CONTRACT DESIGN
Policies built for the strategy
Before you act on anything about tax on this page
This practice is licensed in life and health insurance. It is not an accounting practice, it does not prepare returns, and nothing on this page is tax advice or an opinion on anybody’s tax position.
- Speak to an accountant before you act. Not after. If tax is any part of the reason a decision is being considered, a professional accountant who has seen the actual file is the person to decide it with, and this page is not a substitute for that conversation.
- The rules move. Tax rules, thresholds, rates, forms and deadlines change, most of them at least once a year, and a rule described here may have been amended since this page was built.
- The tax authority is the authority. For anything a reader intends to rely on, the Canada Revenue Agency and, in Quebec, Revenu Quebec publish the current rule themselves, free, and that is where it should be read.
- Nothing here is a calculation of anybody’s tax. This page describes how a rule is written. It does not work out what any reader will pay, recover or owe, because that depends on a whole return and on facts no page can see.
- No professional relationship is created by reading this. No reliance should be placed on it, and nothing in it is legal advice either.
In plain language: we are not accountants. Anything here that touches tax is general information, it changes, and it should be checked with an accountant and against the tax authority’s own page before anybody uses it for anything.
A contract meant to fund the Infinite Financial Sovereignty strategy is designed differently from one bought only for the death benefit. The difference is in the design, not the brochure.
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No price appears on this page, and none is sent by email. What a contract costs depends on the person and the design, and no honest figure can be produced from three answers.
The design choices that decide how a contract behaves
- How the premium is splitThe proportion directed to the base contract against the portion that buys additional paid up coverage changes how early value builds.
- How long premiums are payableA contract paid over a set number of years and one paid for life are different instruments with different early behaviour.
- Who owns it, decided before it is issuedPersonal, corporate, holding company or trust ownership changes the tax position, the creditor position and who controls the value. Changing it later is expensive and sometimes impossible.
- What is guaranteed and what is declaredThe guaranteed values are written into the contract. Dividends are declared each year at the insurer’s discretion and are never promised.
What this page is about, and what it is not about
This page is not about whether to own a participating whole life contract. It is about how such a contract is designed when a household intends to use it for a self financing strategy, rather than buy permanent protection and leave it alone.
The same product, from the same insurer, can be built in shapes that behave so differently that a reader comparing two illustrations would not guess they came from the same contract. The product is described under whole life insurance, and the strategy under the participating whole life strategy. This page sits between them and is about the design decisions nobody explains.
It deserves its own page for one reason. Most of the disappointment attached to this strategy in Canada comes from a design failure rather than from a product failure. The contract did what it was built to do. It was built wrong for the household that bought it, and usually nobody in the room ever said out loud that there had been a choice. A reader who finishes this page should be able to look at a proposal and ask the four or five questions that reveal whether it was designed for them or designed to be sold.
The base premium, the additional premium, and the ratio between them
A participating whole life contract used for this purpose is funded by two things. There is the base premium, which buys the core permanent insurance and is required for as long as the contract says it is required. And there is an additional premium, paid on top of it, which the contract permits within limits.
A word about language first. Much of the talk around this subject gives the additional payment a name that is not its own. It is a premium. Nothing is held on account for the owner and no institution is keeping the money for later. The word matters because it is the first step towards thinking about a life insurance contract as something it is not.
The ratio between base premium and additional premium decides how the contract behaves more than any other single choice in the design. A contract weighted towards base premium is a life insurance policy with a large permanent death benefit that happens to build value slowly. A contract weighted towards additional premium builds value faster in the early years and buys less permanent death benefit for the same total outlay.
Neither of those is right. They are answers to different questions. What is wrong is a household that wanted one and was handed the other without ever seeing that a choice existed.
The ratio also decides how flexible the arrangement is. The base premium is an obligation. The additional premium, within what the contract allows, is usually far more flexible. A design that loads most of the funding into the base premium carries a large required payment for a long time, and that is a promise about the next several decades of a household’s own income.
Paid up additions are the engine
The additional premium does not sit somewhere waiting. It buys paid up additions, and understanding what those are is most of understanding this subject.
A paid up addition is a small, fully paid piece of permanent insurance added to the contract. It requires no further premium ever. It carries its own death benefit and its own cash value, and because it is part of a participating contract it is itself eligible to share in surplus the insurer declares.
That last point is where the compounding comes from. A dividend, declared annually at the insurer’s discretion and not guaranteed, can be used to buy more paid up additions, which raise the death benefit and the cash value, and which are in turn eligible for future dividends. The contract grows from the inside, and nothing has to be reinvested by the owner for that to happen.
Two things have to be said honestly about it. The first is that a dividend is declared annually at the insurer’s discretion and is not guaranteed. A dividend scale on an illustration is a projection and not a promise, and it moves with the insurer’s investment results, its mortality experience and its expenses. A participating policyowner holds a participating contract and is eligible to share in declared surplus. They do not own a piece of the insurer and nothing here gives them a say in how it is run.
The second is that the engine takes a long time to become an engine. Paid up additions bought in the first years are small, and the additions those later buy are smaller still. What eventually looks like momentum is the accumulated result of many years of this, which is the honest explanation for the early figures on any illustration.
What the law lets you put in
There is a ceiling on what can go into a contract of this kind, and it is not the insurer being cautious. It is the Income Tax Act.
A life insurance policy in Canada that satisfies the exempt test is not taxed on the growth in its value as that growth occurs. The test is set out in section 306 of the Income Tax Regulations, and in outline it measures the policy against a benchmark policy to confirm that the contract is genuinely insurance rather than a savings arrangement wearing an insurance name.
The insurer administers the test. It is not something the owner calculates, and it is not something the person arranging the contract negotiates. The insurer monitors it every year, and where a contract is heading past the limit the insurer acts: it may refuse an additional premium, return money, or increase the death benefit so that the contract stays exempt.
For a household the consequence is simple, and it is much better known before signing than after. There is a maximum that can be paid into the contract, that maximum is a function of the death benefit, and the only way to make room for more money is to buy more insurance. Anybody describing this arrangement as an unlimited place to put money has misdescribed it, and that misdescription is the origin of much of the criticism the strategy attracts.
A policy that stops being exempt is taxed differently, and what that means in a particular case belongs to the insurer administering that contract and to a qualified tax professional.
Early cash value is bought with long term death benefit
This is the trade at the centre of the entire subject, and it is the one most often left unsaid in the room where the decision is made.
For a given amount of money going in, a design can be tilted towards early cash value or towards long term death benefit. It cannot be tilted towards both. Money used to make value available sooner is money not used to buy permanent insurance that would have compounded for the next forty years. No design escapes this, and anybody presenting one has left something out.
A design leaning towards early access typically carries a smaller base premium relative to the total, a larger additional premium, and more of the funding going into paid up additions from the first year. It shows more value sooner. Over a long horizon it generally produces a smaller death benefit than the other design funded with the same total money.
A design leaning towards the long term does the opposite. It shows less in the early years and more at the end. A household that will never touch the value and is thinking about what passes to the next generation is better served by it, and will find the first several years of the illustration harder to look at.
The question that settles it is not which design is better, because that question has no answer. It is what the money is for and when the household expects to use it. A household that intends to use the value inside a decade and one that intends never to use it are not buying the same contract, and somebody who never asks which is in front of them cannot design either.
The first years look disappointing whatever the design
This has to be said without softening it. In the early years of any participating whole life contract, the cash value is less than the total of the premiums paid. That is true of a design tilted hard towards early value as well. It is simply less true.
The reasons are not hidden and they are not sinister. The contract buys permanent insurance from the first day, and that insurance costs something whether or not anybody ever claims on it. There are the costs of underwriting and issuing a permanent contract. There is compensation paid to the person who arranged it, which is real, which is paid mostly at the front, and which this practice discloses rather than talks around. And the compounding that eventually does all the work has barely begun.
What follows is a rule to apply before anything is signed. A contract of this kind rewards a household that funds it for decades and punishes one that stops early. Anybody presenting it as something to start now and reconsider in a few years is describing a different product than the one on the table.
A reader who finds the early years of an illustration uncomfortable is reading it correctly. The right response is not reassurance and not a longer explanation of compounding. It is to ask, coldly, whether this household can fund this contract for as long as the design assumes.
The design that fits, and the one that is reduced in year four
Here is the failure this page exists to prevent, described plainly enough that a reader can recognise it happening to them.
A household is shown a design funded at a level that looks reasonable in a good year. It is a stretch, and the illustration is attractive precisely because it is a stretch, since more money going in produces better looking figures further out. The household signs. Then something ordinary happens: an income falls, a business has a slow year, a renewal resets higher. In year four the premium has to come down.
What happens then is not a catastrophe and it is not nothing. The contract can usually be reduced, and a reduced contract is a smaller contract: less permanent insurance, a smaller engine, and a longer road to the point where the value exceeds what was paid in. The household arrives there having paid the early costs of a large contract and owning a small one, and no later good year gives the difference back.
The design that works is funded at a level the household would still be paying in a bad year, with the flexible portion carrying the ambition rather than the required portion. It shows worse figures on the page and it survives contact with a real life. The difference between the two is invisible on the day of the decision and obvious a decade later.
The questions that expose the difference are ordinary ones and anybody arranging this should answer them without hesitating. What is the required payment, and what happens if it is not made. Which part is flexible, and what does the contract do if that part stops. And the one that matters most: show me what this looks like if we fund it for four years and then reduce. That answer should be shown rather than described, and a household that has not seen it has not seen the risk it is taking.
Three designs built from the same product
The same insurer, the same participating contract and the same money going in produce these different results. A fourth row is added for contrast.
| Design | What it is built for | The early years | Over a long horizon | What breaks it |
|---|---|---|---|---|
| Weighted towards base premium | A large permanent death benefit for the next generation. | Value builds slowly and sits well below the premiums paid. | The largest death benefit of the three for the same total funding. | A household that turns out to need access to value and does not have it. |
| Weighted towards additional premium and paid up additions | Value that becomes usable within a shorter horizon. | Value builds faster, though it still sits below the premiums paid at first. | A smaller death benefit than the design above for the same funding. | The ceiling set by the exempt test, and a household that stops funding early. |
| An ordinary protection design | Permanent insurance, bought and then left alone. | Value is incidental and was never the point. | A death benefit that does exactly what it was bought to do. | Nothing, provided nobody expected it to behave like the designs above. |
| Universal life, for contrast | Permanent insurance with the investment element separated and directed by the owner. | Depends entirely on what the owner directed and what it earned. | Depends on the same, and the owner carries that risk rather than the insurer. | Assuming it behaves like a participating contract, which it does not. |
The table is not a ranking. It is a statement that the choice exists, which is the thing a household is most often not told. At the opposite end of the same shelf, term to one hundred holds a permanent death benefit with little or no value element at all, and permanent life insurance shows how the shelf fits together.
The cornerstone guide
Start here: the whole strategy in one page
What it is, how it works in Canada, what it costs, what it risks, how long it takes and who it does not suit.
Jose Salloum Canadian Wealth Creation Centre Inc.
Read the guideWhat a policy loan actually is, and what it does to your taxes
This is where the subject is most often misdescribed, so it is worth being exact.
A policy loan is a loan made by the insurer to the owner, secured against the value of the contract. The insurer advances the money. The insurer charges interest, and that interest is owed to the insurer. Nobody borrows from themselves. A life insurance policy is not a personal financial institution and nothing in this arrangement makes it one.
The tax treatment is where households are most often surprised, and it is not a small surprise. Under section 148 of the Income Tax Act a policy loan is a disposition. It is not simply a debt sitting quietly against the contract. Where the amount advanced exceeds the adjusted cost basis of the policy, the excess is a policy gain and is included in the owner’s income for that year.
The adjusted cost basis is defined in subsection 148(9) of the Income Tax Act, and it is not intuitive. It rises with premiums paid and falls with the net cost of pure insurance, so it moves every year and on a contract held long enough it declines. A contract that could be borrowed against without a gain in one decade may produce one in the next. The insurer calculates it. The owner does not, and neither does the person who arranged the contract.
The Canada Revenue Agency bulletin IT-87R2 sets out the department’s position on a policyholder’s income from life insurance policies. What follows from all of it is one instruction: before any amount comes out of a contract of this kind, whether by loan or by withdrawal, the numbers belong to that specific contract at that specific time and the question goes to a qualified tax professional.
There is another route that avoids the disposition entirely, which is a loan from a financial institution using the contract as collateral. That is a loan from a lender, on the lender’s terms, and it introduces a third party who can change those terms. It is a different arrangement with a different set of risks and it should be examined as one.
When the owner is a corporation
Contracts of this kind are often owned by a private corporation, and the design questions change when they are.
The premium is paid with corporate money, which has generally borne corporate tax rather than personal tax. That difference is the reason the structure gets considered at all. It is real and not a trick, and it is also why these arrangements attract attention from people who have not looked at the rest of the picture.
On death, the death benefit is received by the corporation. The amount by which it exceeds the adjusted cost basis of the policy is credited to the capital dividend account, which is defined in subsection 89(1) of the Income Tax Act, and amounts in that account can be paid out to shareholders as a capital dividend. That mechanism is what people are describing, usually loosely, when they say corporate insurance is efficient.
What changes in the design is the weighting and the ownership. A corporation that will never need access to value has different priorities from one that intends to use the contract as collateral for its own borrowing, and a shareholder whose family will inherit shares rather than proceeds has a different problem again. Getting the combination of who owns, who pays and who is named wrong creates tax consequences that are expensive and sometimes impossible to unwind later.
None of that is decided on a page. It is decided with the corporation’s accountant and a qualified tax professional, with the insurance design following the tax structure rather than leading it.
The criticisms, which are on this site rather than avoided
A page that only explains how something works is a sales page with footnotes. The criticisms of this strategy are real, they are set out on this site, and a household should read them first rather than last. They are collected under the question of whether this is a scam.
In summary form, the serious criticisms are these. The early years are poor and are frequently presented in a way that obscures how poor. Compensation is paid mostly at the front of the arrangement, which creates an incentive to design for size rather than for durability, and that incentive is exactly the one behind the contract that gets reduced in year four. Illustrations project a dividend that is declared annually at the insurer’s discretion and is not guaranteed, and small changes in that projection compound into large differences across decades. And some presentations describe the arrangement as something it is not, using language about personal financial institutions and borrowing from yourself that is not permitted in Canada, for reasons that become obvious the first time somebody believes it literally.
The answer to those criticisms is not that they are wrong. It is that they are criticisms of how the thing is sold and designed, and that a household which understands the design questions on this page can refuse a bad design rather than discover one. A reader who works through all of it and concludes that this is not for them has been well served here, and that outcome is the point of writing it.
The five mistakes this page exists to prevent
Funding it at the level that makes the illustration look best. The right level is the one that is still payable in the household’s worst plausible year, and the ambition belongs in the flexible portion.
Never asking about the ratio. Base premium against additional premium is the decision that shapes everything else, and a household that has not been shown both versions has not been given a choice.
Believing the early years can be avoided by a clever design. They can be softened. They cannot be avoided, and a design that appears to avoid them has given up long term death benefit to do it.
Treating a policy loan as free money. It is a loan from the insurer with interest owed to the insurer, it is a disposition under section 148 of the Income Tax Act, and it can produce a policy gain where the amount advanced exceeds the adjusted cost basis.
Taking the illustration as a forecast. A dividend is declared annually at the insurer’s discretion and is not guaranteed, and the projection is a projection.
Questions people ask
How much can I put into a policy like this?
Less than people expect, and the limit is set by law rather than by the insurer. The exempt test in section 306 of the Income Tax Regulations caps what a policy can hold relative to its death benefit, and the insurer administers it. The practical consequence is that the only way to make room for more money is to buy more insurance. Anyone describing the contract as an unlimited place to put money has misdescribed it.
Why is the cash value so low in the first few years?
Because the contract buys permanent insurance from day one and that costs something, because issuing a permanent contract costs something, because compensation is paid mostly at the front, and because the compounding that eventually does the work has barely started. A design tilted towards early value softens it. Nothing removes it.
Can I borrow from my policy tax free?
A policy loan is made by the insurer, interest is owed to the insurer, and under section 148 of the Income Tax Act it is a disposition. Where the amount advanced exceeds the adjusted cost basis, defined in subsection 148(9), the excess is a policy gain and is included in income. The insurer calculates the adjusted cost basis, it moves every year, and the question belongs to a qualified tax professional before any money is taken out rather than after.
What happens if I cannot keep paying?
Usually the contract can be reduced, and a reduced contract is a smaller contract with less permanent insurance and a longer road back to break even. The household will have paid the early costs of a large contract and will own a small one. Set the funding level at what is payable in a bad year, and ask to be shown what a reduction in year four looks like before signing anything.
Is the dividend guaranteed?
No. A dividend is declared annually at the insurer’s discretion and is not guaranteed. It moves with the insurer’s investment results, its mortality experience and its expenses. A participating policyowner holds a participating contract and is eligible to share in declared surplus, which is not the same as owning a piece of the insurer and carries none of the rights that would.
Should the policy be owned by me or by my corporation?
That depends on where the premium money is and what happens on death. Corporate ownership brings in the capital dividend account under subsection 89(1) of the Income Tax Act, and also questions about who owns, who pays and who is named, where the wrong combination is expensive to unwind. It is decided with the corporation’s accountant and a qualified tax professional.
Is this whole strategy a scam?
The criticisms are set out on this site rather than avoided, under the question of whether this is a scam. The short answer is that the product is a real and heavily regulated contract, and that most of the harm comes from bad design and overstated presentation rather than from the contract itself.
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A thirty-minute discovery meeting
A first conversation establishes whether this fits. No illustration is prepared and nothing is arranged.
Often the answer is no, and you will hear it during the call rather than in a proposal afterwards.
The form is on the discovery meeting page and takes a minute. It arranges a conversation. It is not advice, and nothing is being sold here.
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About the author
Jose Salloum is a Financial Security Advisor (Conseiller en sécurité financière) licensed by the Autorité des marchés financiers in Quebec, by the Financial Services Regulatory Authority of Ontario, and by the Insurance Council of British Columbia. Licensed since 2001, he works with Canadian families, business owners and incorporated professionals.
He is the founder of Canadian Wealth Creation Centre Inc. (CWCC), registered with the AMF, and of its educational branch IBCFinancial.com. He holds the Infinite Banking Concepts® Authorized Practitioner certification from the Nelson Nash Institute, a private certification rather than a regulatory licence.
CWCC is not registered with CIRO and does not provide securities advice. This page is general education and not advice on any individual file.
Important disclosures
This page is education, not advice. The content is general information prepared by Canadian Wealth Creation Centre Inc. It does not take your circumstances into account and is not a recommendation to buy, hold or cancel any contract. CWCC is not registered with CIRO and does not provide securities advice. The firm places insurance in Quebec, Ontario, Alberta, British Columbia, Manitoba and New Brunswick; clients elsewhere are served by advisors licensed in their province.
Nothing here was written with your file in front of us. Read it to understand the subject, then judge it against your own situation, ideally with someone who is licensed where you live and who has seen your numbers.
This is not tax advice, and the tax treatment depends on your own circumstances. The tax treatment described depends on the contract remaining exempt under the Income Tax Regulations and on the reader’s individual circumstances. A withdrawal, a surrender or a policy loan may be a disposition under the Income Tax Act, and amounts above the adjusted cost basis may be taxable in the year they occur. Tax rules change. Canadian Wealth Creation Centre Inc. is licensed in life and health insurance. It is not an accounting practice, it does not prepare returns, and nothing on this site is tax advice or an opinion on any reader’s tax position. Anything a reader intends to rely on should be confirmed with a professional accountant and against the current published rule of the Canada Revenue Agency and, in Quebec, Revenu Québec.
The tax result is not automatic and it is not unconditional. It rests on the contract staying within the Canadian rules and on your own situation. Before you rely on any of it, talk to an accountant who has actually worked with these contracts.
Guarantees come from the insurer, not from the government. Guaranteed values in a life insurance contract are contractual promises of the issuing insurer and depend on that insurer’s financial strength and claims paying ability. Dividends on a participating contract are not guaranteed, are declared at the insurer’s discretion and can change. Policyholder protection in Canada is provided by Assuris within its published limits; deposit insurance does not apply to insurance contracts.
The guarantees written into a contract are real, and they are the insurer’s. The dividend is not a guarantee at all; it is what the insurer decides to declare each year. Know which numbers are which before you make a plan around them.
Illustrations and projections are not predictions. Any figures, examples or illustrated values are hypothetical, are shown to explain a mechanism, and are not a forecast of the performance of any contract. Actual values will differ and may be lower than those shown. Past dividend scales do not predict future scales.
An example is there to show how the parts move, not to tell you what you will get. Any real illustration you are shown should be read on its guaranteed columns first.
Borrowing against a contract carries its own risks. A policy loan or a loan secured by a contract accrues interest. If the balance and interest are not managed, the death benefit is reduced, and a contract that lapses with a loan outstanding can produce a taxable gain in that year. Third party lenders set their own terms and can change them.
A loan is a loan. Interest builds whether or not you pay it, and a contract that runs out of room while it is owed can cost you both the coverage and a tax bill. This is the part of the strategy that needs the most discipline.
Investment discussion is general and comparative. References to investment products, accounts or returns are for comparison and education. CWCC does not sell securities and is not registered with CIRO. Segregated funds are insurance contracts; their guarantees are the insurer’s and apply only at the dates and on the terms written in the contract. Returns are not guaranteed and capital can be lost.
When this site compares a contract with an investment, it is describing how each works, not telling you which to buy. Questions about securities belong with someone registered to answer them.