Case Study: Leveraging Permanent Life Insurance for Optimal Estate Planning

Background

A clinic owner and their spouse, both aged 45, sought to secure their financial future while efficiently managing their estate. Following the recent sale of the practice, the owner’s professional corporation experienced a significant inflow of cash. They faced important decisions regarding how to allocate these funds. With a focus on enjoying their retirement while effectively passing on their success to their children, they explored options that would provide financial security for their family and optimize the value of their estate.

The Challenge

As high-net-worth individuals with substantial value locked in a corporate environment, they needed a strategy that would protect their wealth, minimize their tax burden, and maximize the estate they could pass on to their heirs. The challenge was finding a solution that could meet these goals while also offering flexibility and growth potential.

The Solution

After thorough analysis, a Joint Last-to-Die Whole Life Insurance policy was recommended, structured as follows:

• Amount of Insurance: $1 million

• Total First-Year Annual Deposit: $61,606

• Payment Period: 10 years

• Tax Rates: Personal dividend tax rate of 35% and corporate tax rate of 50%

• Assumed Life Expectancy: Age 90

This policy was selected for its ability to provide a guaranteed death benefit, accumulate cash value over time, and offer significant tax advantages compared to traditional investment strategies.

Alternative Investment Strategy

For comparison, an alternative investment portfolio was considered, with the following allocation:

• Interest: 30% allocation with a 6% return

• Dividends: 20% allocation with a 6% return

• Deferred Capital Gains: 20% allocation with a 6% return

• Realized Capital Gains: 30% allocation with a 6% return

The Outcome

At the assumed life expectancy of 90 years, the difference in estate values was substantial:

• Life Insurance Net Estate Value: $5,124,836

• Alternative Investment Net Estate Value: $3,141,906

The Life Insurance policy provided a net estate value that was approximately 63.1% higher than the alternative investment strategy.

Reasons for the Results and Key Advantages

The superior performance of the life insurance policy can be attributed to several key factors:

1. Tax-Free Growth: The policy's cash value grows on a tax-free basis during the policyholder's lifetime, enhancing the overall return compared to taxable investments.

2. Tax-Free Payout: Upon death, the insurance payout is received tax-free through the Capital Dividend Account (CDA), allowing the full value of the insurance to pass to the heirs without tax erosion.

3. Reduction in Corporate Tax Rate: The policy also has the potential to lower the corporation’s tax rate by reducing passive investment income, which in turn can further optimize overall tax efficiency.

Conclusion

This case illustrates the significant benefits of incorporating a Life Insurance policy into a comprehensive estate planning strategy, particularly for high-net-worth individuals with substantial corporate assets. By implementing this policy, the clients were able to significantly increase the value of their estate, ensuring a greater legacy for their family while minimizing tax liabilities.

This approach not only provided peace of mind but also maximized the financial security and benefits for future generations, underscoring the importance of strategic estate planning.