No, this is not about the TFSA (tax free savings account) that has become part of everyday vocabulary these days. If you already own a permanent life insurance contract such as a Whole Life or a Universal Life policy, it is possible for you to build up savings inside those contracts. When you set up this life insurance coverage you can elect a tax exempt option which means that the cash savings will earn interest without triggering any tax during the accumulation period. In fact, upon death of the insured, all of the insurance proceeds including the cash savings are paid out to a beneficiary or your Estate tax free.
Many view this option as a forced savings strategy, when the insurance premiums are paid over a long period; the cash savings continue to grow and can eventually be used in an emergency or to help subsidize retirement income. One word of caution when considering this strategy; make sure that you do not sacrifice the amount of life insurance you establish in the first place, in exchange for less coverage and more savings. Discuss your insurance needs first, if you have more disposable income to allocate to the policy without cutting back on the required coverage, that’s fine.
In my opinion, one would consider this strategy at an early age (preferably under age 45), and once their RRSP contributions have been maximized.
Keep in mind that the insurance premiums are not tax deductible, only the growth within the savings portion is tax sheltered.
What’s next? What Recession!