04/24/2014 11:59 EDT | Updated 06/24/2014 05:59 EDT

A Money-Saving Secret the Taxman Doesn't Want You to Know

Want to know a secret?

2014-04-24-shutterstock_23986753.jpg There's another tax-free way to save for retirement that the Taxman doesn't really want you to know. It's called universal life insurance, a special financial security portfolio that gives you life and health insurance coverage and a tax-deferred saving component.

What makes this product special?

It's attractive because it allows you to reduce your tax burden by moving some of your taxable money and sheltering it within the universal life policy. Your money grows more efficiently allowing you to achieve an earlier retirement. This is especially effective if you tend to maximize your annual RRSP contribution. It's like moving your coins from a pocket with a hole in it to one with no hole. Universal Life is very flexible and totally conforms to your needs because you can add or remove features and increase or decrease premiums at any time.

So how does it work?

The individual designs the portfolio based on their current personal and/or family priorities. They may choose from a variety of insurances including term, whole life and/or critical illness. The monthly minimum deposit covers the cost of the insurance and anything above this will accumulate in a tax advantaged savings account. If the insured person becomes sick or disabled, there is an option to have the cost of the insurance or the full monthly deposit paid by the insurance company. This then establishes a self-completing insurance-savings plan.

How can I invest my money under the savings component?

There are a lot of investment options available. For example, you can choose between guaranteed deposits or index funds. These funds can be accessed anytime, barring any restrictions attached to the investment type, making this an ideal emergency or retirement fund. Another bonus is that the client can choose to increase or decrease their monthly investment at any time as long as the cost of insurance remains covered.

How does this product shield me from paying taxes?

Basically, the taxes are deferred. Let's do a comparison between an RRSP and a Universal Life withdrawal. During your retirement, if you were to withdraw $10,000 from your RRSP, you are required to pay tax at the source. For argument sake, let's say it's $2,000 leaving you with $8,000. However, withdrawals from a universal policy are taxed differently. If you take out $10,000, you could end up not paying any tax at all depending on how you arrange your withdrawals.

If you assigned beneficiaries to your RRSP account and Universal Life policy, the funds would again be taxed differently at the time of your death. For example, your beneficiaries would not receive the full RRSP amount because it would be taxed at the source. However, your beneficiaries would receive the entire insurance payout tax-free, less any amounts borrowed during your retirement.


(2014) Who's Got The Highest Taxes?