What is it? How to Start the Conversation, and Tools to help
In the fall of 2022, I penned a series of articles that focused on insurance sales opportunities at various stages in the business cycle. Last month I dove deeper into one of those opportunities, Estate Preservation (funding the tax liability), and shared some questions that can assist in initiating the conversation with the hopes of disturbing and motivating your clients to act. In this article, I will tackle the next top strategy, “Estate Maximization (Corporate Estate Bond), and by extension, the Retirement funding alternative (Corporate Insured Retirement Program)”. It’s here that we find the transition from “needing” to “wanting” insurance begins to take hold.
Estate Maximization (and accessing cash values)
As in the previous scenario, the motivation to acquire life insurance is more of a WANT than a NEED. In the process of building a successful business, most business owners have identified certain assets that are not needed to support their lifestyle or business goals. Having originated from retained profits or surplus cash of a business, whether held in an operating company or an investment holding company, these assets are often invested in GICs or other taxable investments. Unfortunately, these taxable investments may not be the most tax-efficient way for the corporation to invest its retained profits. The challenge is that the growth on investments is taxed each year and most, if not all the dividend distribution to the estate, is taxed (either due to redemption of shares or wind up of the corporation on death). As an alternative to traditional investments, a tax-exempt permanent life insurance plan can offer the opportunity to minimize taxes during the accumulation phase and minimize taxes during the distribution phase (either while alive or on death via CDA). Depending on the client’s objectives, the insurance solution may be designed in such a way as to build up more cash value tax effectively to preserve or improve liquidity for either short-term needs (i.e. IFA: Immediate Financing Arrangement) or long-term needs (i.e. Corporate Insured Retirement Program).
Here we find the two most touted solutions promoted in our industry:
1) The Corporate Estate Bond, also referred to as the Corporate Estate/Asset Transfer, Corporate Preferred Estate Transfer, or Corporate Investment Strategy.
2) The Corporate Insured Retirement Plan, also referred to as the Corporate Asset Efficiency and the Corporate Preferred Retirement Solution
By far, these two strategies are the MOST POPULAR and therefore the MOST IMPLEMENTED insurance sales used in the corporate market space today. The Corporate Estate Bond strategy is a corporate insurance concept designed to increase the after-tax value of the corporation to the heirs of the business owner. The Corporate Insured Retirement Plan is a corporate insurance concept designed to provide insurance protection for the business or the estate while accumulating funds tax effectively for future needs (most often, to supplement the business owner’s retirement lifestyle). To learn more about accessing cash values, including collateral borrowing (personal vs corporate borrowing), please refer to the articles in the links below.
It's with these 2 strategies that we often hear permanent life insurance classified as a unique ASSET CLASS.
Especially in a corporate setting, PERMANENT LIFE INSURANCE can significantly increase the after-tax transfer of wealth to the heirs by virtue of the capital dividend account.
Recap (client profile):
(A) The Corporate Estate Bond
Who is it for?
Business owners looking for a tax-effective way to pass on corporate assets to their heirs
Their goal?
Pass on the value of corporate assets to named beneficiaries in a tax-efficient manner
(B) The Corporate Insured Retirement Plan
Who is it for?
Small business owners of privately controlled Canadian corporations who want a source of supplemental retirement income and have corporate funds to invest in a plan, and individuals in good health and require life insurance (to fund a buy-sell agreement, estate equalization, or fund a tax liability), and those who will qualify for third-party loans and are agreeable to managing these loans as part of their business operations.
Their goal:
In addition to obtaining life insurance protection, find a source of supplemental cash flow for their key employee or shareholder
Starting the conversation (sample questions to ask):
Are you accumulating an investment portfolio inside your company? If so, are you doing this for retirement planning, transfer to heirs, or both?
Does your business generate surplus cash that’s above what’s required to sustain your lifestyle goals or required by the business?
Do you want to reduce corporate taxes on investment income?
Do you want to lower your corporation’s existing taxable income on passive assets to avoid losing access to the low small business tax rate? (PASSIVE INCOME TAX RULES 2018 and the small business deduction tax grind).
Do you have heirs to whom you want to transfer your assets to?
Do you want to minimize the tax payable upon the withdrawal of funds from the company?
Do you need permanent life insurance protection for estate planning purposes?
Do you want to supplement your retirement income?
Have you maximized your individual RRSP and TFSA contributions?
Do you want access to cash for business opportunities or to supplement your retirement income in the future?
Tools to help:
Here is a case we worked on in Nova Scotia earlier this year. A successful business owner with surplus cash looking to build and transfer wealth tax efficiently to his estate but also wanting the flexibility to have access to cash to supplement his (and his wife’s) retirement income.
The first chart demonstrates the immense value that the life insurance solution brings to the estate. This is displayed using 3 metrics: (1) actual Net estate Value comparison (2) Estate boost and (3) Pre-tax yield required by corporate investment to match the net estate value produced by the insurance solution. Also, there’s a section that quantifies the growth lost due to taxes for the corporate traditional investment.
The second chart focuses on the retirement income aspect of the insurance solution. Here, the comparison between the “Traditional corporate investment” and the “Corporate Insured Retirement Strategy” is broken down “line by line” with a summary of the positives (pluses) and negatives (minuses) produced by implementing the insurance strategy. It’s a simple and concise way to present the two alternatives.
Asking probing questions and using clear and concise presentation tools are vital components of the overall sales process. Without them, identifying opportunities (client suitability) and highlighting the “lift” that insurance solutions produce can be difficult.
