Too good to be true? How a life insurance product can grow your wealth and help manage taxes all in one

For anyone looking at comprehensive estate planning, one vehicle that’s powerful yet often overlooked is participating whole life insurance. “Its name truly describes its versatility,” says Pawan Dhaliwal, marketing actuary with RBC Insurance.

She calls participating whole life a multi-faceted tool that can be used to protect, build and transfer wealth, and optimize tax efficiency. Despite the range of advantages, it remains underused by Canadians.

Unlike term insurance, which typically provides coverage for shorter time periods like five to 20 years, participating whole life provides a permanent death benefit until the insured person passes, no matter the age. A main benefit of participating whole life insurance is the opportunity to earn dividends in the policy. Equally important, the policy has a cash value that grows over time, making it an all-in-one insurance and investment solution.

“Part of your premiums will be put aside, and those cash values grow inside the policy on a tax-deferred basis,” Ms. Dhaliwal says.

She notes how premiums are pooled in the participating account and invested by the RBC Insurance investment team. On the policy’s anniversary, dividends are calculated by what’s called the “dividend scale”. This calculation is used to determine and distribute the annual policy dividends to the policyholders fairly and equitably. (Note, dividends aren’t guaranteed.) RBC Insurance’s participating whole life policies give clients access to institutional-level assets and market expertise.

Premiums for these policies are typically higher than for term life policies. That’s because the plan is in place for life, and enables policyholders to share in the insurance company’s experience and expertise. As with all life insurance, premiums are generally lower when the policy is issued at a younger age.

By paying the premiums along the way, an individual can effectively shift taxable capital from a non-registered account to tax-exempt growth in the insurance policy, Ms. Dhaliwal explains. “That’s why participating whole life is a great holistic estate planning tool for people who’ve maxed out contributions to their other tax-efficient savings plans like TFSAs and RRSPs.”

She says participating whole life insurance is often most appealing to high-net-worth Canadians who are looking for tax-advantaged investments. They may have significant taxable assets, such as a cottage or an investment account, that they expect to pass through their estate, creating a large shortfall upon death.

The amount of taxes, fees and expenses a family may have to pay when a loved one dies are often underestimated. That can significantly reduce the size of the estate that’s passed on. The policy’s tax-free death benefit can provide liquidity to help pay taxes arising from the estate, such as those associated with a family cottage or a business.

Consider a cottage that a parent bought decades ago for $100,000. That property could be worth $1 million (or more) today. The estate would be responsible for paying the capital gains on that $900,000, on top of expenses and fees associated with probate.

Another advantage is that the benefit is paid directly to beneficiaries, often outside the estate and probate process.

For a business-owned policy, death benefits can also be distributed tax-free to shareholders, and can help cover estate taxes, debts and other obligations without having to sell the business or its assets.

During the policyholder’s lifetime, the growing cash value is key, allowing clients to draw on that sum as needed. That ability can be particularly useful for business owners, who can access the cash value to assist with anything from funding slower periods to expansion opportunities. Individuals can also access tax-free capital by borrowing against the policy.

“For business owners, that can be an easier and faster route than getting a traditional business loan,” Ms. Dhaliwal says.

The versatility of the product complements traditional wealth strategies. For instance, entrepreneurs can tap into their policies to help fund their retirements. Parents or grandparents can purchase smaller policies for children when premium costs are significantly less. Later in life, those children might draw on the asset value for a home purchase. They can increase the coverage too, without paying significantly higher premiums or going through the underwriting process again.

As a flexible, tax-advantaged solution, participating whole life fits into a diversified estate plan, working alongside other investments, adding a layer of predictability, and playing a role in tandem with trusts, wills and other estate-planning approaches. The insurance can be customized to meet individual needs, Ms. Dhaliwal says. “It’s certainly worth exploring in depth with your advisor.”

For clients, this is a policy that protects, grows and unlocks meaningful value throughout their lifetime. And that opens a whole new world of possibilities for more strategic estate planning.

Advertising feature produced by Globe Content Studio with RBC Insurance. The Globe’s editorial department was not involved.