SNiPS – The Best Tax Shelter

The BEST Tax Shelter

Most of us view insurance as a “necessary evil”. I’m going to show you (quickly) that not only is insurance a good thing to have in case you die but it can also provide you with a way to grow and use money Tax-Free.

Life Insurance Tax Shelters (LITS) will not only permit your money to grow tax free but if structured properly will permit you to access the funds without tax ramifications (unlike RRSPs).

The benefit of a LITS versus a Tax Free Savings Account (TFSA) is the life insurance coverage provided in addition to the tax sheltering impact. The other benefit of the LITS vs the TFSA is that you are not limited to a $5,000 annual deposit.


LITS (Life Insurance Tax Shelters)

What are they? Each insurance company has its own name for their unique plan, but the plans basically operate like this:

  • You participate in an insurance plan (policy) that permits you to deposit money in it (to then be invested by the insurance company)
  • I recommend that the lowest “decreasing term” possible policy be subscribed to
  • You want your actual insurance premiums to be the lowest necessary to keep the plan active, because you take the extra money and deposit it within the plan as an investment

LITS – Tax free extraction from Life Insurance Tax Shelters

There are 3 options with respect to how funds may be extracted on a tax free basis as follows. Let’s assume funds invested in the insurance plan amounted to $200,000 over 20 years ($10,000 per year). Your payments amounted to $200,000 but now the investment market value is say $750,000.

1.  The first option has to do with taking the cost of what you put in the plan over the years less the portion that was used to pay the insurance premiums. So here you take out $200,000 less the insurance premiums.

2.  Option 2 requires you going to your bank (if you deal with a company like Manulife they have their own bank for this purpose) and borrow money using the policy as security. Generally you do not need to borrow the funds all at one time, but annually as you need it. The arrangement you make on the loan is that at the time of your death the funds from the LITS will be used to cover the balance owing; this can be done without any repayment being made on the original loan (albeit the stock market hic up of 2008/09 will require more scrutiny of the loan terms). The lending company knows the loan is well secured (by the balance you have in the fund plus the life insurance)

3.  Option 3 involves the funds that are left over in the policy after paying off the loan in #2 above. The remainder flows to your beneficiary tax free.

In the event you do not survive as long as the money does, because it is an insurance policy the balance remaining plus the insurance benefit moves into the hands of your beneficiaries Tax-Free.

I now have made all of my life insurance sales people clients very happy. As always if you have any questions or would like to discuss anything included in the last series of SNiPS please don’t hesitate t let me know.


Larry Smithers
Smithers Group/LGC Smithers Inc
89 King Street West
Dundas, Ontario
L9H 1v1


LGC Smithers and Associates are Accounting, Book Keeping, Payroll & Income Tax Specialists based in Dundas, Ontario.   We serve businesses in the greater Hamilton area and offer expert tax advice.  Contact us today to discuss how we can help with your financial needs at 905-627-2910.