A bright idea for funding post-secondary education

A bright idea for funding post-secondary education

With a new school year starting up, September marks an important turning point in the year for many Canadians – especially us parents. If you are a parent of a school-age child, something that may be on your mind these days is the cost of post-secondary education. Even if your child has only just had their first day of kindergarten, this is one of those topics where the sooner you address it, the better.

Why your RESP may not cut it

For most of us in Canada, a registered education savings plan (RESP) is the first tool that comes to mind when we talk about tax-sheltered saving for our children’s education. While RESPs are certainly useful and a good place to start, they have their limitations, including a $50,000 contribution limit per beneficiary and maximum 35 years to use the funds. The reality is that the total cost for your child to obtain just a typical four-year undergraduate degree is likely to exceed $50,000. Furthermore, your child may well be global-minded and could choose a post-secondary institution that is not considered eligible under the RESP program.

These limitations mean that RESPs will likely fall well short of your objectives if your child chooses to pursue a costly education at an overseas institution – for example, an Ivy League university – or plans to pursue studies beyond the undergraduate level.

Fund my child’s education with … life insurance?

Is using life insurance a conventional approach to saving for post-secondary education? No.

Is it a smart, tax-efficient approach favoured by wealthy families? Yes, and for good reason!

Using a permanent life insurance policy as a savings tool for post-secondary education is actually fairly simple and can potentially result in considerable tax savings. As the parent, you take out a policy on your child’s behalf with you as the policy owner and your child as the insured. This type of policy has both an insurance component and an investment component, with the latter accumulating dividends. Because you are starting when your child is young, these dividends have a long time to compound and grow the value of the policy. And depending on the amount you apply for, medical underwriting might not even be required!

funding post-secondary education

When it’s time to start paying for your child’s post-secondary education, you have two main options:

  1. The first is to surrender the life insurance policy to access its cash value. This withdrawal may be taxable to the owner of the policy. If so, it will be taxed either at your marginal tax rate or at your child’s marginal tax rate if you have transferred ownership to them (you have the option to transfer ownership of the policy to your child on a tax-free basis anytime after they turn 18). Since your child’s marginal tax rate will typically be quite low, there is potential for significant savings.
  2. The second and preferable option is to take out a loan against the value of the insurance policy and use these funds for your child’s studies. The bank issuing the loan becomes a beneficiary of the insurance policy via a collateral assignment for the amount of the loan, while you or your child (depending on your preference) simply needs to pay the interest on the loan. This approach is advantageous because the growth of the insurance policy’s value will exceed the interest on the loan.

Huge benefits beyond education

Even if your child doesn’t end up using their life insurance policy to fund their education – for example, because they are awarded a full scholarship – there are still major benefits to having it. Life insurance premiums are based on factors such as the age, health and lifestyle of the insured at the time when the policy is created; the younger and healthier the insured, the lower the premiums. As long as the premiums continue to be paid when due, the value of the policy will continue to grow and the premiums will be locked in, regardless of changes in the health of the insured.

If the parents of a healthy two-year-old girl wanted to purchase a $3 million whole life insurance policy on her behalf, the premiums on this policy would be much, much lower than what the same girl would have to pay if she decided to purchase a similar policy at age 30 or 40.

While they are unlikely to appreciate it when they’re younger, this is a significant gift to your child – and future generations – that they will be increasingly grateful for as they grow older and wiser. Wouldn’t you have liked it if your parents had proactively sorted out your insurance needs when you were little?

Ensuring a brighter future

There’s no way around it: your child’s post-secondary education is going to be expensive. The good news is that with advance planning and some outside-the-box thinking, you can invest in your child’s education on a tax-effective basis while at the same time giving them a valuable head-start toward a well-insured, financially secure future.

Whether your child is just learning to walk or currently learning to drive, it’s never too early or late to take advantage of this opportunity. We’d enjoy the opportunity (and have the expertise) to assist you with making smart use of insurance to fund your child’s education, freeing up your time to focus on supporting and enjoying your child’s journey through life.

Since there are too many variables and options to cover in this article – including the amount you want to save per year and your specific objectives – this is something best discussed in person. So we invite you to give us a call (+1-647-808-7700), or send us an email to discuss how we can build a brighter future for your child.

funding post-secondary education

Act now or miss out on the benefits of permanent life insurance

Act now or miss out on the benefits of permanent life insurance

Even if insurance is a topic that puts you to sleep, there is a major change coming in the insurance world deserving of your attention given its potential to significantly impact your wealth and what you are able to pass on to your loved ones.

Unless you work in the insurance industry, there’s a good chance that you aren’t aware of this or haven’t given it much thought.

Act now or miss out on Permanent Life Insurance-2

What’s Happening with Permanent Life Insurance?

On January 1, 2017, new rules will come into effect that will change how permanent life insurance policies – which have both an insurance component and an investment component – provide tax-sheltered benefits.

Broadly speaking, the new rules will result in a general increase in the cost of insurance and a decrease in the speed at which premiums can be paid into a policy.

What does this mean for you? Ultimately, you may end up paying more in taxes and enjoy less potential growth of your wealth.

Personal or Corporate Permanent Life Insurance Policy?

The rule changes will affect the taxation of all permanent life insurance policies , whether they are held by individuals or corporations. So if you currently hold a permanent life policy – or plan to set one up in the future – these changes are relevant to you.

Although corporate-held policies may be less common than those held by individuals, they offer considerable tax advantages. For corporate-held policies, the biggest change under the new rules is how old you have to be at the time of your death to receive the full death benefit on a tax-free basis. Currently, if you are 73 or older when you die, the full death benefit can be paid out tax free as a corporate dividend to your chosen beneficiaries. Under the new rules, the amount of your death benefit that can be paid out tax free will be partially reduced unless you are 90 or older at the time of your death.

Why Does This Matter?

The key thing to note is that the upcoming changes will reduce your ability to minimize tax and maximize wealth. The existing rules offer an attractive opportunity to use permanent life insurance to protect your wealth for future generations, but the clock is ticking and this opportunity will disappear as you celebrate the stroke of midnight on New Year’s Eve.

The good news: permanent life insurance policies established prior to January 1, 2017, will be grandfathered under the existing rules. As long as you set up a permanent life policy optimized for the existing rules before the end of 2016, you can lock in your access to the more favourable existing rules. However, some changes to the terms of existing policies may be treated as the creation of a new policy under the new rules and thus take away the grandfathering protection, so it’s important to get everything in order before the deadline.

What Should You Do?

The deadline may still be several months away, but the time to act is now. Insurance companies are experiencing a rush of applications as 2017 draws near and have warned that processing applications may take longer than normal.

The underwriting process – which can take anywhere from a few weeks to several months – must be completed before December 31, 2016 for a new policy to be grandfathered under the existing rules. So, now is the time to start the conversation and get the ball rolling.

Permanent Life Insurance for future generations

You may not find insurance an interesting topic, but in this instance it is a timely topic that offers an excellent way to maximize the wealth that you can pass on to future generations.

We are here to help you take advantage of this opportunity before it disappears, so we invite you to speak with us today about how we can help you grow and protect your wealth.

We have the know-how and resources to identify the right policy for your needs, help you establish a corporation if required, and work with lawyers and accountants to structure things according to your requirements.

All it takes from you is a phone call to get things started:

Rubach Wealth Permanent Life Insurance Meeting