Jul 31, 2019
Another place you may have money
It’s not your mattress. When an emergency strikes, or opportunity arises how many people do you know that can write a check for $50,000 without calling the bank or cashing in RRSPs? Likely not many. The most likely person to be able to do this is someone with a Whole Life Insurance Policy.
Whole Life Coverage does not work like term insurance or the creditor term insurance you may find on a mortgage or standard loan. Whole Life Coverage builds cash in the policy in the form of Paid Up Additions that grows cash as an investment. This is your money, not the insurance companies. Not only does it grow the death benefit of your coverage, but it grows cash you can take when the need arises. The cash is an asset on your balance sheet.
This begs the question, why take a loan from the bank when you can take a loan from yourself? You have some options too. You can do the loan and pay yourself the interest, which will allow the policy to grow by its standard dividend every year. You could also do a straight withdrawal of cash, which would reduce the amount of coverage in force in the event of death. In either case in the event of death the policies death benefit is reduced by the amount of the loan outstanding or withdrawn. A loan would not create a taxable disposition, although a straight withdrawal will above the adjusted cost base of the insurance. Some clients purchase Whole Life policies and then make systematic withdrawals in later years to create cash flow at the same time as reducing their coverage, as needs for coverage elapse. To call these plans flexible is an understatement.
However, the key takeaway from all this is over 1 million Canadians currently have a whole life policy. If the policy has been in force for several years it can be a good place to turn to in the event money is needed. Some people forget about this and run to registered investments, not only hindering their future growth but incurring income tax on the withdrawal. A loan from your insurance policies cash value is a much more beneficial way to get your hands on cash. The loan would not only be tax free, but the interest payment would keep the policy growing. The best of both worlds.
Whole Life policies have another whole set of advantages if they are owned by a corporation, but that’s a topic for another day. Just don’t forget about your Whole Life policy when needs arise, and if you don’t have one maybe it’s time you get one. I do know a guy…
Fonger Wealth Management Inc
Moose Jaw, SK