In a recent study, 67% of business owners said that they would like their advisor to provide estate and legacy planning advice.1
When you talk with corporate clients about protection, there’s a good chance they’ll have other things on their mind such as liquidity, diversification and higher corporate estate values. They likely know that to have stability at death, they need a strong strategy in place while they’re living – and they may look to you for help.
These conversations typically start with a life insurance need, to help protect the value of a client’s business to help them enhance the legacy they can leave to future generations. And among the solutions you can offer is the purchase of a tax-exempt participating (par) or universal life insurance policy.
A corporate asset transfer (CAT) strategy starts with the protection offered by a life insurance policy, and then builds on it by comparing the value of life insurance against a taxable investment. By transitioning a portion of existing taxable assets from the fixed income portion of a client’s corporate investment portfolio to insurance, net estate values may be higher at death, while maintaining access to cash for the business and offering exposure to a more diverse range of assets.
Tax-exempt, cash value life insurance can be an effective estate planning tool, but it also has additional merits when used as an alternative asset class.
Who can benefit?
Clients who may benefit from a CAT strategy using par or universal life insurance policies include:
- shareholders of a Canadian controlled private corporation (CCPC),
- those between ages 30-55 and in good health,
- corporations with a large permanent life insurance need, and
- holding companies with a significant fixed-income investment portfolio.
Corporate clients often have significant assets in taxable non-registered fixed-income investments and may want to enhance the value of their estate while diversifying assets and reducing risk, without sacrificing liquidity. Using a CAT strategy with these clients can help diversify their corporate investment portfolio and enhance their estate value, all while giving them peace of mind knowing they can access cash in the future, if required.
How it works
- Your client’s corporation purchases a par or universal life insurance policy insuring the life of the client. The corporation owns the policy, pays the premiums, and names itself as the beneficiary.
- Premiums are paid by transferring assets from the fixed income portion of the corporate investment portfolio to the insurance policy. The cash value accumulates within the life insurance policy on a tax-preferred basis. Depending on the policy type, the death benefit may also grow over time. By directing excess income to a tax-exempt life insurance policy instead of taxable investments, the corporation can reduce its annual taxable income, potentially resulting in greater asset growth. (Because transferring assets from their investment portfolio to pay the life insurance premiums may trigger deferred capital gains, clients should work with their independent tax advisor to make sure it’s done as tax-efficiently as possible.)
- If the corporation requires access to the cash value in the policy, it may be able to take a policy loan, make a withdrawal from the policy, or collaterally assign the policy to a lending institution for a loan. All these options have their own unique considerations, which need careful consideration before moving forward.
- When the insured person dies, the life insurance death benefit is paid tax-free to the corporation as the beneficiary.
Working with its independent tax advisor, the corporation can post a credit to its capital dividend account (CDA) for the full amount of the death benefit received, less the adjusted cost basis (ACB) of the policy at the time of death. The CDA credit can then be used to pay tax-free capital dividends out of the corporation to the estate or shareholders. With the traditional approach, taxes may consume a large portion of the client’s estate, both during life and at death. The corporate asset transfer strategy uses life insurance to help reduce the taxes payable, while leaving a larger portion for the client’s legacy.
Sun Life Financial’s CAT strategy can help provide clients with valuable life insurance protection for the value of their corporation. It may help them grow corporate assets and net estate values, while maintaining comparable liquidity to an alternate investment portfolio and lower portfolio risk.
Tools and resources
- For an overview of our corporate sales strategies, use our one-page sales strategy overview.
- Run an integrated sales strategy our with new, easy-to-use illustrations system.
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1December 2015 – Data was collected online using the Ipsos iSay panel