Having more money than you need when you retire is a good problem. However, maximizing every dollar you receive by using it efficiently makes sense. Your Canada Pension Plan and Old Age Security are subject to income taxes. Without proper planning, most of that income could go to the Canada Revenue Agency. If you’re out of tax-sheltered investments but want to make the most of your CPP and OAS when you don’t need it, a participating life insurance policy (PAR) could be the solution you’re looking for.
Participating Life Insurance
A participating life insurance policy offers a death benefit that will be in force until the insured dies. Unlike term insurance, it has no expiry date. These policies also provide several advantages that may make them valuable to your portfolio.
Advantages of participating life insurance
A participating life insurance policy offers:
- A tax-free, guaranteed death benefit
- An opportunity to earn dividends
- The potential to build up a cash value in the plan
- Flexible premiums that you can pay for with your CPP or OAS
- Tax-free investment growth as long as the money stays in the plan
The death benefit of a PAR is in place until you pass away. At that time, the benefit will be tax-free to the beneficiaries, providing a sense of financial security and reassurance.
In addition to life insurance, PARs can add to your investible assets. The money you pay into the policy is pooled with other policyholders, and any surplus is paid out as dividends. While dividends aren’t guaranteed, life insurance companies usually pay them. You can use the dividends in your plan to:
- Reduce your premium
- Buy more insurance
- Invest it in an interest-bearing cash component of your plan
- Withdraw them as taxable cash
Another feature of a PAR is that you can use the policy’s cash surrender value as security for a loan. The option to borrow against the policy gives you financial flexibility.
When you purchase a PAR, you can choose a term to pay off your policy, such as twenty years, or make payments until you pass away. A flexible payment structure makes it easier to include the costs in your budget. If you don’t need your CPP or OAS, you can use them to make the payments for your policy.
Many retirees have no RRSP or TFSA contribution room left but want tax-free investment growth. If dividends and cash remain in the plan, they will grow tax-free in a PAR, which can boost your portfolio.
How you can benefit from a PAR
A participating life insurance policy can be very beneficial, depending on your circumstances. These policies are suitable for people who:
- Maximized their RRSP and TFSA contribution room
- Want access to tax-free investment growth
- Want to use the policy for estate purposes to leave a legacy, pay taxes, or equalize an inheritance between beneficiaries
- Are interested in a policy with a guaranteed death benefit and an investment component
Disadvantages of a participating life insurance policy
A PAR offers a lot of benefits but has a few drawbacks. The first is that their premiums can be expensive. Life insurance premiums usually increase with age, so if you’re collecting CPP and OAS, you may find the premiums for a PAR will be high due to age.
Another potential issue is these policies typically require a health exam. If you have health issues, you may not qualify for coverage.
Finally, unlike other investment plans, you don’t have control over the investment options in a PAR. Some investors don’t like the lack of control over their investments in a participating life insurance policy.
Is a Participating Life Insurance Policy Right For You?
A participating life insurance policy can benefit your portfolio and your estate plan. If you’d like more information about whether a PAR is right for you, please call us at 613-416-9649 or book a call online. Our financial advisors at MDL have provided expert estate planning advice for over thirty years. We’ll help you decide if a PAR will enhance your estate plan.
If you liked this article, check out these three:
https://mdlfinancialgroup.ca/satisfying-tax-debts-with-life-insurance-proceeds-is-it-possible/
