We’ve all heard the enticing advertisements, the “Don’t Pay a cent for 24 months” event. When I hear these ads, I think of a Bad Boy or The Brick commercial. There is an incredible opportunity for business owners to do the same thing with financing their life insurance policies. Consider the Immediate Financing Arrangement (IFA); the ultimate don’t pay a cent event, specifically for those who don’t want to pay for life insurance premiums because they don’t want to utilize cash flow from their business. So why is it the ultimate don’t pay event? You don’t repay the premiums until after your death.
Why Would You Consider an Immediate Financing Arrangement?
If you’re looking at selling your business or capital assets that will trigger a significant capital gains tax now or in the future, you can convert capital gains into charitable dollars. If done correctly, you can be utterly whole at the end of the transaction. Utilizing a corporately-held permanent insurance policy is a very efficient way to facilitate this transaction. So would you rather write a cheque to CRA or a charitable organization you’re passionate about?
How Does an Immediate Financing Arrangement Work?
An IFA is a financial and estate planning strategy that:
- Combines permanent, cash-value life insurance with a conservative leverage program allowing the dollars allocated to the life insurance premiums to do double duty by still being available for business and investment purposes;
- Cash flow could be improved in the right circumstances and appropriately structured so that all possible tax deductions are used.
Who should consider an Immediate Financing Arrangement?
IFA’s are not for everyone. However, significant results can be achieved for situations that best match the necessary criteria. The best candidates for an IFA usually are:
- Someone who will be going through a significant tax event, i.e. selling a business, investment property or marketable securities and triggering a sizable capital gain tax owing
- Successful, affluent individuals who are active investors or owners of thriving privately held corporations who require permanent life insurance protection;
- Of good health, non-smokers, and preferably under age 60;
- Enjoying a steady cash flow exceeding lifestyle requirements;
- Pay income tax at the highest rate and will continue to do so throughout their life.
How Can You Improve Cashflow using Life Insurance?
- An individual or company purchases a cash value permanent life insurance policy and contributes maximum allowable premiums;
- The policy is assigned to a bank as collateral for a line of credit;
- The business or individual uses the loan advances to replace cash used for the insurance purchase and re-invests in business operations or to make investments to produce income. This is done annually;
- The borrower pays interest only and can borrow back the interest at year-end;
- At the insured’s death, the proceeds of the life insurance policy retire the outstanding line of credit with the balance going to the insured’s beneficiary;
- If corporately owned, up to the entire amount of the life insurance death benefit is available for Capital Dividend Account purposes.
Proper planning and execution are essential for the Immediate Financing Arrangement. However, if you fit the appropriate profile, you could benefit substantially from this strategy. If you wish to investigate this strategy and whether it can benefit you, please get in touch with me, and I would be happy to discuss this with you.