Life Insurance for TAX Savings

Allan Madan, CA
 Oct 3, 2014

Use life insurance to secure a higher ROI

This article discusses details on how you will be able to use investments in life insurance to secure higher returns on investment (ROI), and potentially reduce tax. To harness the power of maximizing ROI and tax savings, it is important to understand exactly how life insurance and taxation of those life insurance policies work. The tips discussed below will serve as an aid as you look for ways to optimize your after-tax cash flow.

Please note, the information in this article will be particularly beneficial for those individuals who are owners, or one of the owners, of their own family-owned corporations; and have discretionary income (both corporate and personally) available to take advantage of some of the ideas discussed below.

Before we begin the discussion of tax savings in life insurance, an introduction to how life insurance policies work is in order.

Life insurance Ins and Outs

Life insurance policies, especially the Universal Life type, have two parts: a premium portion, and an investment portion. What does that mean? When you contribute into a life insurance policy, and pay $2,000, for example, per month into it, a portion of it will be treated as premium paid towards the policy and another portion of that $2,000 can be used to invest and earn some investment income. This investment income will not be taxed until the funds are drawn and received (this tax-deferral scheme is sort of like the one in an RRSP). That’s the first tax advantage!

There are a few ways you can structure the life insurance policy. Each method will have different implications:

1) Corporation owns the life insurance policy, and is the beneficiary (shareholder is the insured individual)

a) When the insured passes away, the life insurance pays out the death benefit, which is not taxable to the corporation. This is the second tax advantage!

b) The amount by which the death benefit exceeds the “adjusted cost base” of the life insurance can be paid to the surviving shareholder(s) tax free via the capital dividend account. This is the third tax advantage!

c) The life insurance premiums (even the investment portion) are paid by the corporation, which are not tax deductible. You can call this the first tax disadvantage.

This article will present the information assuming this structure is chosen.

2) Corporation owns the life insurance policy, but the beneficiary is another entity

(a), (b), and (c) from the previous section will apply, but the life insurance premium and investment portion payments, according to the CRA’s practice, will be considered a benefit and will have to be included in personal income of the shareholder.

3) Individual owns the life insurance policy, and an individual is the beneficiary

(a), (b), and (c) as above apply to the individual as well

Although it may seem that (a) and (b) are identical, it would be in your best interest to make life insurance premium and investment portion payments from the corporation. The reason is that because corporate tax rates are lower than personal tax rates. It will require more pre-tax dollars to make the same contribution personally, than with the corporation. Here’s an example to explain this:


Lowest personal tax rate (Ontario): 20 %

Lowest (and most common) corporate tax rate (Ontario): 15.5 %

Desired life insurance premium/investment portion payment = $2,500

Corporation makes the payment: 2,500/(1-0.155) = $2,958.58

Individual makes the payment: 2,500/(1-0.2) = $3,125

Difference: 3,125 – 2958.58 = 166.42

Conclusion: to make the same payment into the life insurance policy, it will require higher pre-tax dollars to make the contribution – $166 more in this example. That’s the fourth tax advantage!

The difference can change drastically depending on the appropriate marginal tax rates for the individual/corporation, individual/corporate taxable incomes, and life insurance premium/investment portion payments that apply in your situation.

Cash Values in Life Insurance Policies

The investment portion payments made by the corporation into the life insurance is used to earn investment income. These invested funds and income earned by them grow the cash value of the life insurance policy.

In practice, certain restricted financial institutions will lend money to the individual shareholder secured by the cash value in the corporate-owned life insurance policy. For example, assume ABC Inc. owns a life insurance policy, in which there is an accumulated cash value of $32,000. ABC Inc.’s shareholder, Barry, can borrow $32,000 from a financial institution, secured by the corporation’s cash value.

"Life insurance will help with your after-tax cash flow

Here comes tax advantage number 5: Barry, the individual, can use the $32,000 borrowed to invest in another investment activity, and the interest he pays on the loan can be deducted from the investment income generated! To go even further, Barry can take this $32,000 and potentially invest back in his corporation, by purchasing more stock.

This way, the life insurance cash value will continue to invest, while Barry enjoys the benefit of deducting the interest on the loan and increasing his after-tax cash flow.


Before embarking on following through on the advices noted above, it is crucial to properly structure transactions so you actually do end up taking advantage of the tips. For example, make sure to make the corporation the owner and the beneficiary of the life insurance policy. Secondly, if you do decide to reinvest the borrowed funds into your corporation, make sure to pay yourself with dividends, as that is considered investment income, against which you will be able to deduct the loan interest.

Consult Madan C.A. for more tailored advice; we can study your specific situation and provide a more accurate analysis to help you consider your choices.


The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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