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Collateralized Lending

Using a Participating Whole Life Insurance Plan

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What is Collateralized Lending?

The strategy behind collateralized lending is using a valuable corporate asset as security for a loan.

What's the Best Asset to Use for Collateralized Lending?

A participating whole life insurance is the most efficient and effective asset to use for a collateralized loan, as it provides lifelong coverage, and growth of equity within the plan through annual accumulating dividends.

Policyholders can use these dividends to reduce premiums, buy more coverage, or create a stream of income for themselves in retirement, while the policy's guaranteed death benefit and cash values continue to grow over time.

How Does the Collateralized Lending Strategy Work?

The collateralized lending strategy with a participating life insurance plan involves using the policy's accumulated cash value as security for a loan from a third-party lender, (typically a bank or other financial institution).

This strategy allows the policyholder to access capital without triggering a disposition for tax purposes and while allowing the cash value to continue to grow.

How Do We Use the Collateralized Lending Strategy for You?

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1. Policy Accumulation

Your corporation pays premiums into a participating life insurance policy which, over time, builds up a cash value. This cash value grows through dividends on a tax-deferred basis, which further increases the cash value and death benefit annually.

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2. Collateral Assignment

The business owner enters a loan agreement with a lender who grants them a "collateral assignment" of the policy. This means the lender has rights to the policy's cash value and/or death benefit, but only up to the outstanding loan balance. However, the corporation retains ownership of the policy itself.

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3. Accessing Funds

The business owner receives the loan proceeds from the lender. These funds can be used for various purposes, such as funding a business, making investments, or supplementing retirement income. The loan proceeds are generally not considered taxable income as long as the policy remains in force, and the business owner simply needs to pay their corporation 1-2% of the amount borrowed annually.

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4. Upon Death

When the insured/business owner dies, the insurance company pays the death benefit. The outstanding loan balance, including accrued interest, is first paid to the lender, and the remaining death benefit is then paid, tax-free, to the corporation to be included in their estate.

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An Example: John Doe

John Doe - 45 year old owner of ABC Ltd

  • Wants to retire when he's 65 years old
  • ABC Ltd is a well-established company and is realizing a healthy amount of retained earnings collecting in his corporation each year
  • He has a good amount of RRSP's, and doesn't want to contribute any more into those, so he agrees to invest his excess money within his corporation
  • He wants to find a tax efficient way of creating income from his corporation, while also having less taxes owed to the CRA when he passes away and everything becomes taxable to his estate

His advisor with Highmark Corporate Solutions recommends:

  • The corporate collateralized lending strategy, using a participating whole life insurance plan, as a portion of his overall corporate investment portfolio
  • They apply for a plan with a $2 million death benefit, with the Corporation paying a $5,000 per month ($60,000/yr) premium
  • Each year the policy receives a dividend, which grows both the cash value and death benefit annually, on a tax-deferred basis

When John is 65 years old (his retirement target age):

  • His corporation then stops making payments into the plan, as the annual dividends are now high enough that they are able to pay the premiums for the plan from that point forward
  • John is then introduced to a third-party lender, who uses the insurance plan as collateral, and can then provide John with an income to age 90 of $97,132/yr.

When John then passes away:

  • The death benefit of the insurance plan has grown to $5,564,856
  • The amount John received as income, plus interest, has grown to $4,304,088, which the lender receives first from the death benefit
  • The remaining $1,260,768 gets paid out tax-free to John's corporation
  • The repayment of the $4,304,088 to the lender creates that same amount in additional CDA credits, allowing that value of further assets come out of the corporation without taxation

In Review:

  • John paid $1,200,000 in premiums into the Life insurance plan over a 20-year period
  • Assuming he lives until age 90, he'll have received $2,428,300 in income, and only paying a small fraction back to his corporation (1-2% guarantee fee), for personally borrowing against that corporate asset
  • The remaining $1,260,768 of the life insurance benefit got paid to his corporation, with most/all of it being able to pass through the CDA and be paid to his beneficiaries' tax free
  • An additional $4,304,088 of John's corporate assets (ie: investments) are able to be paid to his beneficiaries' tax free through the CDA
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Ready to Explore Collateralized Lending?

Let's discuss how collateralized lending using participating whole life insurance can help you achieve your financial goals.

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