The Most Important Tax Shelter of all
19 August, 2014
So, you’ve been inundated with information about RRSP’s, mutual funds, stocks, Exchange Traded Funds, options, trading options, spiders, dividends, and currency exchanges. Your US funds have skyrocketed and your NASDAQ account is looking very pretty! The crash of 2008 is an ancient memory and you are just tickled pink with the returns. Life is good again and you are feeling very optimistic about your financial future.
With all this exuberant optimism, you have to admit that something is missing. What is it? Oh yeah, what if I get fatally ill, or worse yet, drop dead and die, leaving my family with only my RRSP portfolio and that leveraged investment concept the advisor spoke with me about (along with an interest-only loan that is tax deductible). In other words, your family can become financially devastated!
Why am I being so blunt, you might ask? The reason is that folks can be so blind to their own mortality. They can be so completely obsessed with obtaining the goal of financial freedom, that they overlook the defensive position of “what if.” The problem is that “what if” hits you like a ton of bricks. If you have not protected yourself properly with adequate coverage, your last moments can be fraught with thoughts of “why didn’t I buy that coverage from the pushy insurance agent!”
Well, maybe I am one of those pushy agents and quite frankly, some folks need a push. You may think that because you can do some SAP programming or build a back end to a website, that for whatever reason you are invulnerable to sickness or tragedy. Guest what? Technocrats get sick and die just like everyone else.
The excuses I hear are amazing, when I sit down with clients to discuss life insurance. Here are some of the reasons they don’t buy coverage:
“I’m not ready to buy insurance. I’ll buy it when I need it.”
“I don’t like the fact that you earn a commission from the sale of this product”
“I hate insurance.”
“I hate insurance brokers.”
I’ve heard it all! Let’s start with the first objection. You can’t buy insurance when you need it. It will be too late! Last week, I had an IT consultant call me saying he was ready to buy disability insurance. The reason he was ready is that he was in a serious car accident the week before and is now totally disabled. Could I find him a policy? I think not. There’s not an insurance company out there that will insure a disabled person.
Let’s talk about the commissions. Let me present it this way. If you have a policy that pays out $1 million dollars to your family at the time of your demise, will you care if the agent earned a commission? You should be more concerned that the policy is properly underwritten, that the company is sound, and that the agent is moral and ethical in future dealings with your family.
During my 20 plus year career, I’ve never met a widow who claimed that the insurance cheque she received for losing her husband and father of children was too large! In fact, it’s amazing how quickly a million dollar policy gets used up. The widow pays off the mortgage, pays for the kids’ school and draws out an income. And, it’s gone.
Finally, let’s talk about the person who hates insurance brokers. There are some agents out there who give our industry a bad name; Earl Jones, Bernie Madoff, and a few other scoundrels to name a few. The majority of us, however, who have been in the industry for 10 years or more, are a pretty trustworthy bunch. The CLU and other designations took some pretty serious headspace and time to acquire. We have our designations, reputations and licenses to lose and don’t want to do something dishonest and jeopardize our careers, our renewals, and our livelihoods. No, we dedicated insurance advisors are a pretty serious crew and we take your lives very seriously.
I’m just getting warmed up. I just delivered a half a million dollar cheque to the widow of a 40ish IT consultant who died of cancer. They were in my office about a year and a half ago telling me they thought that insurance was a rip off and that I just wanted to make a commission. Fortunately, I was able to make them see the errors of their ways. The husband purchased a policy from me. Six months later, he woke up with a stomach ache that would not go away. It turned out that he had a tumor the size of your fist and he was gone in less than one year.
Now, here is a little tidbit you don’t know. Because he died within the two years of owning the policy, the insurer had the right to scrutinize the policy. If the client lied about his medical information or failed to disclose something significant, the insurer has the right to rescind the policy (not pay out the claim) and simply refund the premiums. However, this policy was correctly underwritten, we disclosed all the information, and the claim was paid in full, including two months interest!
Does it really matter that I made commission selling this policy? Without this policy, his wife and son would have been evicted from their home and forced into dire financial circumstances. Instead, they get to stay in the home they love, and get on with their lives.
On that note, you’d have to be absolutely insane to purchase a serious insurance policy without an insurance advisor. One of the questions they ask on the advisor’s report on an insurance application is “Did you ask the insured all the questions on the application in their presence.” It’s important for the advisor to answer “yes” to this question. If the claim is denied for whatever reason, it’s important to be able to sue your advisor whose healthy Errors and Omissions policy will pay out the windfall from a lawsuit. Without this human interface, you open yourself up to not being able to seek recourse in the event a claim is denied.
Touch wood, I’ve never been sued in my career, but I always advise my clients of this option and am not embarrassed to do so.
On a positive note, life insurance tax benefits are paid out TAX FREE! What else do you know that is paid out tax free? RRSP’s get absolutely hit with tax when they are withdrawn. Non Registered investments get hit with capital gains, while preferable to interest only tax, is still a tax. Yet, life insurance gets a tax-free status. At the same time, accumulation of monies within an insurance policy accumulates tax deferred. What does this mean?
You can build up a whack load of dough inside of an insurance policy with zero tax on the growth. And here’s the best part! You can take the monies out tax free if you set it up properly. Let’s say you accumulate $500,000 inside of an insurance policy. You can assign these monies to a bank, create a line of credit equivalent to 90 % of the value of the funds ($450,000), and take the monies out tax free through the line of credit. When you die at age 100, there is a life insurance policy to pay off the line of credit and the rest of monies go to your family tax free. You can do this strategy personally or you can run it through your corporation. The bottom line is, it creates wealth and tax efficiency. I have clients who deposit $250,000 every year into an insurance policy just to shelter monies. And it was their accountant who advised them to do so, not the insurance agent.
I could go on, and I haven’t even discussed critical illness protection. This is a huge topic and everyone should own this type of policy. It pays out a lump sum of up to $2 million dollars in the event you develop one of a series of horrific diseases (cancer, heart attack, stroke, multiple sclerosis, etc). and live 30 days. It’s one of those selfish benefits that you pay the premiums for and you receive the lump sum payout in the event of a claim. Here’s the kicker – the average age of an individual who claims on a Critical illness policy is 41 years old!
Here is my point. Get insured before it’s too late. Find an advisor you like and respect who has some longevity in the business and listen to what he or she has to say. Yes, it won’t be as exciting as the Excel India China fund, but it doesn’t have to be. After all, it’s insurance we’re talking about – conservative, yet very powerful!
This article was written by John Klotz. John is an advisor at Northwood Financial/IPC Investment Corporatin. He can be reached at email@example.com or call 416-783-PLAN (7526).
Insurance Products are offered through IPC Estate Services Inc.