Insurance: Wants, Wishes and Must Haves

Car Insurance. Home Insurance. Life Insurance. Those are the so-called big 3 in the insurance space, but you know insurance can stretch far and wide.

It’s good to have peace of mind, but how much insurance is too much?

In this episode of SARA MAKES SENSE, Sara speaks with Insurance expert Tony Salgado about the real Wants, Wishes and Must Haves of insurance in 2021.  Safe to say, you’re covered. 

To contact Tony Salgado:
Website
Email

Got a question for Sara? Send her an email at ask@saramakessense.ca and she might respond to it in an upcoming episode

Sara's website is https://www.wddevelopment.ca/ 

Transcript

Sara McCullough: (00:00)
Yeah. I know. I'm completely not ready. So let's do this thing.

Sara McCullough: (00:11)
Insurance. You. That's not what my clients always say when I say insurance, but that's what their faces say. What they actually say most often is:  I hate insurance. No kidding, me too. It's hard to like. The good part about insurance; getting enough money to protect your loved ones and your goals, happens after your own death. The bad part about insurance happens while you are alive; you pay for it, over and over again, which is a regular reminder that you didn't need the insurance today because you're not dead. Before you think that today's episode is all about the thing you hate, think about how hard you've worked to save for and buy your house and maybe a cottage. How important keeping your kids in sports is. All of the decisions you've made about your career and the sacrifices and negotiations that have happened if you're in a two career relationship. Think about how much risk you took at the beginning of your business and how successfully it's turned out.

Sara McCullough: (01:20)
Now think about what you would do to protect all of those things. How hard would you work for that? But when you're gone, how do you protect those that you care about? You use insurance. When you have relevant advice and objective assessments of your goals and needs; insurance does a beautiful job of doing what you can't. Go ahead and hate the premiums, hate the industry, hate the blood work. I'm just asking you, if you have goals and you have people that you love and plans that you've worked hard for; stick around for the whole episode today and find out why and how to get this unwieldy thing to work for you. I'm Sara McCullough and in this episode of Sara Makes Sense, intelligent insight on insurance. The bottom line is we've got you covered. Our conversation today is going to weave in and out of a number of areas because insurance is a really broad topic.

Sara McCullough: (02:22)
Not only are there so many types; car, home, life, disability, critical illness, long-term care, the list can seem endless expensive and overwhelming. We're not going to dissect every type of insurance today, and we're not going to tell you what you should and shouldn't have. My goal for this episode is for you to hear why insurance is often the only way to solve a big problem and how advisors who are focused on clients’ needs talk about a very difficult product. My guest today is Tony Salgado, president of AMS Wealth. Before I have Tony introduce himself and his experience and philosophy, I'm gonna tell you why I chose Tony. The reality is, I'm based in Kitchener, Waterloo, home of several head offices of insurance companies. You can't throw a rock in this town without hitting an insurance agent.

 Sara McCullough: (03:20)
Tony doesn't live in KW. The reason I asked Tony to be a guest is because of his experience, because of his background, but mainly because of his philosophy, how does he talk about his clients? How does he talk about these products? Does he talk about why he placed them, when he placed them and when he won't place them, and he does. And so you're gonna hear a little bit of that today, as we talk through different types of insurance, when you would use them, why you would use them and what Tony's business looks like. So thanks for your time today, Tony, I'm really excited to have this conversation with you.

Tony Salgado: (04:01)
Oh, thanks for having me.

Sara McCullough: (04:03)
If you could, just talk a little bit about your background. So before you were the president of AMS Wealth, what were you doing?

Tony Salgado: (04:10)
Uh, sometimes I forget depends on the day, but, uh, I started my career with PWC. So, uh, right outta the gate, I started with Price Waterhouse Cooper. Um, I did my time in the audit stream, got my chartered accountancy designation and then, uh, transferred over to their tax planning group. And so I was really focused on high net worth tax planning and tax planning for privately owned companies. Um, really, really enjoyed that work. And I always believed even as a young boy or a man that I would always be doing something with tax and financial planning, uh, so much to the point where I, I graduated from the CPA In -Depth Tax Program, which is one of two highly recognized programs in Canada and, and then followed by tutoring the program for a period of five years across Canada. So if, if you wanna be a tax expert in Canada, you're going to be doing one of two things; you're either gonna be getting a Master's of Tax, or you're gonna be completing the CPA In-Depth Tax Program, which I taught for five years. So after that, uh, I decided, um, why not be one of a, one of only a few people or unicorn as you would say, and leave the tax professional practice completely behind and move over to financial planning.

Sara McCullough: (05:30)
All right.

Tony Salgado: (05:31)
And so that's what I did.

Sara McCullough: (05:32)
Okay. And so it is, um, uh, you know, it's interesting. One of my, my first guests on the podcast actually has a Master's in Tax, he's a tax lawyer. And as important as tax is to financial planning and certainly we, I think as an industry, both accountancy, financial planning, wealth management, we certainly train clients to focus on tax efficiency and that's that shapes a lot of their questions. And I agree it's extremely important. I think the financial planning industry sometimes leaves out the, the next part of the question or the next part of the plan is why were you tax efficient? Nobody cares about tax efficiency on its own. Nobody on their deathbed ever said, I'm so glad I was tax efficient. So this is where we want to take it that next step and say, so you've been tax efficient and that's partly what you're going to talk about today, but then we also need to remember what are you tax efficient for? And that's where in your world it comes into, why did you do this for the client? What, why did this make sense for this client?

Tony Salgado: (06:46)
So I'll tell you, you know, I'll, I'll, I'll tell you my very first story and my very first experience with this type of planning and I was still at the accounting firm. So we were engaged on a transaction for a family owned business and we had a client who was a real estate, uh, family in Ontario uh; and so you have these stories of asset rich, cash poor; and when you say cash poor doesn't necessarily mean someone is poor, it just means they may not have the liquidity to meet some sort of financial obligation,

Sara McCullough: (07:17)
Right? So they've got assets, but not assets they can spend easily or immediately

Tony Salgado: (07:23)
Correct. And so when you have capital property and capital property can be defined as land, buildings, cars, luxury boats, so you have, in this case, we had a lot of raw land and buildings. And so we were doing a tax transaction for the family, and it's a very popular tax transaction. Everyone will talk about the estate freeze and the purpose of the estate freeze. The tax purpose is to prevent the terminal tax liability or the death tax from getting any bigger. So the tax purpose is to stop your death tax problem from getting any bigger. So that's number one, number two, we were doing it because we had three kids in the family business that each had their own role and they were going to assume ownership of the family business going forward because they were actively involved.

Sara McCullough: (08:13)
And so when you say family business, this was a corporation?

Tony Salgado: (08:17)
Multiple corporations, but yes, we were doing one corporation. So we were doing all this tax work and, and at the end of the day we were stopping a problem from getting any larger. So we've identified, we have a problem. All right, the problem, the problem is we have a 25 million death tax.

Sara McCullough: (08:37)
Most of us consider that a problem. Yes.

Tony Salgado: (08:39)
Yes. So there are good problems and bad problems in life and this is a good problem, but it's still a problem, nonetheless. So if we don't do anything to address this problem, what is the ultimate outcome? The ultimate outcome would be the dilution of family wealth to its core. Um, if, if we don't get in there and, and not only do an estate freeze, which is stopping this 25 million problem from getting any larger mm-hmm , um, and bringing in a liquidity solution, such as insurance, to to pay for the 25 million problem, what would happen is those three kids that are in the family business would have to sell the raw land, would have to sell all the buildings when mom and dad are gone and they would actually be out of a job. Okay. Why would they be out of a job? Because that is their job. Their job is working in the family business. So what is the bigger objective? The bigger objective is to not only retain wealth, but to allow the family business to transition from one generation to the next. Why do we have a 70% failure rate from transition from first to second generation? So we need to have these solutions to address these problems.

Sara McCullough: (09:52)
Okay. So in this case, it wasn't that the family hadn't been successful. It wasn't that the business was, um, untenable, unworkable, um, the kids didn't know what they were doing. None of those things. You're just saying as this transitioned from one generation to the next you knew for sure you were 25 million into CRA.

Tony Salgado: (10:17)
For sure, by the way, there's a timeline to come up with the 25 million. It's not like you can pay it in three years after mom and dad passed. No, no, no, no. There's interest charged if you don't meet the timeline.

Sara McCullough: (10:28)
And this was partly connected to the corporation, partly connected to the parents owning shares in the corporation, correct?

Tony Salgado: (10:37)
Correct. Correct.

Sara McCullough: (10:39)
Okay. And so for all of the listeners, part of the reason I'm pulling this out a little bit, um, is partly because you've got no notes for this. You're just listening to Tony and I talk. Um, so that can get a little airy with all this talk of corporations and estate freezes and shares. The other part of the reason is this is Episode 10 of Sara Makes Sense, Episode 11 is on corporations. So listen to both. All right. So you've stopped this 25 million dollar, uh, CRA bill from getting any bigger. But as you say, 25 million for most of us is big enough. And the corporation was worth more than 25 million, but you're saying to, to meet that obligation, you're gonna have to start selling the thing that generates the money.

Tony Salgado: (11:30)
Correct. And I don't want, and I don't want the 25 million number to scare people to, to a point where, well, my problem is not that large, so I don't have a problem. Well, no, I mean, you can change the number and the problem is still there. And so, that was just my personal experience in terms of the first file that I worked on while I was not even outside in the insurance world, but I was inside the tax world. And I was looking at, here are the problems. We have a problem that's existing. And we, we have a solution to stop it from going any larger, which is great, which is great, but what is the solution to address the existing problem today?

Sara McCullough: (12:06)
Right?

Tony Salgado: (12:07)
And, and so, and if we don't bring in that solution to address the existing problem that's already there, the alternative solution would be having to sell the assets and, and the tax leakage on that would be significant. And so the overall objective to retain the family business, to retain the family wealth, would be completely out the window.

Sara McCullough: (12:30)
Okay. So you're saying there's going to be a bit of a snowball effect here that there's this, this bill to CRA and then if you're meeting the bill with assets of the corporation and you sell a property, that's gone up in value, then you've created another tax bill.

Tony Salgado: (12:48)
Bang on. Let me ask you a question. How many layers of tax are there upon death when a business owner passes away?

Sara McCullough: (12:55)
I'm gonna say at least four,

Tony Salgado: (12:57)
Well, there's definitely three that I know of. So, people always talk about double taxation upon death and, and I would say; you know what, if you're not working with any advisors, it's triple taxation upon death and I'll lay out the three layers. Number one, deemed disposition upon death; an individual passes away in Canada or leaves the country, there's a deemed disposition. Number two, corporation needs to actually sell the asset to get to cash, that is the second layer, inside the corporation. First layer, personal; person passes away. Second layer, corporate; corporation needs to sell. Third layer, corporation needs to then funnel the money up to the individual. Three layers of tax if you don't work with an advisor.

Sara McCullough: (13:43)
Right? And that's just the reality of how we've structured our tax system and what happens when you have a corporation. And again, there are many, many benefits to a corporation, but as you say, you need to plan for what you've already done so you get the benefit out of what you've already done.

Tony Salgado: (14:03)
A hundred percent. I, I spend so much time focusing on like estate and, and tax and insurance upon death. That a lot of times people then come to me at the end of the meeting; they're like, wait a minute, why did I set up this corporation in the first place? They're like, whoa, whoa, whoa, you you're, you're kind of missing the boat here. I mean, the corporation has allowed you to completely retain so much capital to benefit from small business tax rates throughout your lifetime. Mm-hmm , it's been a great, it's been a great vehicle for 40 years, 30 years, but now, we need to add something to it, for it to continue to be a great vehicle. So that's kind of the mentality where people say, well, I've been so successful, I've built so much wealth, why do I need to change anything? Because I've done so great, I'm not gonna change my strategy.

Sara McCullough: (14:52)
A and again, I think this all goes to what are the family goals? What are the family needs? And is the family clear on those? And when we talk about the goals, part of the financial planning process is to put numbers around those goals; both for when you're here and when you are not here, um because none of us have the choice to be here forever and very few of us choose when we leave this world.

Tony Salgado: (15:25)
A thousand percent. Yeah. I always say people die, but corporations don't. You actually need to do something for a corporation to go away. Correct. It doesn't just go away.

Sara McCullough: (15:34)
Right.

Tony Salgado: (15:35)
So, you know, and, and we looked at one example, which was my very first case of using insurance to pay for the tax bill upon death. And so we would use the life insurance solution to meet this tax problem upon death. But ultimately that is a subset of what is the overall family objective; the overall family objective in that case was to keep the family business from one generation to the next. And all three kids were involved in the day to day management of that family business. So now I'm gonna give you another example, what am I currently working on today? Today I have a file on the go which is also a family run business and in this case I have four kids. Now, when I say kids, I don't necessarily mean they're three or four or five years old, they're older than I am, but they're kids of the founder,

Sara McCullough: (16:30)
Right.

Tony Salgado: (16:31)
In this case, why am I using insurance as a solution for this family business? Their death tax liability is almost zero. How is it zero? There's been a lot of planning done really, really early on. And so the death tax is really insignificant. So, what am I doing? When we meet with the family, we ask them about their objectives. This family's objectives are very different from the first story. Of those four kids, three of them never show up to the business. One of them works day and night in the business. So, the family objective is to pass the family business to that one kid who's working his tail off every day in the business, but the other three don't show up. So, how do we use insurance to create a fair estate equalization for those other three? And these conversations are always very interesting because fair is not equal and equal is not fair.

Sara McCullough: (17:41)
Right.

Tony Salgado: (17:42)
But we need to create some form of liquidity for those three kids that are not working in the family business.

Sara McCullough: (17:50)
And so again, the goal there from the parents' perspective is to not only necessarily maintain the business beyond their own life, but to maintain the business specifically for that child while giving something to their other children. So it's kind of that business career focus during my life. Plus here's, what's important to me as a parent.

Tony Salgado: (18:14)
Exactly.

Sara McCullough: (18:15)
Okay. So that makes sense. And as you say, we're not talking necessarily about a tax bill there. We're talking about a business that might not survive being divided by four. (Exactly.)  And a child who then doesn't have a career and three siblings. Or if you just write, I leave my business to my one child, we've got three siblings who are probably not gonna talk to their fourth sibling again.

Tony Salgado: (18:42)
It's gonna create problems. And so people always say, if you were to put one liner, what is the one liner and what you do in your business? So what does AMS wealth really do? Well, I use insurance solutions to solve tax and estate problems. Now, I won't know what those tax and estate problems are until I talk to you.

Sara McCullough: (19:04)
And I think, again, that's where this isn't purely about a product. This is about how do you use a product so that it works for you.

Tony Salgado: (19:16)
Exactly. I'm always really shocked when a business owner contacts me and asks me for pricing, right? Like I’m like, it's very like surreal to me. Like, uh, they're like, uh, give me pricing on a million dollars of insurance. My response, what's the insurance for, like, who, I don't know, like how do I price something that I, I don't know the solution, what am I creating the solution for? Uh, it, it makes no sense, right? So when a business owner comes to me, and normally that happens in a case where they don't come with an advisor so I, I kind of almost never work by myself. Um, I'm always working with other advisors. I don't manage money, so I don't, I don't take on investments to manage. So, that's an advisor that's like, should be working with me or accountants lawyers. These are all advisors that are doing something for the family owned business for the client mm-hmm and they'll identify, okay, we have either a tax or a estate issue.

Sara McCullough: (20:13)
So the other thing that frequently causes estate issues is a cottage.

Tony Salgado: (20:21)
Oh, cottages. So, cottages. So, if you like, I don't know, if you like cars .. do you like cars? (No.) Okay so for anyone that's listening that likes cars, solving a cottage problem is like me teaching you how to drive a Honda accord.

Sara McCullough: (20:36)
Okay.

Tony Salgado: (20:37)
Solving a family business transition problem is like me learning how to drive a Ferrari.

Sara McCullough: (20:43)
Ah.

Tony Salgado: (20:43)
Okay. So the cottage, (yes). The cottage has a bunch of sentimental issues, values and emotional ties. Great because you spent some summers there, you spent some weekends there. Now imagine the emotional ties in something that you've spent 16 hours a day, six days a week, build. Okay? The emotional ties to your logo, to your business, to your bran;, imagine how significant those emotional ties are to you, as opposed to, yes a cottage, is also very emotional and you have, you create great memories and it's an asset.

Sara McCullough: (21:18)
It is. And I know I've had some clients, um, one of them in particular; what to do with the cottage actually put a halt on him signing his will. I think when I last spoke to him; it was going on three years. He called it the confounded cottage because again, there was more than one child; they lived varying distances from the cottage. One of them loved going up there and put sweat equity into the cottage so he could fix the steps, he could do all kinds of things, but couldn't afford the ongoing expenses of the cottage on his own. The other one, no sweat equity, but equally committed to showing up.

Tony Salgado: (22:04)
Yep.

Sara McCullough: (22:05)
So based on what you've just said about how you can use insurance to, um, either buffer a tax bill or equalize between children; you're saying the same thing could happen using the same product to again, get to the client's goals.

Tony Salgado: (22:24)
A hundred percent,

Sara McCullough: (22:25)
Or, if the goal, I think maybe a little bit more so with a cottage and what I hear in my office a little bit more so with a cottage is, I don't know where my kids are gonna be when I pass away but I want them to have the option to keep it. So would you say that insurance can be used to increase options so that somebody else can make a decision that's not based on dollars available?

Tony Salgado: (22:58)
Remember I said asset rich, cash poor.

Sara McCullough: (23:00)
Yes.

Tony Salgado: (23:00)
There you go. (Okay.) So, so an asset rich cash poor, don't use my 25 million dollar example from the beginning for every single situation, because this is an example of a probably a smaller dollar, but the problem is the same. So the problem, the concept of you have an asset, this case, it's a cottage, tax problem number one, upon death cottage is most likely taxable. (Right.) Okay that's the first problem. Why do I say most likely? Because in Canada you can designate a property as a principal residence, you have the choice of choosing your cottage or your city home, but most likely you're gonna be choosing your city home and so the cottage is going to be taxable. Second problem, you have more than one kid so who gets cottage? Right. Very simple. Like you don't need to be a tax expert to have this conversation. (No.) Its, who gets the cottage; two kids or more. Your options are one kid raises their hand and says,” I definitely want the cottage”, and the other one raises their hand and says, “I definitely don't”. That's a really easy solution where we can come in and say, here's the cash to compensate for your portion of the cottage. Here's the buy-out. You take the cash. You take the cottage. Everyone's happy. What if they all want a piece of the cottage

Sara McCullough: (24:19)
Which happens.

Tony Salgado: (24:20)
So then you have to address the first problem. First problem, as a reminder, there's tax upon death. So you need to have the cash to pay for that tax problem. Second problem, everybody wants their hands on this cottage. Let's not get into spouses and kids and divorces and creditor issues and borrowing issues. Let's not get there. Let's just say, we're gonna allow two kids to own the cottage. We're gonna have insurance to pay for the tax bill upon death. And now the ownership is transferred to these two kids. What about an ownership agreement? Let's have an agreement in place where you have specific weeks. You have specific months that are available to one, specific months available to the other and there's gonna need to be an agreement as to share for the repairs. Not easy to do, takes a lot of planning, a lot of work, but it could work.

Sara McCullough: (25:17)
So, up until now, we've really talked about permanent insurance, right? Because we've talked about these policies being in place at the time of death; of the owner, the manager, um, you know, so these policies really need to last as long as the person involved so that they're there to meet the tax bill.

Tony Salgado: (25:43)
I, I, I, I want you to continue your dialogue with me. Um, but I wanna interrupt you. You know, I've had, I've had clients say, so this is great. I understand that you're solving my $1 million problem using 20% or 10% to get that million dollar. Great. I, I read the contract and it says, so this is a client speaking to me, literal conversation; I read the contract and it says permanent, uh, solution or pay to a hundred. (Yeah.) The next question that follows; what if I live to 102?

Sara McCullough: (26:18)
And …

Tony Salgado: (26:19)
My response is, if, if you believe you're gonna live to 102, whatever it is you're doing, I wanna know what you're doing because if you have that belief that you're gonna live past age a hundred (mm-hmm) I am definitely gonna sign up for whatever it is you're doing. The technical answer is permanent solutions are permanent. So even though you may see age a hundred on your contract, that's just the assumption that you'll live to max age a hundred. But if you outlive a hundred, guess what? It's still there.

Sara McCullough: (26:46)
Yes. Okay. And again, um, I think that's so important for people to know, um, for so many reasons. And I think the other thing I wanted to pull out is, um, that the solutions we've talked about so far need to be there for the owner's lifetime because when you said, sometimes you get these calls outta the blue with somebody saying how much for a million dollars; I've certainly worked with some clients and when I've talked about their estate and I've said, either you have this tax liability, or you've said you wanted to, you know, leave this child one thing and this child the other thing, but they're not gonna be equal in value. How important is that to you? Sometimes the client will say, I have this insurance policy and when I look at the policy it's not a permanent policy. It in fact is designed to expire probably before the client does, which is why it's cheaper.

Tony Salgado: (27:49)
Right. (Right.) You typically get what you pay for in this world, right? And so if you pay for something that's cheap, you probably get something that's cheap. Now, that's not to say that that's not a suitable product or a valuable product for that family. (Absolutely.) So, I'll give you an example of one of my clients, I have a family construction family, uh, business, and two best friends started a business together. Two best friends have been in business for 15 years and the company is very successful. Now, these two gentlemen are under 50 and they expect to work for another 20 years. (Okay.) But they're equally invested in the business and they're equally, uh, entitled to 50% of their share. Now, using simple math, I'm going to tell you that this business is worth 4 million.

Sara McCullough: (28:37)
Okay.

Tony Salgado: (28:38)
So each best friend is entitled to $2 million dollars if we say it's worth four. Now, what happens if one of them either passes away or becomes disabled?

Sara McCullough: (28:51)
Right.

Tony Salgado: (28:53)
So is the best friend going to be running the construction company with the guy's wife? So, you know, when you started this conversation with, we need to start with the overall objective, forget, forget insurance, forget tax, forget, forget all that. (Yeah.) It's gotta, it's gotta start over here with, what's the problem, what's the objective and, and what's the problem? So the problem, when I asked the guy, are you working with his wife? He said, I, I, I don't see how that would work, she doesn't know what we, what we do.

Sara McCullough: (29:21)
No and rightfully so

Tony Salgado: (29:22)
Rightfully so. But what happens in the estate when, when, when, when the first guy passes away, the shares then may transfer to his wife. And so, and so then the wife is entitled to $2 million dollars because her husband had these shares that are worth 2 million. How does she get paid out? Right? How does the surviving business partner come up with $2 million dollars cash to pay out the the surviving widow? Right?

Sara McCullough: (29:52)
And so in that case, we're really talking about the financial stability of a business and two families.

Tony Salgado: (30:02)
Oh, a hundred percent. Yeah.

Sara McCullough: (30:04)
Right. What if, what if the surviving spouse really needs the $2 million dollars to maintain their lifestyle? Right? So husbands put in this much time, effort to build this business, this is their income. What if she needs the money? What if the surviving partner can't pay it out?

Tony Salgado: (30:23)
A hundred percent. You have not only 25 employees to worry about, you have customers, you have suppliers, and you have two primary families. Each guy is married. Each guy has three kids. And yes, they have a valuable business that's worth $4 million dollars but that doesn't mean that they got millions of cash sitting around and, and that's, and that's where people need to start really conceptualizing the fact that if one of these partners passes away, doesn't matter which one, one of them passes away, the surviving widow has a mortgage, has three kids to put through school, we have 25 employees on the payroll that we gotta pay, we have client suppliers. It's, it's just a domino effect,

Sara McCullough: (31:09)
But that a policy to cover that need, that may be something that's maybe a little more suitable for a term insurance, because that's going to change over time.

Tony Salgado: (31:20)
A thousand percent.

Sara McCullough: (31:21)
But when we talk about a mortgage, when we talk about kids going through school. So again, I think it's important to me that the listeners, you know, there's so many types of insurance, we're covering relatively few of them today. But my goal in this episode is to listen to you talk about the, the families that you've helped and kind of help us recognize the need. And, and as you say, not be put off by necessarily huge dollars.

Tony Salgado: (31:54)
Uh, yeah I, I always say in this case, this construction family example, the, the solution that I put in place is a term solution. So it's a cheaper solution, but it meets the objective. So, you know, we don't expect if, if these two best friends don't sell the business within the next 25 years, we can then review their estate and insurance planning later. But for the short term, in the short term, 5, 10, 15 years, we have something in place that can protect all of these people involved.

Sara McCullough: (32:25)
Could you have placed a permanent policy for that? For those…

Tony Salgado: (32:30)
I could have,  I could have, but it would be like selling a Ferrari to someone that likes driving 20 kilometers an hour. It's it's not suitable. Right? Like if you don't appreciate a Ferrari, if you don't like driving fast, why would you buy one?

Sara McCullough: (32:42)
Right. Okay.

Tony Salgado: (32:44)
So in this situation, you wanna meet a short term need and a short term problem because ultimately, you know, the business could be sold. One of the partners could want to exit before the other. (Right.) There's a thousand different things that could happen um, so this would be more of a short term problem as opposed to a permanent problem.

Sara McCullough: (33:03)
Okay. All right. So, it's possible sometimes for some business owners to use insurance policies as an investment, can you talk a little bit about that.

Tony Salgado: (33:17)
Tax tax tax. So you think you think that we've talked a lot about tax upon death? (Yeah.) And so let's look at tax about when you're living.

Sara McCullough: (33:26)
Right.

Tony Salgado: (33:27)
Your next segment's gonna be on corporation. So let's keep the, the, the flow of the corporation.

Sara McCullough: (33:32)
Okay.

Tony Salgado: (33:33)
You run a, you run a business through a corporation; whether you're a dentist, a doctor, or construction company, or somebody else, you're running a business through a corporation, lots of good reasons to do that. One of the good reasons to do that is you get access to the small business tax rate. So on the first $500,000 dollars of active income, you pay a very small rate of tax, and I'm not gonna steal the thunder for your next segment, but it's a very small rate of tax on active income,

Sara McCullough: (34:02)
Right.

Tony Salgado: (34:03)
Let me focus on passive income. So there's two types of income you can earn inside a corporation; active gets treated very fairly, passive could be very highly taxed. So I'll give you the tax rate. So if you have a bond or a GIC inside of a corporation in Ontario and across Canada, it'll be similarly high, you're, you're gonna be paying 50.17% tax inside the corporation. So, does that look like an attractive tax rate to you?

Sara McCullough: (34:36)
No (no) and so again, this is money that I've generated from whatever my main business activity is um. In episode 11 I own Bob's Big House of Noodles, which I've incorporated, so I, at some point become very successful selling noodles. So let's say I've got about $280,000 dollars that I make in a year, but I don't need it for my personal expenses so I leave it in the corporation. And so you're saying the first year when it's active business income, I do get a very favorable tax rate as opposed to pulling it all out.

Tony Salgado: (35:11)
Correct.

Sara McCullough: (35:12)
After that, if I buy a GIC, because my banker says, you know, you're not getting anything on that money and you really should do something with it. If I buy a GIC and I earn interest on it, it's that interest that's, that's paying just over 50% tax

Tony Salgado: (35:31)
Those bankers.

Sara McCullough: (35:33)
  I mean.

Tony Salgado: (35:34)
GICs GIC’s today are gonna get you 1 to 2%. 1 to 2%, uh what was the recent inflation number, we saw 2%. (I think so.) Okay. Taxes. Yeah. Taxes, 50%. Inflation is 2% and GIC is 2%.

Sara McCullough: (35:47)
Okay. So we are losing spending power, for sure.

Tony Salgado: (35:50)
For sure. You're losing spending power and patience and time talking to that banker. So, what we need to look for is how do we use insurance as an investment.

Sara McCullough: (35:59)
Right.

Tony Salgado: (36:00)
How can an insurance product be used as an, can you actually make use of life insurance while you're alive? You know, I thought that life insurance is only good when you die.

Sara McCullough: (36:09)
I though that's when you were dead.

Tony Salgado: (36:10)
Yeah. Incorrect, like unbelievable how like financial education is not so prevalent as I would hope. So, a financial instrument such as an insurance product can in fact be used as an investment. So when you deposit money into a tax exempt Canadian insurance policy, it continues, it starts to grow in value, these permanent products. So whether it's universal whole life doesn't matter, it's permanent. (Okay.) And once you deposit money into there, the insurance carrier does something with it. They're not just gonna take your money and park it in a GIC. (Right.) Why, why would they do that? So they're gonna take your money and they're gonna make investments with it. They're gonna buy bonds. They're gonna buy equities. And you, as a policyholder, participate in those returns.

Sara McCullough: (37:02)
Okay.

Tony Salgado: (37:03)
So over time, as you deposit money into the insurance, you start accruing an investment value. If you do that over several years, you're gonna come to a point where the investment value that's inside this insurance, you can actually use in your lifetime. You, how do you use insurance as a retirement income? Or how do you use insurance in your lifetime? (Mm-hmm.) You have three options, okay? You can build an insurance policy where you can have a collateral loan against it.

Sara McCullough: (37:38)
Okay.

Tony Salgado: (37:39)
You can have a policy loan. So first two options we're talking about financing the investment.

Sara McCullough: (37:46)
Okay.

Tony Salgado: (37:47)
And the third is you could actually sell your insurance. You could actually surrender it. Now, it may not be suitable for everyone to do that and how you do that is very important. So for anyone listening, please don't go out and surrender your policies. That's not what I'm saying. I'm just giving you the three primary options of how you use insurance as an investment. But I'll tell you why people will do this. Number one, as the investment value grows, it's not taxed. That's the key. So if you were to deposit the same amount of money in a GIC, that's taxed at 50%, in another bond, interest income, that's taxed at 50%; you take the same deposits you put 'em into an insurance product, and every year it compounds without, without tax.

Sara McCullough: (38:34)
Okay. So it's, it's a little bit like when clients make deposits into their RSPs or deposits into their TFSAs, that, that the returns that those monies generate, however, they're invested, don't get taxed.

Tony Salgado: (38:51)
It's an unlimited TFSA. We set up the bucket of account. When I, when I have clients do this, we set up a, a limit and we say, okay, annually, your cash flow allows for 10,000, 50,000, whatever the number is to deposit into this account. By the time you get into your retirement, you have doubled your investment. And, and in order to do that tax efficiently, without taking on too much risk is extremely hard in any other environment.

Sara McCullough: (39:21)
Right. Okay. So, and again, just to clarify, CRA does have some hard limits around what can go into these policies annually.

Tony Salgado: (39:30)
Correct. And so, so this should sound so good to listeners that people should say, I'm gonna put millions and millions into, into this and not pay any tax, which someone has already told me to do that. But no, you can't do that. If you do that, then they're not exempt policies. So you gotta follow the guidelines I give you. And here at AMS Wealth, that's what we do. We will set out a, get a guideline to say, based on your situation, here are your annual contribution limits.

Sara McCullough: (40:00)
And again, when you are speaking to a client, it's really important that you understand what is the client's free cash flow every year, how consistent is that, what's going to meet their goals? Because I find for a lot of my clients where these policies fit very well; and I have been insurance licensed for the majority of my career. These policies often fit a client's request for, how can I be more tax efficient year to year, because I do have this money that I'm generating that I don't need today. Sometimes though I find it gets sticky for the client because when I talk through you can use a universal life or a whole life policy as an investment and here are the things I really like about it for you, based on your goals, it does come with insurance, which makes their estate bigger. And sometimes their goal is, I don't want to leave that much money to my children. That seems like an awful lot.

Tony Salgado: (41:09)
And that's the selling portion that we just mentioned. So for the clients that want to be tax efficient, so inside the corporation, you're gonna be paying 50% tax if you don't use insurance,

Sara McCullough: (41:20)
Correct. On, on the retained earnings. (Correct.) So kind of that passive income.

Tony Salgado: (41:25)
That's right. And so now we're looking at building a tax exempt policy that's going to grow over time, not pay 50% tax. Oh, by, by the way, this policy also doesn't claw back your small business deduction, because now within associated groups, you also get clawed back on your small business deduction federally. So this also doesn't do that. (Okay.) So this passisve income that you're earning is not taxable, doesn't affect your small business deduction. Now in retirement, it create, it could create a large estate, but you don't wanna do that.

Sara McCullough: (42:02)
Right. What if that's not my goal?

Tony Salgado: (42:03)

So what can you do? You could get a loan against it to limit the payout so you can enjoy all of the proceeds.
 
 Sara McCullough: (42:11)
Okay. So I could use this money.

Tony Salgado: (42:13)
A hundred percent.

Sara McCullough: (42:14)
Okay.

Tony Salgado: (42:15)
You could, and, and you use the, the investment you build inside your insurance is available for you in your retirement. That's the key.

Sara McCullough: (42:24)
Okay. Okay. So it really, again, I think when you say life insurance, our, our default thought as a client is that's not mine. It's for when I'm dead and it's for somebody else.

Tony Salgado: (42:37)
That's right. Let me give you an example. Forty year old dentist, forty year old dentist is earning more money than she needs. So she has a professional Corp, that professional Corp has retained earnings, and she's starting to build her retirement portfolio. (Mm-hmm.)  Life insurance and retirement, yes those things can go together. So this forty year old follows a deposit schedule, I'm gonna make the numbers really simple 10,000 a year for 10 years.

Sara McCullough: (43:06)
Okay.

Tony Salgado: (43:07)
That seems like a hundred thousand dollars of a commitment, which it is, which it is. In retirement this healthy 40 year old dentist will have double that for her to use in her retirement. So, in her retirement, in her sixties, where you can easily get double of her investment. So when she's in her sixties, we're gonna have access to $200,000 or more of investment value.

Sara McCullough: (43:31)
All right. So I think that's an important piece, again, as clients, I think we often feel, um, boxed in by the insurance company. Um, it, it feels like a very unwieldy product. It feels like, um, the insurance companies have all the power and we don't, and I, I think it's important to have a conversation about how can you use this kind of, for all stages of your life, because we've really touched on a lot of important points for clients in that kind of building phase, where you've got maybe a new business, a mortgage, younger children; moving to we've got excess cash flow that we don't necessarily need for our day to day needs, but we're not sure we want to, um, pay more than we need to, to CRA. And then that end of life, transitioning things to the next generation,

Tony Salgado: (44:29)
Bang on. We were able to do that over 45 minutes.

Sara McCullough: (44:33)
Thank you.

Tony Salgado: (44:34)
That was pretty impressive.

Sara McCullough: (44:36)
Anything, anything else that you feel is really important um Tony related to your business that you would like to leave with listeners today?

Tony Salgado: (44:46)
Uh, if you don't do any planning, your corporation and your family can pay 70% tax upon death and that's 70, 70, um, so meet with your advisors, talk about your planning and know what your ultimate objective is first. If you know what your ultimate objective is first, we can create solutions to help.

Sara McCullough: (45:12)
Okay. Thank you so much for your time today. I really appreciate all of the client stories. And again, I really appreciate the, the values and the philosophy that helped you make this shift from just doing the taxes for clients. And as important as that tax planning is, I think it's been so interesting to listen to you in all of our conversations talk about why you made that shift and what you're doing today, and what kind of drives you day to day when you're looking at matching client needs to a product. So thank you.

Tony Salgado: (45:50)
Thank you for having me.

Sara McCullough: (45:53)
In life we all have pieces scattered here and there. And in today's episode, we talked about not only the pieces in your life, but the pieces in your life that might be scattered after you die and what you don't want to be scattered and what you want held together and passed on and protected. And so for this, we need someone who can cut through the noise. Someone who gets to know you, not just as a person, but can also really show and make sense of not only your financial plan, but your risk zones. And I hope one of the things that you took away from that conversation between Tony and I is sometimes that means more than one advisor. I work with a lot of other professionals. So does Tony. When you have a complex situation, you need more than one person because there are different pieces that you want brought together, and there are different expertises and different specialties that can work together to get the best outcome for you and your family. And all of these relationships and the planning belongs to you, not your planner, not your other advisors. I'm Sara McCullough thank you for listening to Sara Makes Sense.

Disclaimer: (47:21)
The information in this podcast is intended for general information and illustrative purposes. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer, or accountant before making any changes to your situation. Sara's designations and licensing include: Certified Financial Planner, Registered Financial Planner, Certified Divorce Financial Analyst, and holding an insurance license.