Insurance as an Asset

With the relatively recent availability for realtors to incorporate using a Professional Real Estate Corporation, or PREC, the opportunity to build wealth more tax effectively than ever before is absolutely worth understanding.

The simple benefits of using a PREC as opposed to earning income as a self-employed realtor are fairly obvious. The primary reason that most will take advantage of this PREC opportunity, however, is to minimize tax by paying corporate tax rates as opposed to personal tax rates. This allows you to save upwards of 40% in annual taxes while still building wealth in your PREC.

The question still remains, however: What are the key opportunities to maximize wealth creation while minimizing the taxes you pay?

Most realtors build a real estate portfolio because they know how real estate works, the difference between a good buy and a bad buy, and how to add value to their purchase in the process. But where do they go when they begin to look for other investment opportunities, to ensure that their overall net worth isn’t too heavily lopsided in real estate?

Tax-Exempt Growth and Access

There are many options, but only one of which provides the power of tax-free growth and access that a properly structured life insurance policy provides – not just for loved ones or the next generation, but for you. The key is understanding how to turn a tax-exempt, cash-value life insurance policy into one of the safest and most powerful assets in your portfolio, and we will show you how.

Life insurance is by far the most misunderstood asset class in Canada. Most people only see it as a benefit to their dependents or their already successful family members. However, that forces the question: Why do almost all the wealthiest families in every industrialized nation in the world see this instrument as an asset to use for themselves, not just the next generation?

If you’re a high-income realtor or real estate investor, you can use life insurance to create tax-free growth, tax-free income and a liquid, accessible tax-free account during your lifetime. Sound familiar? All three of these benefits are what make a traditional TFSA so powerful, only this asset does not come with a $7,000 annual deposit limit, or need to be held in your personal name alone.

Whether you own a PREC or not, using life insurance as an asset gives you three critical advantages:

1. Tax-Exempt Growth

Whether you own your policy personally, your PREC owns it, or even a family trust owns it, there’s steady, predictable growth of your tax-exempt cash value. In fact, these policies have been paying a profit every year since 1848 in Canada, without ever missing a single year.

2. Tax-Exempt Access

How many financial products in Canada offer you both tax-free growth and tax-free access? Only three. Your TFSA, your home, and your personally or corporately funded life insurance policy. As a realtor, liquidity is essential to building and running your business, whether to help fund your income during slower times, or to take advantage of great opportunities as they present themselves. Most realtors we work with need to know they can access their wealth, not

park it for “one day down the road”.

3. Capital Preservation

Market volatility has hit every Canadian at least once in their life. For realtors, that is more true in the last couple of years than it has been for almost two decades. One of the unique features of cash-value life insurance is that your dividend cash value vests each year. This means that you never have to worry about a market crash or even a subtle decrease, because your cash is

safe and contractually guaranteed.

The biggest reason why successful realtors and families own life insurance is not because they need life insurance. It is because they understand the inherent value it provides as a tax planning tool and specifically, a tax-exempt living asset as they continue to build their family’s generational wealth.

If you’re like many of the families and professionals we work with, you are more focused on wealth creation than you are on wealth preservation. That makes access to your capital essential which is especially true if you invest in private mortgages and real estate.

One powerful strategy that many of our clients use, as they continue to accumulate their family wealth, is to use their policy as an asset that can be leveraged to build additional

Assets.

Step-By-Step:

1. You purchase a cash-value life insurance policy
2. You assign this policy to any major Canadian bank
3. This bank then lends you back 100% of your annual deposit, or 100% of your total cash value
4. You reinvest these proceeds into your business, real estate portfolio or investment of your choosing

If you own a business, invest in real estate, or fund private mortgages, this is a unique strategy for you. Why not consider flowing those same taxable dollars through a tax-free life insurance policy first, then right back out to the original investment or asset you were going to take advantage of in the first place?

You have effectively used one source of capital to build two separate assets simultaneously. Meanwhile, you’re ensuring that your family keeps as much of the wealth you have built over your lifetime, without having to fire sale half of it to pay your terminal tax bill with the CRA. Sound familiar? The exact same concept and tax rules apply to borrowing from your real estate to invest in your business or other qualifying assets.

Using this strategy ticks a lot of boxes for high-income earning professionals and business owners:

You own a permanent life insurance policy for life and are only responsible for the interest on your loan
You have created a tax-free benefit to your estate or business that will cover your terminal tax liability
You have repurposed funds you were already investing to create two assets and an estate benefit
If corporately owned, you can use corporate tax dollars to fund this policy as opposed to personal tax rates of 50% or higher in some provinces

If you’re looking for new ways to build wealth as tax efficiently as possible, this is an asset class worth understanding.

Disclaimer

Guest posts on Canadian Real Estate Wealth Magazine represent the views of individual authors and not necessarily those of the magazine or its editorial team. These posts are for informational purposes and do not constitute professional advice. The magazine does not guarantee the accuracy or reliability of the information in these posts and is not liable for any errors, omissions, or actions taken based on their content. Authors are responsible for their submissions and must ensure they do not infringe on third-party rights. Readers should verify the information and consult professionals before acting on it. Links to external websites in guest posts are provided for convenience, and the magazine is not responsible for their content or availability. For concerns, please contact the author directly.