurance! The leveraging of your account is what allows the plan to outperform other investment vehicles, because a loan is never taxable! |
| How Is It Structured? |
When it comes time to take income from your plan, the bank will accept your plan as security for a loan. You can then make a single loan or a series of annual loans that you will use as income. The bank will capitalize the loan payments, so that you never have to make payments on the loan. Because the tax~sheltered growth within the plan continues to grow TAX-DEFERRED the bank has an ever increasing asset with which to secure each year's loan. The loan is eventually repaid from the TAX-DEFERRED insurance payout, when you die. And then, the insurance payout in excess of the bank loan balance is paid out TAX-DEFERRED to your beneficiaries. Since a loan is not taxable, this plan allows
you to Earn All Of Your Income TAX-DEFERRED! |
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