Owners of very successful private corporations are well aware of the importance of cash flow. Many are protective of how they allocate corporate capital so that business ventures are adequately funded and investment opportunities are not missed.
The Immediate Financing Arrangement offers an opportunity to provide life insurance coverage and accumulate wealth on a tax-advantaged basis without impairing corporate cash flow.
An IFA is a financial and estate planning strategy that:
· Combines permanent, cash value life insurance with a conservative leverage program allowing the dollars allocated to the life insurance premiums to do double duty by still being available for business and investment purposes;
· In the right circumstances and when structured properly so that all possible tax deductions are used, an improvement in cash flow could result.
IFA`s are not for everyone. For those situations that best match the necessary criteria, however, significant results can be achieved. The best candidates for an IFA usually are:
· Successful, affluent individuals who are active investors or owners of thriving privately held corporations who require permanent life insurance protection;
· Of good health, non-smokers, and preferably under age 60;
· Enjoying a steady cash flow exceeding lifestyle requirements;
· Paying income tax at the highest rate and will continue to do so throughout their life.
· An individual or company purchases a cash value permanent life insurance policy and contributes allowable maximum premiums;
· The policy is assigned to a bank as collateral for a line of credit;
· The business or individual uses the loan advances to replace cash used for insurance purchase and re-invests in business operations or to make investments to produce income. This is done annually;
· The borrower pays interest only and can borrow back the interest at year end;
· At the insured’s death the proceeds of the life insurance policy retire the outstanding line of credit with the balance going to the insured’s beneficiary;
· If corporately owned, up to the entire amount of the life insurance death benefit is available for Capital Dividend Account purposes.
Proper planning and execution is essential for the Immediate Financing Arrangement. However, if you fit the appropriate profile, you could benefit substantially from this strategy.
If you wish to investigate this strategy and whether it can be of benefit to you, please contact me and I would be happy to discuss this with you. As always, feel free to use the sharing icons below to forward this to someone who might find this of interest.
(Back to Back Long Term Care)
Will your family be affected by the costs of caring for an aging loved one?
Statistics Canada states that over 350,000 Canadians 65 or older and 30% of those older than 85 will reside in long term care facilities. With increasing poor health and decreased return on investments, the fear of facing financial instability in your declining years is real.
How will this impact your family?
Caring for an aging parent or spouse takes its toll emotionally and financially. Adult children with families and job pressures of their own are often torn between their obligations to their parents, children and careers. This often results in three generations feeling the impact of this care.
Is it important to you to have control over your level of care?
· The cost of providing for long term care is on the rise
· While many Canadians assume that full-time care in a long term care facility will be fully paid by government health programs; this simply is not the case. In fact, only a small part (if at all) of the costs of a residential care facility will be paid by government health care programs
· 28% of all Canadians over the age of 15 provide care to someone with long term health issues
· For the senior generation, the prospect of the failing health of a spouse puts both their retirement funds and their children’s or grandchildren’s inheritance at risk
· Capital needed to provide $10,000 month benefit (care for both parents) for 10 years is $ 1,000,000 (if capital is invested at 4% after-tax)
Norman (age 64) and Barbara (age 61) have three children, aged 32-39. While still in good health the family does have a concern for their future care.
To safeguard against failing health it was decided that they purchase Long Term Care Policies to protect their quality of care and a Joint Last to Die Term 100 Life Insurance Policy to recover the costs.
The Long Term Care policies would pay a benefit for facility care in the amount of $1,250 per week for each parent. The monthly premium for $10,000 per month Long Term Care for both Norman and Barbara is $544.17.
The Premium for a Joint Last to Die Term to Age 100 policy with a death benefit of $250,000 is $354.83 per month.
Upon the death of both parents $250,000 is paid to the beneficiaries (children) tax free from the life insurance policy, returning most if not all of the premiums paid.
Advantages of the Long Term Care Back to Back Strategy· Shifts the financial risk of care to the insurance company
· Allows for a comfortable risk free retirement
· Preserves estate value for future generations
When is the best time to put this structure in place?
· Remember, the older the insured, the higher the costs
· Do it early while you are still insurable!
Please call me if you think your family would benefit from this strategy. Feel free to use the sharing icons below to forward this to someone who might find this of interest.
Should you wish to learn a little more about long term care, the Canadian Life and Health Insurance Association (CLHIA) has published a brochure which can be downloaded here
Many business owners know the important role that life insurance plays in effective corporate planning. Whether it be the funding of a shareholder’s agreement, life insuring corporate debt, or protecting against loss from the death of a key employee, life insurance is of great value in underpinning the financial success of a corporation. Just as life insurance needs for families change over time the same is also true for requirements of the business. If it has been some time since you have reviewed your corporate insurance needs then it is probably time for a corporate insurance audit. This is especially true if the company has enjoyed consistent or significant growth since the time the insurance was first implemented. The scope of the audit and the insurance related issues include the following:
Current corporately owned life insurance
Have the factors which affect pricing changed?
If the current coverage is renewable term insurance should the policy be re-written now before it renews at a substantial increase?
Term Life Insurance policies usually have a conversion period until age 70 or 75 allowing the policy to be converted to a permanent policy without medical evidence. If the policy is nearing the end of the conversion period your options should definitely be explored, especially if you would no longer qualify for new life insurance. Are the beneficiary and ownership designations still compliant with current income tax regulations and Canada Revenue Agency policy? For example, if your corporately owned policy has a beneficiary designated other than the corporate owner, you may wish to review that arrangement to confirm that you are not attracting any shareholder benefit or other undue re-assessment risk. Also confirm that that the beneficiary designation is consistent with Capital Dividend Account planning.
Life insurance funding of the Shareholders Agreement
Has the share value of the company increased? If it has, then the amount of life insurance that the company owns to fund the shareholders agreement should be reviewed and increased. If new shareholders have been added to the agreement, then those new shareholders should be insured in similar fashion to the others. If the company continues to grow and thrive, it may be appropriate to change the type of life insurance held to something longer term or more permanent. For example, if it is obvious that ten-year renewable term insurance does not provide a long enough term, then the coverage should be changed to 20 year term or longer, or perhaps term to 100 or permanent coverage. Insurability can be lost at any time and the longer the term of the policy the longer the current premium will continue.
Insuring the human life value
Key person life insurance is used to reimburse a company for loss in the event of the death of an employee which would severely affect profitability or share value of the corporation. Periodically the company should review the policies it maintains for this purpose to ensure that the proper amount of coverage is in place. If there is no key person insurance determine whether there should be by identifying those employees whose death would adversely affect the bottom line of the corporation.
Life insurance collateral deduction
When considering the advantages of the Capital Dividend Account it is recommended that corporate debt be life insured. If a shareholder whose life is insured for this purpose dies and the insurance proceeds retire the outstanding bank debt, even though there may not be any residual proceeds remaining a Capital Dividend Account is created that is up to 100% of the death benefit. Capital dividends can be distributed tax free to the surviving shareholders making insuring corporate debt very advantageous. In addition, the corporation can deduct from income the net cost of pure insurance of the insurance policy.
If the corporation owns life insurance on a shareholder or key employee for this purpose check to make sure that the right amount of coverage is in place. If not, there should be an additional policy purchased or perhaps a re-write of existing coverage that results in the appropriate amount. If there is current collateral term insurance in place that has been issued with a rating due to less than ideal health or other factors it is recommended that an attempt be made to re-write that coverage. It is possible that the insured can now qualify for lower standard rates of insurance resulting in a lower premium.
If the current insurance was issued with an additional risk premium due to health or other issues this would be another reason to re-write the coverage. This is because substandard policies (those with a rating) issued after December 31, 2016 now have a higher net cost of pure insurance and therefore a higher collateral insurance deduction than those issued before this date.
Be careful to protect Generation 2 policies
The provisions of the Income Tax Act dealing with the taxation of life insurance policy were changed effective January 1, 2017. These changes modified certain factors that ultimately result in the amount of death benefit that can be credited to the Capital Dividend Account. Policies issued between December 1, 1982 and December 31, 2016 are referred to as Generation 2 policies and those contracts generally provide a larger CDA contribution, that Generation 3 policies issued in 2017 and later. As a result, unless there are extremely extenuating circumstances, those policies should be maintained in their current form.
Given the demands of running a business, it’s easy to put off what may seem to be a low priority item on your to do list. Life is unpredictable so it is advisable to always be prepared for events that are out of your control. Reviewing corporate insurance coverage periodically will help to ensure that the right amount and the proper plan is in place. With the help of an experienced advisor, an insurance audit can be very advantageous and have a positive effect on both the bottom line and the balance sheet of the corporation. If you think now is the right time, give me a call and I’ll be happy to assist. As always, please feel free to share this information with anyone that may find it of interest.