More can be done to educate clients about the financial planning benefits of a “properly structured” life insurance policy.
Chris Karram, founder and chief strategy officer at SafeBridge Financial Group, likened the vehicle to having money under your mattress … except it continues to grow.
But he believes not enough advisors are prepared to educate clients about how it can be used as a tax-free savings account that’s liquid, can be accessed for retirement or prior, has less volatility than a five-year GIC and doesn’t have an annual cap.
He told WP: “It’s a great vehicle that’s been around a lot longer than a TFSA but people don’t know about it, so it takes a little more commitment to educate your client and help them understand how it fits into their overall financial portfolio. Frankly, some advisors are interested in that process and some aren’t. That’s the reality of the beast.”
Karram sees two categories of clients: the family market, which he said may not always be the best option because of the higher annual, long-term commitment in terms of deposits, and high-net-worth individuals who have extra cash flow and investable assets.
“They are paying extra tax and want to minimize that on their investable assets or use their extra cash flow to minimize tax on new funds,” Karram said. “They are in a unique position where they can take advantage of this vehicle.
“The truth is, many advisor understand this but not as many as you’d imagine understand the inner nuances of these vehicle in terms of how long they’ve been around, how a participating fund works, what companies offer them and why, and what their various niches are in terms of clientele.”
For certain clients, a life insurance product can be a core pillar of their portfolio and financial plan, with potential to shelter tax, produce consistent dividends and protect a family for generations. For the vast majority of Canadians, however, Karram said that life insurance is the most misunderstood financial tool in the country.
“Most think of life insurance as just that, consistent with home insurance or car insurance. But life insurance is different. It's a tool that obviously protects your family - and there is no greater way to pass on wealth to the next generation if you have insurance upon death - but what most people don’t understand is it’s been around since 1847 in Canada and it's a product that, when structured properly, because it’s under the Insurance Act, can help shelter money from tax.
“The money that grows inside the policy is tax free and it can be completely creditor proof, so no one can get to that money if something ever happens from a credit perspective. Also, once you receive your annual dividend, that value of your account cannot decrease.”
This, he added, is critical in case a 2008 “were to roll around again”, while the other major attraction, according to Karram, is that it has paid a dividend every year since 1848, which makes it the only financial instrument in Canada that’s never failed to pay a profit.
“It’s the juice of the vehicle,” he added. “And the fact that the profit has been paid every single year through the Great Depression, multiple recessions, tech bust and September 11 … that makes it stand out among its peers as an investment grade vehicle because even GICs say, ‘we will guarantee your capital but not your returns’.
“When you really get into the nuts and bolts of a properly structured cash value life insurance policy, the benefit to the individuals can be significant because it can be used for retirement income purposes and used by Canadians as an asset the bank is willing to lend you money on.”
He added: “We understand real estate. You buy a property and you put down 20% and you have got 20% equity in the property itself and you hope it goes up. Life insurance can be used very similarly when structured properly; you put your money in as your annual deposit but then you withdraw those funds up to 100% depending on the lender.”
He stressed that the banks in Canada are confident enough in the consistency of the vehicle and what it’s done over 171 years that they are willing to lend 100% of the money you put into it.
“Also, the portfolio that pays the annual dividend on a life insurance policy is different from company to company but what is really, really special is the majority of them have a lower standard deviation than even a five-year GIC, which is mind-blowing.”
While not a one-size fits all product, Karram said there are a growing number of people who have become disillusioned with the other, better-known investment vehicles that government “has its fingers in".
He said: “They are what the government knows the most about and some people don’t want them to have their hands all over their assets, thinking ‘they’ve got my house, RRSP, TFSA but I’ve got other assets and I want to put them elsewhere’.”
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