Insurance for Physicians - The Secret Ingredient
Tyson Nguyen is an Insurance Planning Associate with Nicola Wealth, bringing five years of experience in estate and insurance planning. He holds a Bachelor's degree in Mathematics and Economics from the University of British Columbia, and has earned several professional designations, including Chartered Life Underwriter (CLU®), Certified Health Insurance Specialist (CHS), and BC Life Insurance License. Below, Tyson outlines a practical insurance solution tailored for physicians in Canada.
Canadian insurance can be complex to fully explain and understand, but the essential details to assist with financial planning are straightforward
Term insurance provides low-cost protection to cover early career concerns such as income replacement and mortgage payments. With aging, premiums increase but needs may also diminish to a point where term insurance may no longer be required or sensible.
On the other hand, in mid or later career, insurance with an investment component or participating (“Par”) has several advantages:
Safe stable returns within an insurance plan are an attractive alternative for those who are already fully contributing to RRSPs and TFSAs.
The premiums do not increase with age, and you may choose to reduce or discontinue annual payments at a future date.
The protection provides lifelong financial security as the coverage does not expire.
The policy builds cash value over time which is another asset accessible for emergency or retirement use and also available as security against tax deductible investment loans.
Payments can be tailored to individual needs with flexible dividend options.
The policy provides tax-free payment to the beneficiaries which can safeguard against the consequences of a substantial tax bill that results from the transfer of corporate assets to the next generation.
In essence, “Par” insurance is an investment vehicle offering safe, stable returns that accumulate tax free and add an insurance component making a highly attractive option for physicians who are already fully contributing to RRSPs and TFSAs and are looking for viable alternatives. These concepts are perhaps best illustrated with a practical example.
CASE STUDY
Dr. Smith is 45-year-old surgeon with no substantial debt and a corporation that pays her an annual income but has surplus funds to invest within the corporation. She meets with her advisor and selects a Par insurance policy with a $1.8 million death benefit and annual deposits of $100,000 which she plans to fund for ten years.
This example compares her projected results with the Par insurance to sticking with fixed-income investments at a 4% yield in her corporation, taxed at 50% rate.
As you can see, by year 5 or age 50, the policy’s cash value nearly matches what she’d have in fixed-income investments, and it surpasses that by year 10 or age 55. At her life expectancy, the policy’s return is projected to be 5.09%.
Dr. Smith is also mindful of her cash flow and wants the flexibility to reinvest in her business when needed. Her advisor hence suggests that she could borrow against the cash value of the policy and reinvest it in her corporate portfolio. This approach makes the loan interest tax-deductible and providing extra growth opportunities outside the policy. Ultimately, her only cash outflow is the net interest cost of the loan after deducting the loan interest and the insurance factor. In some years, she could actually have a positive cashflow as she can borrow back more than the premiums she puts into the policy, once the cash value of the policy grows more than $100,000 per year. We assumed a loan borrowing rate of 6%, and a 5% external investment return.
The results below show the net difference of keeping investments in her corporation as-is versus implementing the Par insurance leverage strategy.
In summary, at her life expectancy, this leveraged whole life strategy could potentially add $4.7 million more in value than simply holding fixed-income investments in the corporation. By age 90, this is equivalent to an impressive return of 8.44%.
For high-earning physicians, like Dr. Smith, Par insurance policy offers more than just financial protection for your loved-ones. It’s a dynamic tool for reducing taxes and building wealth. By leveraging its powerful benefits, Par insurance is truly a secret ingredient that can help transform your wealth-building and estate planning journey.