19/12/2024
Estate Bond is a strategy using life insurance to increase the amount of your estate passed on to your beneficiaries. This strategy can substantially increase the amount of money you have available to pass to your beneficiaries upon your passing, when compared to other investment types.
If your RRSP’s, TFSA’s and RESP’s are not fully maximized then you should avoid this strategy and instead continue to invest in these other three investment vehicles. All three of those choices will produce results that far exceed anything a life insurance policy can do.
If your tax preferred investments (RRSP’s, TFSA’s and RESP’s) are all maximized, then in some fashion any further retirment savings are going to be taxed.
We assume that your taxable investments are done using some sort of asset allocation, and that some portion of those investments are in fixed income – bonds and similiar more guaranteed investments, earning a lower more stable interest rate than say an index fund. It’s that portion of your investments that you would compare investing in a life insurance policy. Often, this would be 10-20% of your taxable investments.
So, if your tax sheltered investments are full, and you have a portion of your taxable investments in fixed income or bonds, then this is the strategy for you.
The strategy is straighforward, you simply redirect a portion of your investments that you do not expect to ever need while alive, from fixed income, to a life insurance policy. Upon your passing, the life insurance policy pays a death benefit into your estate. The death benefit is projected to exceed the amount that would be available from investing in other asset classes.
In this case, conceptually we are treating the premiums as investments and the death benefit as the realized, after tax value of the investments at the time of your death. That allows us to compare to other investment types.
Assuming a male age 50 non-smoker, premiums of $50,000 for 10 years and then nothing thereafter (the policy becomes paid up). I’ve used Equitable Life for this example.
Advantages will vary based on when you pass, however in this example if you passed at age 90, the life insurance policy would pay out $3,149,655 to your estate. A comparable investment with the same premiums, earning 4% before tax would deliver $1,276,278 after tax to your estate. The life insurance after tax rate of return at that age is 5.29% annually. The alternative investment, illustrated at 4%, actually returns 2.67% after tax annually.
You can download the sample report HERE
You can see that if you have investments that you don’t expect to use in your lifetime and the goal is to maximize benefit to your beneficiaries, then a life insurance policy can be very advantageous – giving you much higher values in your estate than otherwise would be possible or likely.
If you’d like to discuss this strategy further and receive customized quotes, please contact The Term Guy at (416) 642-6820.
You may also be interested in the Insured Retirement Plan.