Okay, if you thought back end leveraging was complicated than this next concept might actually melt your brain. I was thoroughly dumbfounded by this for at least 3 months until I finally wrapped my head around it. Once I fully understood the power of this strategy it literally blew me away.
In the last email we talked about growing the Cash Surrender Value (CSV) in your life insurance so we could borrow against it during retirement for preferential tax treatment. The name of that concept was back end leveraging because we were essentially leveraging the policy on the back end.
The next concept I will talk about is front end leveraging which is also known as immediate financing arrangements (IFA).
Here’s the problem it solves:
You have a business owner that is quite cash heavy in his business. He’s constantly reinvesting back into his business or expanding and spending large amounts of capital. He may have a large passive portfolio and is paying a large amount of corporate taxes both for active income and passive income.
He understands the importance of life insurance and knows that he needs it for estate planning, however, he doesn’t wait to tie up any capital and wants to continually reinvest in his business.
Here’s what we do using front end leveraging:
- The corporation buys a Whole life with Paid up Additions (PUA)
- We use a special type of whole life that gives us a massive amount of CSV in the early years
- Immediately after paying the premium, the corporation borrows back a portion of that premium (70%-100%)
- They use that loan to reinvest back into their business for the purposes of producing income
- The interest on that loan is deductible under section 20(1) of the ITA
- The following year he does the exact same thing again, however this time he also borrows back the interest he paid in the previous year
- He continues to do this year over year until the insurance is paid off (let’s say it was a 10 pay)
- After that point he continues to pay the interest on the loan and borrow it back the following year.
- He does this year over year until he dies at which point the loan is fully repaid and the remaining face amount is paid out to the beneficiaries (Remember paid up additions)
Here’s what you need to wrap your head around, why would we want an ever-growing loan that we would have to pay the interest on every single year?
The reason is this; every single year that we can prove that we used the loan to produce income it is an allowable deduction to the corporation. But the following year we borrow back that interest amount again, so we really paid $0 – it just gets tacked onto the overall loan that is repaid upon death.
However, every single year we can use those deductions to save massive amounts of taxes over our lifetime.
In some cases, you can literally save more taxes than what you paid for the insurance.
There are a million things that go into this strategy and a number of other benefits that are simply outside the scope of this post, however, I LOVE this stuff and would be thrilled to have a chat with you about how this works.