Basic Concept
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The client purchases a life insurance with maximum deposit in account. At retirement, the client negotiates a loan with a bank or any other financial institution, guaranteed by the surrender value of the contract. He then uses the borrowed funds as complementary retirement income or to buy back his partner's company shares or any other business undertaking he may see fit.
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As a general rule, it is difficult to borrow more than 75% of the value of property given as collateral. With life insurance, the borrowed amount corresponds to a portion of the surrender value. Taxation is not taken into account because we suppose that the loan will be repaid with the death benefit and not with the surrender value after a buyback.
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This rule is followed by the majority of financial institutions. Some Banks will permit, under certain conditions, a loan up to 95% of the surrender value.
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If there is a need for financial planning, legal advice, fiscal considerations or any other related matter, it is recommended that you consult one of our specialists.
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Institutions Norms

The lending institution's principal preoccupation is to make sure that the borrower will be able to payback the loan; therefore it will consider a variety of factors such as income, assets, liabilities, and all other assets that can be given as collateral.
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The concept of leverage insurance with collateral financing only refers to usual banking practices.
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The bank consents to a loan guaranteed by the cash value of a Universal Life insurance policy that will, eventually, be reimbursed within the death benefit in the contract. The bank will study the loan application according to its own norms and regulations. To establish if the proposed guaranty is sufficient, the bank will calculate the value of the policy given as collateral in accordance with the life expectancy of the borrower. Then the bank will make sure that loan plus interest, and a certain margin of security, does not exceed the future surrender value during that period of time.
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The borrower should obtain from the lending institution a commitment that no reimbursement be demanded until his death and that the interest on the loan be added to capital borrowed. Many financial institutions will require the signing of a "Promissory Note", which will place the borrower in a most vulnerable position.
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Even if the premiums cease to be paid on the Universal Life, the value of contract will keep on growing. The loan will also increase according to withdrawals from cash value and interest paid or not.
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These points are very important since the loan is guaranteed by the life insurance policy and that death will release, tax free, the necessary sum to reimburse the loan and interest.
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If the annual interests are not paid and are added to capital borrowed, the outstanding balance may increase very rapidly.
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The bank loan will only be reimbursed when the insured dies. Indeed, if the owner of the Universal Life reimburses the loan while still living, with the surrender value of the policy, he will immediately be subject to heavy taxation. This will have as a consequence the reduction of the surrender value of the contract and to leave the client without insurance, and possibly, with an outstanding loan balance because, after taxation, the net surrender value would not be sufficient to cover loan plus interest.
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This is why, during the life of the loan, the financial institution will make sure that the guarantee is sufficient by comparing the surrender value of the contract and the loan balance.
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In case of insufficient guarantee, the bank could ask the debtor:
1- To reimburse part of the loan,
2- Or to consent to a supplementary guarantee.
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The bank could also ask the client to surrender the life insurance and pay back the loan. In that particular case, the bank could receive the net value of policy, up to the amount of the loan plus interest.
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Finally, the bank can establish provisions during the life of loan to make sure that the guarantee is sufficient.
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Dispositions relative to Avoidance Action
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The Minister of Finance is constantly adopting new measures to reduce the loopholes that allow tax payers to subtract themselves from taxation. Lately, Revenue Canada was equipped to counter taxpayers that try to avoid taxation; with regards to dispositions relative to Avoidance Action which permits Revenue Canada to ignore operations carried out with the only objective of reducing or avoiding taxation.
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Since the domain of application of theses rules is very vast, we have asked an important Montreal Law firm to answer the question and to see if those measures include Universal Life Insurance policies with collateral financing:
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- According to this cabinet, Revenue Canada could not resort to these rules to tax the sums coming from a loan on the pretext that they are comparable to partials buy backs of a Life Insurance policy.
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Target Clientele
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Individual insurance retirement plan

The affluent that searches for a fiscally advantageous and original investment strategy and usually has at their disposal important resources (professionals, business people, and superior management).
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Buyback plan of company shares

Companies formed of a group of professionals who which to provide their associates with a fiscally advantageous plan to buyback an associate and/or to insure a supplementary retirement revenue. Let's point out particularly lawyer's cabinets, accountants, doctors, dentists, architects, etc...
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The program is conceived to insure the retiring associate complementary resources witch will be paid in recognition of is contribution to the company, and could be added to foreseen sums or to buyback his company shares.
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Retirement plan for shareholder

The small and medium businesses who want to invest advantageously (regarding taxation) company surplus for medium to long term to the benefit of the director/owner (shareholder). The small business with benefits exceeding the $200,000 deduction they are entitled to, invest these exceeding sums to the benefit of the director/owner whom must then invest these important sums. (Company is the owner of the Universal Life policy and will later transfer ownership to the director/owner.)
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The program uses Insurance owned by the company to enhance supplementary retirement revenue to shareholder or to provision a shareholder buyback plan.
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The Universal Life Insurance Contract

A powerful financial tool

Advantages:

Flexibility: You can along the way, augment or diminish your premiums or your death benefit, inject or withdraw sums of money, or cease to pay at the time of your choice, transfer property to your child and withdraw money tax-free (Education Fund), etc...Finally, this is a personalized program built according to your protection needs and/or retirement savings scheme.
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Investments with superior return: you could choose to invest in guaranteed interest for different periods of time, or opt for indices.
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High-return Fiscal Shelter: You can almost double your return when investing in a Universal Life if you compare with traditional investments. This is made possible because your gain will accumulate sheltered from taxation. This is one of the few fiscal shelters with almost no risks.
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The mechanism of Universal Life

It rests on the bank account principal...

• The insured pays a premium deposited in a Capitalization Fund.
• The Insurer deducts contract fees ( administration, mortality rate, etc...)
• The company credits, at the end of the month, a competitive interest return, or indexed capital gain, on outstanding balance of capitalization fund.

Universal Life is insurance for life! With this program you take care of all your insurance needs. Only one policy, flexible and well adapted to your present and future needs, joined with a savings fund. This is all you need to insure your security and your family's.
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Collateral Financing

1. Mr. Client invests in a Universal Life Policy.
2. The contract is given to guarantee a loan from a financial institution.
3. Mr. Client uses the loan as an additional revenue, tax-free, and never pays back interests on borrowed amount.
4. When death inevitably occurs, the financial institution is repaid (principal and interest) from the policy's tax exempt Death Benefit. Balance of Exempt Account value plus Insurance Amount are paid to the Beneficiary.