Last week, our blog post passive investment income and limiting access to the small business tax rate.  As promised, we will be delivering more detailed articles over the next few weeks.

This week, our focus is on structuring universal life insurance and how to structure it in a way where you can maximize the cash value growth in a life insurance policy. 

For an advisor if you’re discussing this with a business owner or incorporated professional, here are the key points you should keep in mind when discussing a life insurance policy:

  • Choosing the right cost of insurance will have a major affect on cash value of a life insurance policy
  • Lowering the Estate Benefit (to an amount that keeps the policy on side) will also help enhance the cash value in a life insurance policy by reducing the Net Amount at Risk (NAAR); thus reducing cost.
  • Keep an eye on the Adjusted Cost Basis as this could create a tax issue within the life insurance policy

As usual, we’ve put together the following to help you with your discussion:

  • Infographic on how to structure universal life. 
  • Article to use on your website, email newsletter and social media

The Infographic

The Article

One of the few tools available to limit passive investment income is life insurance; specifically, Universal Life Insurance.   This type of life insurance combines permanent life insurance protection with a broad range of investment account options for tax-preferred savings growth.  The investments inside this type of policy are not subject to the calculation that limits access to the small business tax rate.

However, with this type of insurance, there are a lot of options which make Universal Life Insurance complex and confusing.  To help guide you, here are some things to consider when building a policy to maximize the cash value based on a 49 year old Male with $100,000 deposit in a policy.

  1. Choose the right cost of insurance for your goals
    • Yearly Renewable Term (YRT) maximizes early cash values at the expense of long term coverage cost.  Whereas a Level Cost of Insurance (LCOI) is structured to maintain a level cost over the life of a policy at the expense of early cash values.

  2. Adjusting the Estate Benefit
    • To enhance the cash value, you can lower the estate benefit at the earliest date allowable by the insurance company. 

  3. Don’t create another tax problem
    • Review the policy annually and make sure the Adjusted Cost Basis (ACB) is not creating a tax issue within the policy.  The lower the ACB, the greater the tax liability when there is a disposition

These are just a few of the options that you need to consider.

If you are looking for ways to reduce your passive investment income so that it does not affect your access to the small business tax rate, please do not hesitate to contact us.

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