Expenses:will I spend my whole LOC?

[rmorelan]

Yes. The broker was recommending even before I get my MD, now, I sign up for $2M of 10 year term life insurance @ $650 annual premium, and once I start practice, I convert the $2M to universal life at about $7,100/annual premium, paid by the company. This is on the basis that at the time of my death the coroporation will have millions and there will be a tax to be paid to remove the funds from the corporation. The death benefit would ease the tax burden and can be paid out tax free as a capital dividend. He suggested that I would eventually want more life insurance. We ran the numbers and for sure, there would be a saving compared to waiting to take out universal life say in 8 years.

 

We also discussed disability insurance. He explained that disability insurance is based upon "personal" income, i.e., not the payments that go into my corporation but rather what I take from the corporation as salary (and dividends I believe). If I take out $100,000 gross, or $62,000 after tax, the annual premium would be about $2,100 and if disabled, the insurance company would pay me $62,000 annually. So, it comes down to how much in after tax dollars does one need to live, and that is the amount of disability insurance cover we would want (provided we actually receive personally these funds as income (and dividends?).

 

And then there is critical care insurance which we did not discuss.

 

right - although I will have to ask why you currently need 2M of life insurance? What dependants do you have requiring that sort of income?

 

the exception to all of these is that as a medical student or a residency you can by-pass the income requirements and they just have a standard max. For a residency is 4K which is tax free and higher than you normally would have access to for a residents income.

 

The reason you pay the disability personally is that way things are not taxed because you paid for it with after tax dollars. If you paid for it via the corporation then it would be taxed.

[future_doc]

right - although I will have to ask why you currently need 2M of life insurance? What dependants do you have requiring that sort of income?

 

the exception to all of these is that as a medical student or a residency you can by-pass the income requirements and they just have a standard max. For a residency is 4K which is tax free and higher than you normally would have access to for a residents income.

 

The reason you pay the disability personally is that way things are not taxed because you paid for it with after tax dollars. If you paid for it via the corporation then it would be taxed.

 

I have zero dependents. I gather the recommendation was made on the basis that if when in practice I would take out at least that amount of insurance, universal life (until age 100) would cost substantially more than it would if I were to but this cheap policy now with the right to convert within the next 10 years, i.e., the total cost of insurance would end up being less by buying some now and converting compared to buying a universal life policy in 8 or 10 years (so, it would be an investment for the future locking in lower rates). Then, there is the added fact that a medical would not be required for the conversion and should I then have a medical problem making me uninsurable or substantially increasing the premium due to added risk, we have eliminated this risk.

 

You are sharing interesting information regarding disability insurance for residency - thanks. I understand what you are saying re disability insurance. Effectively, the rate is slightly more than 3%.

[cheech10]

I never understood the rationale for Universal Life as an investment product. A tax-free payout after I'm dead? No thanks, I'll use the money while I'm alive and leave my heirs whatever's left.

 

If you need insurance, regular term insurance also pays out tax-free; if you need an investment, buy a regular investment product rather than one that obfuscates the past and present returns and fees.

[schmitty]

I never understood the rationale for Universal Life as an investment product. A tax-free payout after I'm dead? No thanks, I'll use the money while I'm alive and leave my heirs whatever's left.

 

If you need insurance, regular term insurance also pays out tax-free; if you need an investment, buy a regular investment product rather than one that obfuscates the past and present returns and fees.

 

I think the idea is that it is kinda killing two birds with one stone...

[rmorelan]

I have zero dependents. I gather the recommendation was made on the basis that if when in practice I would take out at least that amount of insurance, universal life (until age 100) would cost substantially more than it would if I were to but this cheap policy now with the right to convert within the next 10 years, i.e., the total cost of insurance would end up being less by buying some now and converting compared to buying a universal life policy in 8 or 10 years (so, it would be an investment for the future locking in lower rates). Then, there is the added fact that a medical would not be required for the conversion and should I then have a medical problem making me uninsurable or substantially increasing the premium due to added risk, we have eliminated this risk.

 

You are sharing interesting information regarding disability insurance for residency - thanks. I understand what you are saying re disability insurance. Effectively, the rate is slightly more than 3%.

 

ha - we can argue about that a bit The total cost is not lower - it must by definition be higher as the insurance company needs to make profit and is taking on a higher risk (in one scenario you would get nothing if you died in the first two years - in the other you get 2M. That diff in risk MUST be paid for some how). They take your money and invest it to help cover the extra cost in part- but that is something you could do as well and then have the return on your investment 10 years down the line. You could get sick and become uninsured of course but you can also get a lower policy with a guarantee right to increase the amount later on as well. The list on this stuff goes on, and on

 

Doesn't mean it is a bad idea, only that it does cost more in the big picture. Insurance people rarely go through this properly. It annoys me.

[rmorelan]

I think the idea is that it is kinda killing two birds with one stone...

 

Officially yes that is the point but in reality if that was it then it would be dumb. Only for people who are somewhat lazy - something that is supposed to do two things rarely does either of them as well as two separate things.

 

The real reason is much sneaker than that and is based on taxes again - our old friend. Not taxes when you are dead but when you are alive.

[future_doc]

I never understood the rationale for Universal Life as an investment product. A tax-free payout after I'm dead? No thanks, I'll use the money while I'm alive and leave my heirs whatever's left.

 

If you need insurance, regular term insurance also pays out tax-free; if you need an investment, buy a regular investment product rather than one that obfuscates the past and present returns and fees.

 

If only it were that simple. I know a man in his early 70s whose life insurance has terminated. His wife is in her early 60s. He now has a RIF, when he dies it rolls over to his wife's RRSP, assuming she is 2nd to die. They have children in their late 30s. When the man and wife die, there will be a large sum inherited by the adult children from an RRSP - with a large tax bill. So, they just took out insurance, very costly, on the life of the wife precisely to help pay the enormous taxes his children would need to pay on this inheritance. People want to save their heirs the taxes, so they inherit more. This is where insurance comes in.

[rmorelan]

If only it were that simple. I know a man in his early 70s whose life insurance has terminated. His wife is in her early 60s. He now has a RIF, when he dies it rolls over to his wife's RRSP, assuming she is 2nd to die. They have children in their late 30s. When the man and wife die, there will be a large sum inherited by the adult children from an RRSP - with a large tax bill. So, they just took out insurance, very costly, on the life of the wife precisely to help pay the enormous taxes his children would need to pay on this inheritance. People want to save their heirs the taxes, so they inherit more. This is where insurance comes in.

 

that is one reason - there a few others

 

1) when you die you assets are frozen. So you may be worth a lot but no one can access it until everything is processed. In many cases that leaves people depending on you hanging - but life insurance in their name by passes that completely and the wheels will still spin.

 

2) ok this gets a bit bit complex - I am afraid I have to go all economics/financial planner here a bit Under the canadian income tax act investments in your life insurance policy get to grow TAX free. That is quite huge actually - because as a doctor there are two things working against you compared to others

a) you get taxed a lot on income you remove from the business

you greatly exceed the RRSP upper limits. You need to save way more than 21K a year to maintain your lifestyle in retirement.

 

This forces you unfortunately to be stuck with investments that are taxed - even in the corporation where your money first ends up it is taxed as business income at 18%. When you withdraw it you get taxed more (groan). It gets taxed potentially ever year on profit from anything invested in the corporation as well - 18% off the top of all profit etc each year. You can just imagine seeing that REVERSE compounding going on - you lose the 18% now and all the money that would have earned as well over years and years. Make my mad just thinking about it

 

If only there was some magic tax free investment you could have in your corporation that you could put all the money and it would not be taxed every year etc. No business tax, no personal tax. That would be great - but of course only a stupid government would create an open ended investment vehicle like that - outside of the sorts of rules an RRSP would have.

 

TBC

[rmorelan]

But wait, the government did create one, and it has been around for ages. It is call whole life insurance and surprisingly investments in it grow tax free. Amazing!

 

Of course we all know in the long run the life insurance company has to make more money that we get back in polices - or they would go under. So what the government has effectively allowed (ha this is fun) is a company to get a fee which is proportional to the size of the policy each year so manage the fund and let you invest in it. If the government did that we would call it something - we would call it a tax (proportional fee to some investment/income?). So hilariously the tax here shifts from the government to the insurance company (of course the rate is much lower for the insurance company or no one would do this - oh and of course they don't call it a tax, it is called your premiums).

 

Ok so for years and years the money grows tax free in the policy. Wonderful! It is like an RRSP but better - there are no limits, there are no rules on content, there is no government oversight, there is no restrictions, and you don't have to cash it out at any particular time. Great!

 

TBC

[rmorelan]

Ok so now you are thinking (I hope) this is amazing! Tax free investing for ages all wrapped up safe and basically hidden in a life insurance policy. I mean who would have thought of that? This is even outside of other forms of taxation like all life insurance is.

 

Ok now this is were it just gets oh so wonderfully fun! I mean seriously this is why I almost when in to financial planning/economics.

 

The government added this wonderful loophole - you can take loans out against the policy. Loans up to 90% of the investment in most cases - 90% of the policy amount. Lets take FD's example of a 2 million policy. That is a loan of 1.8 million dollars.

 

Of course you should pay back that loan. I mean it is a loan right? Yeah - a loan to your own policy. And strangely the owner of this loan (you) doesn't really charge interest to the person who got the loan (you). Funny enough there doesn't seem to be any strict repayment plan either. It is almost like the owner of the loan (you) doesn't really care if the loanee (you) ever pays it back. Strange.

 

Oh but wait there is more!

 

TBC

[rmorelan]

man this is a long post - sorry people.

 

Oh there are two other wrinkles.

 

a) the money you got is a loan. Loans are NOT taxed. Some how you just waved your hands and got money out of a company and you didn't pay any tax on it. No personal and no business tax - on money that was already growing tax free for years.

 

Who paid the policy premiums - the business - with pre tax money.

 

if you die before the "loan" is paid back the insurance company will pay off the loan with the assets in the insurance policy (that is why you can only get up to 90% out of it - it makes sure the insurance company is safe).

 

This is very dangerous stuff - and the government should close up this loophole immediately. I mean it should have been closed 30 years ago. They probably will - but they HAVEN'T yet and no insurance company is a big hurry to have that happen.

[future_doc]

Are you recommending whole life insurance?

 

One excellent investment may be to buy shares in the insurance company. If they are a money making machine, over the years, the stock will go up substantially.

[ploughboy]

Things do happen to people all the time but there are always ways of minimizing the damage. Insurance is an extremely cheap way to protect yourself...Not to be melodramatic but I am covered 6 ways to Sunday on things like this.

 

Likewise. In in the ER and the unit I've seen far too many instances of really bad things randomly happening to good people who were young, healthy and doing all the right things with their lives. There, but for the grace of God, go I. My insurance is paid up.

[rmorelan]

Are you recommending whole life insurance?

 

One excellent investment may be to buy shares in the insurance company. If they are a money making machine, over the years, the stock will go up substantially.

 

The are a blue chip stock - they aren't particularly for growth but rather income I mean the market there isn't growing.

[rmorelan]

Are you recommending whole life insurance?

 

One excellent investment may be to buy shares in the insurance company. If they are a money making machine, over the years, the stock will go up substantially.

 

I am recommending learning about this stuff and taking an active interest in the business side - if you are a doc you are almost certainly a business person. Don't be a crappy business manager - too much is at stake. Rules change, laws get updated - stay on it

[filter105]

I've never applied for Alberta student aid and it seems to be different than OSAP, can anyone shed a light for this?

[holiday1001]

that's why I went with a 250k LOC

 

u of o might have bursaries? mac gave me a chunk of money for literally fewer than 10 clicks