Permanent life insurance, such as whole life and indexed universal life (IUL), can function as an investment while still providing a death benefit. These policies accumulate cash value, which policyholders can access through loans or withdrawals.
- Tax-Deferred Growth: The cash value grows tax-deferred, making it an attractive option for those who have maxed out other retirement contributions.
- Supplemental Retirement Income: Policyholders can borrow against the cash value to supplement retirement income with favorable loan terms.
- Protection Against Market Volatility: Some policies offer market-linked interest credits while including a floor to prevent loss.
By leveraging these benefits, individuals create a tax-efficient income stream while maintaining insurance protection.
Premium Financing for High-Net-Worth Individuals
Premium financing allows affluent individuals to obtain large life insurance policies without liquidating assets. This strategy involves borrowing funds to pay premiums, often using the policy’s cash value as collateral.
- Preserves Liquidity: Individuals keep their assets invested instead of using them for premiums.
- Leverages Low-Interest Rates: If loan interest is lower than investment returns, policyholders may experience net gains.
- Estate Planning Benefits: Premium-financed policies can cover estate taxes, ensuring heirs receive the maximum inheritance.
This approach helps individuals maintain financial flexibility while securing substantial life insurance coverage.
Life Insurance as an Estate Planning Tool
Estate taxes can significantly reduce generational wealth. However, life insurance helps mitigate these costs and ensures a smooth transfer of assets.
- Keeps Proceeds Outside the Taxable Estate: Placing a policy in an Irrevocable Life Insurance Trust (ILIT) excludes the death benefit from the taxable estate.
- Provides Liquidity for Estate Taxes: Heirs can use life insurance proceeds to pay estate taxes instead of selling valuable assets.
- Equalizes Inheritances: Business owners can use life insurance to provide liquidity for non-participating heirs while passing the business to those involved.
By integrating insurance into estate planning, families can efficiently transfer wealth while minimizing tax burdens.
Buy-Sell Agreements for Business Owners
Business continuity is crucial for entrepreneurs. Life and disability insurance ensure a smooth transition in case of death or disability.
- Life Insurance in Buy-Sell Agreements: Business partners fund buy-sell agreements with life insurance. This ensures heirs receive fair value while surviving partners retain control.
- Disability Buyout Insurance: If a partner becomes permanently disabled, disability insurance provides funds for the remaining partners to buy out their share.
- Key Person Insurance: Companies take out life or disability insurance on key executives to mitigate financial loss.
With these solutions in place, business owners protect their companies and provide financial security for their families.
Disability Insurance for High Earners
Traditional disability insurance often falls short for high-income professionals. Standard policies cap benefits, leaving a coverage gap. High earners, such as physicians and executives, require specialized coverage.
- Supplemental Disability Insurance: Private policies supplement employer-provided coverage to bridge income gaps.
- Own-Occupation Coverage: Benefits are paid if the policyholder cannot perform their specific job, even if they can work in another capacity.
Disability Overhead Expense Insurance: Business owners use this policy to cover operating expenses if they become disabled.
Tailored disability insurance ensures high earners maintain their standard of living in case of disability.
Charitable Giving Through Life Insurance
Life insurance provides a cost-effective way to leave a significant charitable legacy while gaining tax benefits.
- Naming a Charity as a Beneficiary: A simple way to direct the policy’s death benefit to a nonprofit.
- Donating an Existing Policy: Transferring ownership of a policy to a charity may provide an immediate tax deduction.
- Using Life Insurance in a Charitable Remainder Trust (CRT): This strategy allows individuals to receive income while ensuring the remainder benefits a charity.
By incorporating charitable giving into financial planning, individuals maximize their impact while optimizing taxes.
Final Thoughts
Life and disability insurance offer more than basic financial protection. When used strategically, they become tools for investment growth, estate planning, business succession, income protection, and philanthropy. Whether you want to optimize estate strategy, secure your business’s future, or enhance disability protection, these strategies help achieve long-term financial goals.
To explore how strategic insurance solutions fit your financial situation, please contact us. With the right strategy, your insurance policies become powerful tools that go beyond risk mitigation, helping you build wealth and secure your legacy.
Jaryd Runquist, CPA, B.Comm.
Specialized Insurance Strategist, Wiegers Financial and Insurance Planning Services Ltd.
The Advisor and Manulife Wealth Inc. and/or Manulife Wealth Insurance Services Inc. (“Manulife Wealth”) do not make any representation that the information in any linked site is accurate and will not accept any responsibility or liability for any inaccuracies in the information not maintained by them, such as linked sites. Any opinion or advice expressed in a linked site should not be construed as the opinion or advice of the advisor or Manulife Wealth. The information in this communication is subject to change without notice.