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July 3, 2001 If you’ve reached your RRSP ceiling think Universal BY MICHAEL KANE MICHAEL KANE IS MONEY COLUMNIST AT THE VANCOUVER SUN While many Canadians struggle to find RRSP money each year, others are banging their wallets against Ottawa's contribution ceilings. They are virtually out of the game because they have saved diligently in the past or belong to a generous employer pension plan. If you have little RRSP room but still have cash to spare, universal life insurance offers another way to invest and minimize the taxman's take. It allows you to defer and even avoid income taxes because the savings portion of the policy is not taxed as long as it is paid out as a death benefit. First, you must cover off your life insurance needs. Usually the best bang for your buck is through term insurance that will provide for your loved ones or business needs if you die during a specified term, usually 10 years. Universal life insurance comes into its own when you have built some assets and you want permanent coverage, says Lyle Konner, a financial adviser based in White Rock, B.C. Permanent insurance means you know where you stand on premiums whereas term insurance can become prohibitively expensive as you age, and may be unobtainable if your health declines. It also offers estate planning advantages. Perhaps you want the tax-free proceeds of the policy to pay capital gains tax on a cottage or an investment portfolio that you want to pass down to the children. Universal life insurance could ensure that your estate does not have to liquidate assets to pay the government. The key advantage is additional tax sheltering. "You have the same investment options, in funds or indexes, and it grows tax sheltered like your RRSP," Konner says. "For those people who are in a position of perhaps not having a lot of personal debt, have maxed out their RRSP’s and have some excess cash, it is an alternative for diversification." Universal life allows you to separate the life insurance component from the investment component. The savings component will compound tax-free and on death, the entire amount, including the accumulated savings, will be paid to your beneficiaries without tax consequences. This strategy makes less sense if you expect to draw against the cash value while you are still alive. Then the amount you receive will be taxable, or partly taxable, depending on how long you have held the policy. If you expect that you will need to draw on your life insurance to supplement your retirement income you might be better off with alternative investments, says Daniel Stronach, a Toronto-based personal financial planner. This is because permanent life insurance is subject to extra fees and taxes which create a drag on your investment results. If you can safely assume that the accumulated savings in the life insurance plan are destined to be paid out to your beneficiaries on death, Stronach says the tax-free compounding generally outweighs these extra fees and taxes. Since you can enjoy tax-free compounding on the investment portion, Canada Customs and Revenue Agency has imposed limits on how much you can contribute to a universal insurance plan but they are well in excess of current RRSP and pension plan contribution ceilings. |