Questions re: tax exempt investment from universal life insurance

xgbsSS wrote: ↑ The tax exemption room is not a straight $17500 per year.
What that $17500 per year calculation is the estimated amount to fully fund your policy in 20 years on the policy illustration. In other words, it is a guessed amount to try to get there. In fact, you can generally deposit much more than that $17500 to get it caught up even further.

The room calculation is tricky. There are a few rules involved to calculating it.

The benefit value cannot increase 8% more than the previous year. This is included in both the face value and cash value of the policy if your cash value is paid out on death.

The 250% rule is a anti-dumping rule. This states the cash value starting at the 10th year of the policy cannot be worth 250% more than the cash value at year 7 and checked each 3 years moving forward.

Here is a Sunlife article about the changes made in 2017 that highlight some of the rules and parameters used. It is complicated and I still fully can't answer it cause of how complicated the calculation is.
https://www.sunnet.sunlife.com/files/ad ... impact.pdf

And 100%, there is no way to have a guaranteed 10% return on your universal life plan. That statement actually really bugs me. That sounds like a life insurance agent using an unrealistic illustration to sell you a policy. That is really bad. In general, I would say a 4-5% is more realistic, however it also depends on teh investments you chose. Mine is 100% equity and some years it has had double-digit gains, but if stocks are down that year, it could easily be a loss.

Can you disclose the face value, the benefit amount, if the benefit is face value only or with cash value, the province you live in, whether the policy is set as yearly/annual renewable term or fixed cost, and the company and funds you are set with? Based on $17500, I hope you have maxed your TFSA/RRSP first. This sounds steep and better only be used if you can afford it.

choicedot3 wrote: ↑ I'm in AB, sum insured $330K and it's yearly renewable term. This is BMO.

The 2 funds that I am set with:
https://bmoinvestpro.fundata.com/en/FundSnapshot/11233
https://bmoinvestpro.fundata.com/en/FundSnapshot/36066

I don't know how to tell about face value or cash value. My policy said for death benefit option, it is sum insured plus fund value.

FYI, the 10% return I was using on my posting above is not what the life insurance agent was telling me. It was me playing with the 10% return when I was using the investment calculator to see what the end balance will be in the future.

xgbsSS wrote: ↑ Yeah, not likely to get 10% guaranteed in the long term so I wouldn't base it on 10%. I would recommend 7% at most otherwise you may be disappointed. While NASDAQ and Dynamic American Power have done well, there is no guarantee they will moving forward. This is also very American equity heavy meaning you are at a great risk if there is US equity downturn. Your policy is very American equity heavy. Also are you with Dimension with Bonus or Dimensions with low fees? What date is your policy signed on?

You cannot apply the performance that is shown in these forms. The reason is BMO doesn't show the performance once you apply the fees of the UL policy. For example for the BMO NASDAQ100, you either take off 1.75% or 3.00% per year depending on the policy type you have. For the Dynamic Power American, you take off 0.25% or 1.50% in Wave 33 or later, or 0.75% and 2.00% if earlier. Also, in Alberta, you pay 3% on every deposit in the policy meaning your policy deposit goes down 3%. Your facevalue of the policy is $330k (death benefit). The cash value is anything above this.

Depending on your age, I would be very cautious. To make this work, you need to really deposit a ton as much as possible to get this to efficiently work. You can even deposit past $17.5k if you can as you need to get this policy to self fund after a while. Once you sufficiently get this funded, you need to immediately switch the policy to a level cost so you can fix the cost. Make sure you are maxing your TFSA and possibly RRSP before you proceed with this. If you haven't, I think you have been sold an unnecessary policy here. Are you looking at estate issues here?

choicedot3 wrote: ↑ There is no guarantee that historical performance will be the same moving forward with any fund anyway regardless of whether it came from the tax-exempt account from a life insurance or any other form of fund, right?

My understanding the 3% is for the insurance premium only. However, if it applies to the investment deposit as well then you have a valid point that tax-exempt from life insurance carry more fees than other funds.

I'm 48 y.o. and had a simple mind when I sign up with this product and has nothing to do with estate issues (not even sure what is estate issue is). I was thinking it will be good for me, if, in addition to TFSA, I can get another tax-free investment account.

Currently, I'm on Dimension with Bonus. The bonus structure is like this: starting from year 6, I'll get a 1.5% annualized return bonus + once the account value hit $25K, there is another bonus of 0.25% annualized so, in the end, the total bonus will be 1.75%.

For Dimension Low Fees, any funds fees are 1.25% lower than Dimension with Bonus. There is a bonus of 0.25% annualized return bonus once the account value hit $25K.

That said my 2 questions:

1. Based on the bonus structure and in your opinion, which one is a better deal, with a bonus or low fees?

2. Back to my original question: if the account value is more than the tax-exempt room:
a. I will lose the tax-exempt status and my account value becomes taxable
or
b. Only the amount above the tax-exempt room is taxable

I'm assuming the answer for question no.2 is a.

xgbsSS wrote: ↑ On the investment growth, sure, but to then estimate a high-end calculation will set you for disappointment.

Incorrect. 3% applies to the entire deposit. One-time but something to think about.Remember , your cash value under the law is technically future insurance premiums, hence the tax application to the entire payment. This is in addition to the fees on the policy and then fees On the investment. Always be cognizant Of your monthly premium cost as well.

So, estate issues arise when you own property or perhaps a corporation. Perhaps you want your children, heirs Or beneficiaries to get ownership of this property or a business you own, but when you due, there are capital gains and other taxes to be paid. This is an example of estate issues. Life insurance allows you to build tax-free cash that could cover for these costs so that things dont need to be sold and control can be made. Generally, unless you have exhausted all your tax-sheltered or advantaged options, I wouldn't jump to insurance unless you can fund them well. Have you maxed your RRSP? How much Canadian equity do you own non-registered? If these aren't substantial, I would hesistate to consider UL insurance as wise in this case.

For BMO, Dimensions with bonus If held at least 11-13 years, comes out ahead of low fees.

Generally If you exceed the tax-shelter amount, the policy will automatically transfer money to a shuttle or side account. So b is correct. See "side account" under the BMO documents. This is then invested but not tax sheltered. So honestly the risk of being not tax exempt is minimal because the mOney is just funneled to the side until room is made to be sheltered. The best way to know how much room you have is look on your annual statement Or inforce illustration. It should state the remaining room you can deposit that year (it will likely be higher than the $17.5k).

Just be careful here, the value of the tax shelter is really when you have exhausted all choices. You onLy have mentioned TFSA and you dont own a corp from the sounds of it. Just ensure you max this as soon as possible and lock the pricing once you've maxed. Try to deposit past the 17,5k so you can lock the monthly premium cost.
Also consider getting a Canadian Tire Triangle Mastercard, so you can deposit the premiums via that and get 1% on the premium deposit.

choicedot3 wrote: ↑ Do you mind explaining why do I need to deposit past the 17.5K to lock the monthly premium cost?

Are you saying, my insurance premium can be higher if I deposit less?

According to my insurance agent, my insurance premium totaling around $50 ($35 something premium + $12 admin fee + 3% tax) will never be higher than that. It can, however, lower once I filled the tax-exempt room.

FYI, with BMO, they don't accept payment with credit card. Only the initial payment can be made with credit card.

xgbsSS wrote: ↑ You should pay past this so you can lock in a lower monthly fixed insurance premium cost earlier. The later you do this, the more it is going to cost the older you get.

That is absolutely incorrect. Your agent should be ashamed. The insurance premium goes up each year. That is why it is called Yearly Renewable Term. It is like getting a 1 year life insurance policy. The pricing changes each year. Now you can "lock it" at anytime in the future, but it then jumps up. But it stays the same price. Can I ask if your agent is from Greatway Financial, World Financial Group or Primerica?

And while BMO doesn't accept credit card payments directly, Canadian Tire Mastercard allows you to bypass this by depositing like bill payment. I do this myself on my own policy. This will at least get you 1% on your deposits.

The more and more you reply, I think you have been ripped off. The UL policy is definitely not worthwhile especially if you are invested also in GIF We need to review your financial stuff a ton here. Your income level is frankly IMO too low to support a UL policy

choicedot3 wrote: ↑ That is not what my agent explain it to me. My agent is with Customplan https://customplanfinancial.com/ and it looks like the agent not only have to be ashamed but also should lose his license?

My 2 questions:
1. You said, pay past the tax-exempt room to lock in a lower fix monthly premium. Knowing that my policy is yearly renewable, at what point the premium become fix?

Also, you said:"you can "lock it" at anytime in the future, but it then jumps up. But it stays the same price." If I lock it, then why it can jumps up?

2. What does income salary level has to do with whether I can support UL policy? If anything, maybe I should lower the benefit to make it more affordable? If so, it doesnt mean I should not be having UL policy at all?

I wish I'm talking with you BEFORE I made a decision!! I guess, better late than never *sigh*

xgbsSS wrote: ↑ 1. You have to ask it to be changed to fixed. The whole point of YRT is to add funds now while the insurance cost is low and then you can lock it later in life. This allows the money you deposit grow under lower fees until you have enough to cover the fixed cost. This allows your costs to stay fixed. It will "jump" because fixing the cost until age 100 means guaranteeing the cost. If you wait. the yearly renewable term will become extremely expensive. The later you delay this change, the more it is going to cost you.

2. Because the whole point of UL policies is to shelter when you are in a high tax bracket. at $70-80k per year, you are frankly not at the point where this matters. This is a very expensive policy. Unless you have a lifetime need for life insurance, or you haven't maxed your TFSA and RRSP, and then have non-registered investments, I don't recommend UL policies, period.

OK first things first, when did you purchase the UL policy? You can see whether surrendering the policy is worthwhile. If you have no debts, have maxed your TFSA and RRSP, you can consider keeping it, but honestly it isn't worth it.

I will just let you know, a lot of life insurance agents (this is what this person is) are not worth their time. Unfortunately, I don't think complaining will get you anywhere. Canada's system is brutal.

xgbsSS wrote: ↑ 1. Yes, it will get more expensive each year. Until you lock it, it won't stay the same price. This graph illustrates the cost. It doesn't include Universal Life but the concept is the same.



So as you get closer to old age, the cost of insurance starts growing and growing. When you lock the price, the price will be higher than you pay now, but it will never go up in price.

No, you can lock it whenever. The reason why you might want YRT now is because more of your money is invested. Since less money is deducted each month, more of your money is invested. The reason why I am telling you the value of overfunding the policy is you want the cash value to eventually be big enough so that it covers the cost.

For example, my policy is $250k. I did fixed cost at 30 years old at $156 a month. My cash value is around $55k. If that investment grows 5% a year, I yield about $2750 a year or about $229 a month. This would cover the insurance cost so the cash value should go up without me depositing more money. If I had done YRT, the cost of insurance would have been about $30ish a month. The good part about this is this means whatever money I deposit, more of it is invested so it can grow in the mean time. But say at 40, if I decided to fix the cost, it might be $300 a month to fix. At that point, I better have enough cash value for it to grow enough. So the reason why I am telling you to invest as much as possible is because you want to make sure the cash value is big enough to be able to cover the cost. Any delay would mean the cost may get so big that you cannot cover the insurance cost. This also assumes your investment choice allows for enough growth to cover this. Any down years, means the cash value goes down by the investment and the cost of insurance.

2. No, it is more complicated than that. Universal Life insurance policies can be corporately owned and allows corporate earnings to be sheltered and taken out as a capital dividend. This is much more complicated for your purposes and not relevant.

The problem with borrowing against the UL policy is this assumes you can. You still need to be credit worthy. Additionally, the interest rates on these UL backed loans aren't necessarily cheap. Policy loans at insurance companies right now are 6.2%. So sure, you don't pay income tax on borrowing against the value, but you are then paying 6.2% each year which could end up eating up the entire loan. Additionally, we don't know what future interest rates are like. Also, most loans secured by UL don't allow past 50% of the cash value if the investments are equity. If you change to bond or daily interest savings on the UL, you might get a higher percentage.

With the policy being 3 years old, the surrender charges will be high unfortunately, 550% of annual premium cost. You are not in a good position to surrender at this point, but I would recommend not funding this further until you get to year 10 and then surrender the policy. in the mean time, max your RRSP and TFSA in lower cost investments. Once these are done, accumulate Canadian equity in non-registered. Only once this gets expensive from the dividend income, would I fund the Universal Life. I would recommend holding this for another 7 years and then cancelling the policies.

choicedot3 wrote: ↑ Woild you agree if I say that I need to speak with a true financial planner who will assess the totality of my financials and goals before coming to a suggestion?

Not just a life insurance agent who number 1 goal is to sell insurance products. FYI, the same insurance agent is now trying to sell me Critical Illness and/or Disability Insurance.

Last week, I got in touch with one of RBC financial planner, not sure if that's the right move?

xgbsSS wrote: ↑ It's up to you. Please be careful with "financial planners" especially ones at certain firms. More often than not, they only can sell the products they offer. This one at RBC might be fine, but again, if this is just a person at a branch, their knowledge could be limited. Mind you, there are also really good ones too.

The best thing I can recommend is to know as much as possible yourself. Additionally, I always will encourage DIY investing because you then cut out the middle person. I believe you are more than capable do setting up your own investments. The RFD community is great for this and I highly encourage you consider DIY.

If you do go with RBC, that is fine. Just understand the funds they are recommending and what accounts they are recommending for you to invest in. The biggest thing is to understand the role of each account and how to best utilize them.

If you want a good financial adviser, you should consider finding a CFP that is fee-only that doesn't try to make money based on the sales of the products they offer. This is the best way to eliminate bias on product sales, however this can also cost a few thousand dollars too. This is why in general, for most people, utilizing low cost investments to accumulate your wealth first is usually the best basic step,

choicedot3 wrote: ↑ I appreciate your inputs!!

Questions about my UL: can I change from yearly renewable to fix?

If so, I understand that with yearly renewable, unless I can maxed out the tax-exempt room early on to let the investment growing big enough to cover the rising cost of premium, then yearly renewable is not worth it. But does fix term a better deal?

I can only assume this is another lose-lose situation which was why unless I have a situation where having UL can be justified, it's better if I do not have UL at all if growing wealth is my primary goal?

Also, the reason why I'm asking if its possible to change from yearly renewable to fix is because of this: my wife also own the same UL policy, but, just today, I realized that her policy was being setup with Dimension Low Fees, not with Dimension with Bonus like mine.

I was asking the agent if we can change from Low Fees to Bonus and he said, we can't change it. Not sure if this is true.

That said, with UL, can we change from yearly renewal and low fees to fix and with bonus?

xgbsSS wrote: ↑ It isn't necessary to max before you switch to fix. What I am saying is the less money in the policy means the more money you need to top to cover the monthly cost and the harder it is for the growth to cover it. The idea of universal life insurance isn't investment growth but rather to ensure the growth of the investment covers the monthly insurance cost. To make the tax-advantaged growth work, you really need to maximize it as much as possible. As you can see, that 3% fee, monthly insurance cost and insurance premium tax really start eating at your cash value. So really unless you max it out, more often than not, you don't get any advantage with a universal life policy.

A UL policy CAN work if you can really fund this thing. It also isn't terrible as a life insurance policy in general, Just realize that there are only a select number of people can make it worthwhile for investment purposes.

Your agent is correct, you can't change between bonus and low fees. Ultimately, it doesn't really matter. What I can say is for low fees, it is easier to cancel so your wife might have lucked out in this case, especially as I see that it is probably worthwhile for you to cancel these policies.

For the UL policy, you can switch between YRT and fixed no matter which version it is. However here is the thing.

1. Only switch if you are indeed going to utilize this for wealth accumulation
2. If you decide to cancel at year 10, keep it YRT and just cancel it at year 10. This will keep the insurance cost low

Unless your RRSP and TFSAs are maxed, I wouldn't keep these. I would recommend you accumulate via non-registered. Yes, you will have some taxes to pay overtime, but the costs of your insurance policies will likely be higher overall unless you can overfund these policies. Frankly, I don't see this happening, not without being uncomfortably devoting such a large portion of your paycheque .

choicedot3 wrote: ↑ A few more questions:
1. If I keep YRT, I should wait until year 10 to cancel the policy without penalty, right? How much usually the penalty to cancelling a policy before year 10?
2. You said, it is easier for my wife to cancel due to being with Low Fees. Can you elaborate more? She can cancel anytime without penalty? Or, her penalty will be cheaper than mine?

xgbsSS wrote: ↑ 1. https://www.bmo.com/advisor/canada/inte ... 20217E.pdf
It's about 300% of your premiums as of right now.

2.Not easier, sorry wrong word. Cheaper because you weren't charged the higher fees like yours with the policy with the bonus. The with bonus type is more expensive shorter term.

choicedot3 wrote: ↑ Thx for the link, I'll read it.

I want to make sure that I understand this correctly.

You suggesting, only switch to fix if I want to keep this policy.

Why I should maxed the tax-exempt room only if I switch to fix?

Is it because with YRT, even if I maxed the tax-exempt room early on, the growth in my investment account may still be less in pace compare to the increase of the premium? If so, in the case where the investment can't reach a self sustain point, at one point the future I have to pay the portion of the premium out of pocket.

With fix term, if I maxed early on, there is a more likelihood that my investment can grow large enough that at one point in the future it can be self sustained in paying the premium by itself? If so, the self sustain situation will be sometime in the future and at present time and until we reach the self sustain point, I have to pay the steep premium out of pocket.

Is my understanding correct?