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Yes, the life insurance industry is a tax haven, and will likely always enjoy that status, because of all the special laws created, just for it. You can spend time wondering why, or you can use their heavily favored status to your advantage.

One popular strategy is the life insurance tax shelter. In the last 10 years, Canadians have stuffed millions and millions of dollars in these programs. The reason is that they allow either tax-deferred or TAX-FREE treatment of your investment dollars, with no risk.

What is an insurance tax-shelter?

Simply put, an insurance tax-shelter is a plan issued by a life insurance company that allows you to deposit any amount of money and shelter all of the growth of the investment from income tax.
How does it work?

Revenue Canada allows insurance companies to issue these plans and maintain their tax-shelter status as long as they satisfy certain conditions.The insurance company must maintain a minimum amount of insurance on each plan to keep it tax exempt. The insurance however, can and should be low cost decreasing coverage, only enough to keep the plan tax exempt. The amount is based on a Revenue Canada formula and each plan must meet an annual test.

What makes the strategy work?

Why do these plans out perform other non-sheltered investments? Your earnings build-up TAX-FREE within the plan. The annual expense charges of the plan cost less than the tax which would have to be paid on the investment earnings of a similar investment such as GICs, bonds,etc.

Example: Assume an 8% annual rate of return. A couple, both age 45, in a 50% tax bracket would have to pay a total of $43,244 of income tax on the earnings of an investment of $10,000 per year for 10 years. In contrast, if they invest $10,000 per year for 10 years into a tax-sheltered insurance account, earning the same rate of return, they would pay only $10,701 in total expense charges (including insurance cost) to the insurance company over the 10 years. The plans are flexible, allowing you to vary the amount of you deposit, and choose the investment type of the plan from GICs to investment Index Fund.

How do you get your money out?

When it comes time to take income, you can take income from your plan one of three ways. Here are two income strategies for Canadian residents (for tax purposes). Make direct withdrawals from the tax-deferred account and receive part of your income TAX-FREE.

Under special arrangement, you can leverage the account with a bank. The bank will take your plan as a security loan. You can then make a single loan or a series of loans as income. The bank will capitalize the loan payments, so you will never have to make payments. The loan is repaid from the TAX-FREE insurance pay-out, when you die. The insurance pay-out in excess of the bank loan balance is then paid out TAX-FREE to your beneficiaries. Since a loan is not taxable, you can earn all of your income TAX-FREE.

By comparison, if you tried this with your RRSP, your financial institution would be forced to withhold 25% and send it to Revenue Canada.

Now, custom-designing your health insurance plan is fast and easy. It is a flexible and comprehensive health insurance plan. The Ontario Government Health Insurance Plan offers Limited Coverage.

If you are one of the millions of Canadians without an employer group health plan – and, therefore, vulnerable to health care costs not covered by your Government Health Insurance Plan – supplemental health care coverage could be right for you. For only dollars a day, we can offer you a unique combination of health benefits that provide you and your family with comprehensive coverage you simply shouldn’t do without.

Our plans cover you when your provincial health plan doesn’t.

Many common health care expenses, such as dental work, prescription drugs, eyeglasses, private and semi-private hospital room accommodation and many other costs, are not covered by a Government Health Insurance Plan. If you’re without an employer group plan, these expenses can come out of your pocket. These plans  can cover these costs, and many more, for just a few dollars a day.

We have plans that let you choose exactly the coverage you need. It’s easy to select and customize a health plan that covers your needs and those of your family. Simply start with a core plan and then tailor it according to your age, budget and health coverage needs with Add-Ons or custom design your coverage.

• Prescription Drugs
• Accidental Death and Dismemberment
• Vision
• Dental Insurance
• Emergency Travel Assistance
• Extended Health Care
• Supplementary Health Care

Why have critical illness insurance?

What factors should I consider before buying private disability insurance?

First of all, we’re talking long-term here. For short-term needs, you are better off funneling pricey premium payments into a liquid emergency fund. That way, if you never need it, it’s your money!

On to long-term…

As is the case with life insurance, there are two basic types of disability insurance: group (obtained through work or membership in an organization) and private (purchased on your own). Unlike life insurance, however, private disability insurance is almost always more expensive than group, often significantly so.

So, if you carefully examine your employer’s plan and decide you need more disability coverage, start by looking in your own back yard. Some employer plans allow you to buy additional coverage — often a boost from 60% to 80% of your salary — through the same group plan, at bargain rates. Also, if you are a member of any groups, clubs, or professional associations, check those sources too.

If these leads don’t pan out and you’re forced to buy a private disability policy, it’ll be expensive, but you may also find some nice advantages to ease the pain a little:

Some advantages to private disability insurance

1.   Benefits you receive if you become disabled will be tax-free, as long as you paid the insurance premiums with after-tax money.
2.   The policy will not be tied to your current job. This leaves you free to experience a mid-life crisis, heading off to the Himalayas with disability insurance in tow. More seriously, if you have entrepreneurial ambitions, it might be a good idea to lock in an individual policy while you can. Once you become self-employed, affordable disability insurance will be very difficult to find.
3.   If you are a highly skilled, highly paid specialist — like a brain surgeon, a power forward for the Knicks, or a wedding DJ — you may want disability insurance that locks in this exceptional income level. This more-expensive class of policies is called own-occupation coverage. Any-occupation coverage is the more-common — and less-expensive — group insurance option. Any-occupation policies require you to take lower-paying jobs in your field, if available, with no insurance payments to make up for any lost income.

Some important things to look for in private disability insurance

• Be sure the policy is “non-cancellable.” This guarantees that policy premiums cannot be changed as long as you pay them on time. Avoid “guaranteed renewable” policies. These sure sound great, but only “non-cancellable” locks in premium costs.
• Be sure the policy is non-cancellable to age 65.
• Unless you have direct access to Nancy Reagan’s astrologer, don’t purchase an “accident-only” policy or one with a limited benefit term (five and 10 years are common). Sure, these policies are cheaper, but they don’t cover disabling illnesses or the whole of your working life, respectively. Who knows what the future holds?
•  ”Residual benefits” is an important rider. This benefit — which can also come in the form of a loss of income policy — pays the difference between your old salary, prior to becoming disabled, and the best salary you can get afterward. Not only does this protect you from the downside of any-occupation policies (being forced into a lower-wage career), it might also head off an awkward situation in which you are forced to choose between sitting at home (and collecting disability) or working part-time (and losing all disability payments).
•  If you can afford it, a cost-of-living rider will protect your future benefits from the ravages of inflation. Also, with a private policy, your “income” will be set at the time you take out the policy. You might want to increase this protected income level as your career progresses, without a medical exam. Check to see if this requires the purchase of a policy rider.
• The waiting period, before disability payments kick in, acts just like a car insurance deductible. The more emergency savings you have, the longer you can wait for disability income, the lower your premiums will be.
• Watch for clauses that exclude pre-existing medical conditions or dangerous hobbies, unless of course you are in perfect health and define excessive risk as two cards on bingo night.

Believe it or not, this isn’t a complete listing of all the important details regarding long-term disability insurance. If you decide to purchase a private policy, then you might want to work with an independent insurance agent or a financial planner. The Internet is a great source of information, but when a purchase combines high cost with this many potential pitfalls, it often pays to have an expert on your side, that’s me.