Why every family business need life insurance

Any fool can make a fortune. It takes a man of brains to hold onto it.”

– William H. Vanderbilt

By Jennifer Poon, January 3, 2023

Wealth creation vs. wealth preservation

Success is not a given. Entrepreneurs take many risks in their active business, usually with a lot of hard work and an element of luck. They would prefer not to take risk in their passive portfolio. When it comes to your hard-earned profits, capital preservation is key. Choosing low risk, passive involvement would minimize the risk of losing your capital. For a very successful entrepreneur, the bigger challenge is how to pass on your legacy to the next generation, hoping that the fruits of your labour can be enjoyed by generations to come. Three reasons why this can be a very daunting task: 1. Taxes, 2. Market uncertainty and long-term horizon, 3. No guarantees.

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"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1"

Warren Buffet, Two Rules of Investing

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Life insurance provides tax sheltered returns, guarantees and downside protection and superior portfolio returns, that is why whole life insurance is a great tool for generational wealth transfer.

The Tax Grind

With the current high tax rates in Canada, investment returns are taxed at about 50%, that means you only keep about half of what you make. Life insurance provides tax sheltered growth so your returns can grow tax free. On a compound basis, this can account for as much as an additional $10 millions in your bank account if you deposit $1 million in the next 10 years and earn 4% on an annual compound basis. Death benefit is intended to provide for your loved ones with financial support in the event of your untimely death. As such, it has several tax advantages including drawing out the insurance proceeds as tax free dividends to your estate.

The combination of these two very powerful tax attributes is rare and difficult to replicate in conventional planning and investment vehicles. In our example, you will need to find an investment that provide 15% returns as a replacement, but then higher return also translates to higher risk.

Portfolio composition

Your premiums are invested in a par account. Insurance companies take a very conservative, low risk approach to investing premiums. In fact, the par account often provides lower risk and higher return than most popular index funds. Large insurance companies are also able to access new equity issues, debt issues and private equity offerings that are not accessible to retail investors. Simply put, you and I are unlikely to be able to build the same quality portfolio.

Low risk, guarantees and downside protection

Life insurance provides a guaranteed payout and a guaranteed cash value. Once the policy is written, your premiums are guaranteed to stay the same regardless of future markets or health concerns. Premiums paid to insurance companies are invested and dividends are paid to participating policyholders. Policy holders can use the dividends to purchase additional insurance which may have a cash value. When the cash value is credited to the policy, it is vested. If the markets fall, it’s protected.

Capital Preservation is key

You work hard for your success. For most of our clients, losing money is not an option. Life insurance can be effective in maximizing your returns by providing tax advantages, guarantees and professional investment management that can not be replicated. This helps you preserve your hard-earned cash and pass it on to generations to come.