# The "10/8" insurance strategy for high income earners



## Racer (Feb 3, 2010)

Hi folks,

I was wondering if there is anyone here who has an opinion on the "10/8" insurance strategy. 

Basically, you contribute money to a life insurance policy, year after year. Then you get a participating bank (RBC is one of them) to accept the cash value of the life insurance policy as secured property for a loan. 

The bank charges you 10% for borrowing the money -- the principal of the loan is 100% of the cash value of the policy. 

The loan stays in a guaranteed investment account. The bank guarantees you will receive an 8% rate of return on your invested funds.

It looks like you are paying 2% for the privilege of participating in this arrangement, but the benefit comes from the fact that you are able to deduct the 10% interest you pay to the bank for the loan they gave you.

For people in the highest tax bracket, the after-tax cost of borrowing is only 5.5%. 

I have found a few articles about this, commenting on whether Canada Revenue will allow this scheme or if it will try and shut it down under the GAAR. 

See http://www.investmentexecutive.com/client/en/News/DetailNews.asp?id=48084&pg=1&IdSection=25&IdPub=175

Also http://www.investmentexecutive.com/client/en/News/DetailNews.asp?IdPub=152&Id=41244&cat=30&IdSection=30&PageMem=&nbNews

And http://www.lohncaulder.com/library/article.php?id=149


It looks like you have to have very reliable cash flow in the highest tax bracket. 

Personally, we aren't in a position to handle this level of risk, and our cash flow isn't reliable right now. Just curious about what others think.


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## patmanz (Jul 26, 2010)

the old universal life 'scam' coming back with a different name

Look here for a start:

http://perry.kundert.ca/range/finance/ul-blows


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## Jungle (Feb 17, 2010)

^+1. Who told you about this? I'm not an expert, but from what I know, it goes like this..

Salesman tries to sell you Universal Life, (big profits..) 
You are smart, you say, "no way, buy term and invest the rest"
Salesman says that's "temp insurance, no good", but knows "a way around it"
Salesman says buy "Universal life, bank will secure new loan against it", THEN you invest" Win win, right?

Well, salesman just "created a need" for his company, investments, banks to make MORE profit, when you can just "buy term and invest the rest. " to begin with...

Insurance is just for risk management. Once you have the money, the risk is gone, stop buying insurance. The salesman don't like that. They want you hooked for life, on so called permanent insurance, and tie you up in with all types of investment crap. 


PS, the bank offers an investment with 8% return??


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## wheel (Jun 22, 2010)

Jungle said:


> ^
> Insurance is just for risk management.


Are you as good looking as you are smart? If so, you must be quite handsome .


Racer - that's quite a house of cards you're building there. Start looking at downside risks - what is not guaranteed and for the nonguaranteed stuff, what happens worst case scenario.Do you lose your insurance because the investments fail in the future and you're left with exhorbitant underlying insurance costs? Do you have a guaranteed that the banks will give you the loan 20 years in the future after you've built the money inside the policy, and if so, at what rate? 

What if CRA comes down and kicks your @ss because they don't like you using life insurance to basically get around paying taxes (instead of using it for insurance purposes, as intended). 

As Jungle was pointing out, you're increasing your risk, not managing it. Increasing risk on life insurance can leave you uninsured.


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## HaroldCrump (Jun 10, 2009)

Racer said:


> Basically, you contribute money to a life insurance policy, year after year. Then you get a participating bank (RBC is one of them) to accept the cash value of the life insurance policy as secured property for a loan.
> 
> The bank charges you 10% for borrowing the money -- the principal of the loan is 100% of the cash value of the policy.
> 
> ...


If 2% is the negative spread, can you not achieve the same goal by borrowing from a LOC at P+1% (common these days) and investing in a money market ETF/fund?
Your interest rate on the loan will be 4% and you'd probably make 2% from your investing, giving you a -2% spread.


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## Jungle (Feb 17, 2010)

wheel said:


> Are you as good looking as you are smart? If so, you must be quite handsome .


 ..funny, I say the same thing everyday I pose in the mirror lol..


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