A Potentially Overlooked Financial Resource

COVID-19’s severe impact on the economy is weighting liquidity access significantly higher in the consideration of any investment vehicle.

Experts strongly advise against the disposition of well-structured but currently depressed investment portfolios today; as patience historically recaptures value over time.

As written by Andrew Willis in the April 14th, 2020 Globe and Mail, some of Canada’s largest private debt funds are constricting liquidity options by temporarily freezing investor withdrawals.

Typically private debt investors are looking for wealth preservation, income and higher returns on traditional fixed income investments and according to Canada Mortgage and Housing Corp amongst other assets, hold about $14 Billion or 1% of outstanding mortgages in Canada.

Life insurance companies and banks hold the lion’s share of the Canadian residential and commercial mortgage market. Previous recent Trusted Advice articles have outlined what liquidity/stimulus options the banks are providing; a sometimes overlooked liquidity option guaranteed by the Canadian life insurance industry is as follows:

  • Policy owners of permanent, participating life insurance have guaranteed access of up to 90% of their accumulated cash value account without the necessity of cancelling the policy in order to preserve the important guaranteed, tax free, insurance proceeds to their beneficiaries in the event of their premature death.

By borrowing these values through paying interest on the loan to the insurance carrier i.e. Sun Life Financial’s current rate is 4.95% (which can be expensed for income tax purposes in certain CRA approved situations; you will want your advisor to confirm all potential tax ramifications of the loan) liquidity is accessed today, the future growth of the policy is unencumbered and the borrowed amounts can be repaid at the option of the policyholder at some time in the future. Should the policy owner die in the interim, the loan is subtracted from the guaranteed death benefit and fully repaid to the insurance company.

Alternatively such policies are generally regarded as excellent collateral by Canadian banks which will lend against the cash values, depending on the circumstance of each situation, a strategy which might avoid taxable loan dispositions when the cash value exceeds the adjusted cost base of the policy.

It should be noted that the cash value account in such a policy is always guaranteed and that the projected dividends once declared annually, are also guaranteed.

Policy owners should review their own life insurance portfolios for an understanding of their underlying values and also recognize their merit when reviewing planning objectives such as tax preferred wealth preservation, income, higher traditional fixed income investment  returns and liquidity access, without some of the risks.