In this episode of ‘Conversations on Wealth’, podcast host Sarah Widmeyer chats with Jason Middleton, Estate & Insurance Advisor about how an advisor can make sure clients are set up appropriately with insurance products as part of their overall wealth plan.
“With permanent insurance, as you’re building up equity or value, kind of like building up equity value in your home: it’s accessible, like a non-registered account you’d have at Richardson Wealth, it just happens to be housed inside the insurance policy. That’s what gives it its tax exempt nature.”
Sarah Widmeyer 0:16
Welcome to Conversations on Wealth, hosted by Richardson wealth, a podcast dedicated to helping Canadians navigate the complexities of your wealth with a multi-dimensional approach to planning and wealth management. I’m Sarah Widmeyer, Senior Vice President and Head of Wealth Strategies at Richardson Wealth, and today, we’re discussing insurance for high net worth investors. What has become increasingly clear is that clients are looking to simplify and enjoy their lives. We know that a complete wealth plan will support them in doing so, and although it might not be commonly known, an insurance strategy and solutions can be a key part of that strategy. Joining me today is Jason Middleton, an estate and insurance advisor here at Richardson Wealth. Welcome, Jason.
Jason Middleton 1:06
Thanks for having me.
Sarah Widmeyer 1:07
My pleasure. Jason, I think it’s safe to say that many people have had a less than favourable experience with insurance, in part as it can be confusing, and it touches on tough subjects to face such as illness or death. Proper insurance coverage is very important, of course, but perhaps what is sometimes overlooked by affluent Canadians is how insurance can help build, protect, and pass on wealth. Let’s start with the basics. Life insurance, it often has a negative connotation for people. Why do you think that is Jason?
Jason Middleton 1:46
That’s a big subject. There’s a lot of things built into there. Uhm, I think the first one is insurance is something that’s sold, people don’t tend to like to be sold something. So from our perspective, uhm, it’s tying it to a need or an objective, creating that understanding, and educating clients so they can understand how it’s going to help them get further ahead. I always use an example of my wife, she’s a mortgage broker. And we kind of joke, she puts people into hundreds of thousands of dollars of debt, and at the end of it, they thank her. And the reason is that she’s given them a means to accomplish a goal, which is buy that family home. So there’s the emotions that are surrounding it. So it’s really important from our perspective that we really understand our clients’ objectives. And then you can create that understanding, which then ties it to it, so they don’t feel like they’re being sold, so they don’t have the understanding, they’re just gonna look at it like an expense. And an expense is, has a negative connotation to it. So we really try and tie it to a goal, tie it to an objective, and then they can look at it like an asset, just like any other.
Sarah Widmeyer 2:44
Jason Middleton 2:44
And it just becomes a tool.
Sarah Widmeyer 2:45
Okay, so permanent life insurance policies that have an investment component. Like I guess building an asset can help you grow your wealth on a tax-deferred basis. Can you explain how this works?
Jason Middleton 3:00
Absolutely. So unlike term insurance, which is temporary in nature, where you’re paying a premium, it’s simply an expense, you’re not building up any value. A permanent policy has essentially what I call a premium reserve account, essentially, it’s a place where clients can put money to pay future premiums on their life insurance benefits. So when someone dies, the estate or the corporation gets that benefit. However, you can over deposit or put extra money or invest it into that account, and that account, because it’s inside of an insurance policy, is tax exempt.
Sarah Widmeyer 3:30
Jason Middleton 3:30
So this is extremely valuable for people in a top marginal tax bracket, or inside of corporations, because it allows them to take retained earnings or extra money and accumulate it on a tax sheltered basis, and at the end, that will pay out tax free out to the estate.
Sarah Widmeyer 3:45
So why is it tax sheltered? So we’ve got RRSPs. We’ve got TFSEs, why this just is? Is it some benefit tied to the insurance?
Jason Middleton 3:55
So insurance has a pretty strong lobby group. But it’s interesting because the tax free nature of insurance is not a scheme, is not an opinion, it’s actually written to the Income Tax Act, Section 140 of the Income Tax Act deals with insurance. So, uhm, it’s a pretty interesting product. It just is what it is. That’s always been the case with insurance policies.
Sarah Widmeyer 4:15
Yeah. I’m thinking about interest rates right now. So interest rates are going up. Which should mean I think that dividend rates in the insurance, so the investment return that people are earning on that excess cash is probably going to rise… in, in this type of environment.
Jason Middleton 4:34
I think we’re gonna see a little bit of compression. But I think over the long term, yes, I think over the next five to 10 years, as interest rates rise, these policies will do better. So the nice thing is the planning that we’re doing now, hopefully we’re doing that planning at a low watermark i.e. we’re setting our clients expectations, and we’ll hopefully overachieve them. But again, insurance isn’t a short term vehicle.
Sarah Widmeyer 4:34
Jason Middleton 4:36
It’s it’s the longest term vehicle you can possibly buy. So if we tie it to that ultimate objective, we’re not looking at the performance five years out or 10 years out, where we’re looking (is) 20, 30, 40, 50 years out, what’s it going to do for the estate? So that’s really the primary driver and the primary value to insurance is that tax free transfer of wealth between generations, which is a big concern among wealthy individuals and our clients because they have enough for themselves.
Sarah Widmeyer 5:19
Jason Middleton 5:20
Sarah Widmeyer 5:21
Prior to death, can you use that money? Is it accessible?
Jason Middleton 5:25
And that, you know, you ask, “Why is there a negative connotation to insurance?” That could probably should have tied it back to that is that people look at it, because they don’t understand it, they’re sort of reluctant so they have a closed mind. They look at that money as an expense or it’s gone and it’s not accessible. And that’s just not the case with permanent insurance, as you’re building up equity or value, kind of like building up equity value in your home, it’s accessible. So inside that permanent insurance policy, and depending on the type, there’s different access points, you can access it in many different ways. It’s just like a non registered account you’d have it Richardson, it’s just happens to be housed inside the insurance policy, and because it’s housed inside the insurance policy, that’s what gives it its tax exempt nature.
Sarah Widmeyer 6:03
Jason Middleton 6:03
Sarah Widmeyer 6:04
And so you can take it out on a tax exempt basis?
Jason Middleton 6:07
There’s a bunch of different ways to access it, you know, you can take a direct withdrawal, and just pay tax, okay, just like you would had have similar to an RRSP, or non registered account, you can borrow against it similar to you know, setting up a line of credit against your home. You know, I always say to clients, if you want to understand the risk profile of an asset, just ask a bank what they’re going to lend against it. Yeah, you know, bank will lend you, you know, 60% against your margin account If it’s in equities, I guess, they’ll lend you 80, 85% of your home value without insurance. You know, a bank will lend 90 to 95% of the cash value of an insurance policy, because it’s very stable to them.
Sarah Widmeyer 6:43
Oh, wow. Okay. What happens when a life insurance policy becomes an unfortunate reality? So what happens at the time of a loved one’s passing?
Jason Middleton 6:54
Obviously, unfortunately, I’ve had to pay a fair amount of claims in my career, which is always a sad time, but the reality is, that’s what it’s there for. I think that’s part of also why there’s a negative connotation to insurance because it’s an intangible asset. It’s not something you can hold, right? You’re essentially selling a promise by a company to pay (an) amount of money way in the future. Uhm, so I think people get nervous about that. But the reality is, the life insurance COs aren’t like, it’s not like travel insurance, where they’re fighting claims, or you know, disability insurance or car insurance. It’s really not the case. They’re in this business to pay claims. I know it sounds a bit cheesy, but they really are. I think the stat that Manulife put out in 2014, they paid 99.95% of all claims submitted.
Sarah Widmeyer 7:40
Jason Middleton 7:40
It’s a phenomenal amount.
Sarah Widmeyer 7:41
Yeah. So changing gears then for a moment. So we’ve touched on taxes. How can insurance create efficiencies, for example, business owners, including doctors, lawyers, other professionals, they can incorporate their practice. One of the ways to build wealth is to use corporately held life insurance. Can you explain how that works?
Jason Middleton 8:04
Yeah, I mean, there’s been a huge amount of wealth created in this country over the past 15, 20, 25 years, I think that’s a part of that’s a direct correlation to the amount of people that can incorporate like you said, doctors, lawyers, architects, real estate professional, everybody’s incorporating now. And I always look at money kind of like a river, it follows the path of least resistance. So for money, or capital, part of that resistance is taxation. So we’ve created, we, you know, the government’s created a system, a tax system that incentivizes people to incorporate so you know, someone could pay 50% personal tax versus 12% corporate tax and be left with 88 cent dollars, of course, they’re gonna try and only pay 12%. So this causes massive swelling of wealth inside of a corporation, but if you look at what the government has done over the past, you know, decade it’s trying to equalize or erode that value by changing the way passive assets, investment assets are taxed inside of a corporation. When I think I don’t know if clients have run the numbers, and really understand what the back end pain of that tax is going to feel like, which is why it’s so important in our business, to work with the advisor and the wealth planning team to really put a plan together so the client can see the runway and see what that’s gonna be like and gives them context to make a decision. But really, we can take so the original question was, how does insurance fit into that? And it takes that deferral that you’ve gotten by incorporating and you can essentially spread that deferral out to death and ultimately pass that wealth on tax freeze, you can take that deferral essentially and make a portion of it permanent, which is really attractive from a planning perspective when you need capital in the estate, or you want to pass wealth on.
Sarah Widmeyer 9:46
Mmhmm. I heard, ugh, one time it’s like with insurance, you’re buying dollars 100 cent dollars for pennies on the dollar. So instead of paying the tax man or the tax deferral 100 cents on the dollar, with insurance and funding the tax liability, you’re, you’re essentially buying those dollars on sale, you’re buying them for pennies. And that, really, kind of, as you can tell, it stayed in my brain. And it made sense to me
Jason Middleton 10:17
What people don’t realize is that you’re essentially, by incorporating the government’s just giving you a deferral, they’re letting you use.
Sarah Widmeyer 10:23
That’s all it is. A deferral.
Jason Middleton 10:22
They’re letting you use that tax money you otherwise, would’ve had to pay for it personally, and they’re letting you invest it and earn money on it. And you’re, you’re gonna recoup that, they’re gonna recoup that at the end of the day. And if you look at all the changes they’ve made over the past decade, it’s just slowly trying to squeeze that money out of the corporation, into their hands, I mean, I find the best way, and I eat my own cooking. So this is something that I’ve done for my family, the best way to really understand the value of how insurance can accomplish an objective is to sort of go through an example, and I’ll share what my wife and I have done, you know, I was incorporated for many, many years, and we earned money. And we’re mid 40s. And I find when you go through the planning process with clients, the math is the most important, but there’s this relationship dynamic that happens with clients, you know, one person wants to achieve one thing, one one person wants to achieve the other. So our job as planners is to try and find solutions that meet both of their objectives. So, you know, one of my objectives with the kids is I wanna make sure they have something, you know, I don’t want to leave them so much that they can do nothing, but I want to leave them enough that they can do whatever they want to do. If Sophie wants to be a yoga teacher, she can be a yoga teacher. She doesn’t need to worry. If she wants to work at Tim Hortons. She could work at Tim Hortons.
Sarah Widmeyer 11:32
Sophie, both are great options (laughs)
Jason Middleton 11:34
Yeah, so she doesn’t have to worry about financially, her financial well being in the long term.
Sarah Widmeyer 11:40
I understand, yeah.
Jason Middleton 11:41
But my wife really wants to just, she’s more of a, you know, they can fend for themselves. So how do you bridge that gap? And so one of the ways is then, you know, to accomplish my objective, I’d say, “why, what assets am I going to leave them?
Sarah Widmeyer 11:54
Jason Middleton 11:54
There’s a cost that money is finite. So my job or what I was looking to say how can I use the least amount of my capital to achieve that objective? So therefore, there’s the most amount of capital left in that bucket to achieve Dana’s objective, and what we settled on was corporately owned insurance. So we’ve allocated a percentage, you know, 1% annually of our corporate nonregistered portfolio into an insurance policy. So I’m taking 88 cent dollars, essentially, corporately, and I’m turning it into tax, ultimately, tax free dollars for the girls. So I’m using less of my money to achieve what I want to achieve, which then by default, like I said previously, allows more in that bucket for Dana and I to retire and enjoy our lives. So it kind of, ticks off both buckets there.
Sarah Widmeyer 11:59
Sarah Widmeyer 12:49
Jason, this has been a great discussion. Thank you. There’s so much more to insurance, especially in terms of your entire wealth plan. Do you have any closing thoughts you’d like to share with us?
Jason Middleton 13:01
My advice on closing would be just keep an open mind. We’re not trying to sell you something. It’s really needs based planning. Where are you going? And insurance is just a tool.
Sarah Widmeyer 13:13
Insurance is just a tool. Yeah, that’s a great closing. Thank you. Thank you so much, Jason, for joining us and sharing your insights into insurance as a tool to build your wealth. If you’d like to learn more about how insurance strategy and solutions can complement your wealth plan, please reach out to your advisor. Be sure to follow Richardson Wealth on LinkedIn or Facebook for a broad range of information on many planning topics, including this one. Thank you all for listening, and be sure to tune in for future episodes and more great advice.