How Life Insurance can Safeguard your Estate…and Help Keep the Family Cottage


Immediate financing arrangements (IFA) are a financial planning strategy that allows incorporated practice owners to buy life insurance coverage while having access to funds for other investment opportunities.

For dental practice owners who have worked hard to build a successful business, a significant challenge often arises as they plan for the future. Their financial success and the value of their estates can sometimes lead to unexpected tax obligations upon their death. This dilemma becomes particularly difficult when valuable assets, such as the beloved family cottage or other cherished possessions, are at risk of being sold to meet these tax liabilities.

In the following case study, we will explore the story of Maria, a dentist in her mid-40s with a thriving practice, who faced the daunting task of preserving her assets while addressing a potential estate obligation of over $2 million to the Canada Revenue Agency (CRA). We will delve into the innovative solution proposed by her financial planner, Jordan, that involved a life insurance policy owned by Maria's corporation. This solution not only aimed to secure her comfortable retirement but also sought to protect the sentimental value of her family cottage. With advice and guidance from CERTIFIED FINANCIAL PLANNER® professionals at CDSPI Advisory Services Inc. a carefully designed financial plan can help small business owners like Maria, navigate the complexities of estate obligations while preserving their hard-earned assets.

To address this issue, Jordan proposed a solution with a life insurance policy owned by Maria's dental corporation that would payout upon her death. This approach would provide a tax-efficient way to inject cash precisely when it was needed, ensuring that Maria’s estate could meet her tax obligations to the CRA without having to sell valuable, cherished assets.

Maria’s Dilemma: Choosing the Right Type of Life Insurance

The first question they faced was what kind of life insurance would work best for the proposed solution. Though she understood the many benefits of permanent life insurance, Maria had concerns about the cost and potential financial impact on her business. She also knew that term life insurance wouldn't offer the desired benefits in her specific case, particularly the fact that the coverage would end around the time of her life expectancy because of the limitations imposed by the lack of cash value of a term policy.

Jordan’s Solution: Using an Immediate Financing Arrangement

Instead, Jordan presented the option of creating an Immediate Financing Arrangement: a financial strategy that provides an opportunity for individuals and incorporated business owners to obtain the permanent, or “whole life”, life insurance coverage while still preserving cash for investment or business opportunities. For Maria, Jordan felt this type of permanent life insurance offered the long-term protection, flexibility, and shorter payment periods she needed. Additionally, Maria’s corporation could access the cash surrender values that build up during the policy’s lifetime and can be redeemed if necessary, providing immediate liquidity.

Here’s how it would work: By making deposits into the whole life insurance policy and using an Immediate Finance Arrangement, Maria’s corporation could immediately access up to 100% of the funds deposited. The cash value of the policy would become an asset for the business, allowing it to borrow against it when needed. This approach to securing life insurance significantly reduces the impact on the business’ cash flow, providing more benefits than term insurance could.

Of course, there are some considerations and risks involved with an Immediate Finance Arrangement. While the life insurance itself is guaranteed as long as the premiums are paid, one potential risk is fluctuating interest rates on any loans taken out with the policy’s cash values as collateral. However, historical data indicates that over time, the benefits of an Immediate Finance Arrangement align with the client's planning objectives, even if interest rates vary.

For Maria, the Immediate Finance Arrangement offers several benefits:

  • Reduced impact on the company's cash flow.

  • Lower cost compared to term life insurance.

  • Valuable tax deductions than can be used immediately.

  • Quick and cost-efficient access to cash for settling estate obligations.

  • Preservation of estate assets, including the beloved family cottage.

Tailored Planning and Ongoing Review

Immediate Finance Arrangements are tailored to meet each client's specific planning objectives. Regular reviews of business and estate liquidity needs, preferably on an annual basis, help identify any potential gaps in coverage. Purchasing additional life insurance can be the most cost-effective solution for ensuring financial security for you, your loved ones, and your estate.

Getting started is easy. CDSPI was created by dentists and the professionals at CDSPI Advisory Services Inc. understand the unique needs of dental professionals at all stages of their career and life. They prioritize providing advice in the best interests of dentists above all else.

CDSPI and John Wordsworth, President of Lengvari & Associates, have a strategic and collaborative relationship to share in-depth knowledge with Canadian dentists, providing advanced planning and customized insurance solutions. The Immediate Finance Arrangement was created by the Lengvari organization in the late 1970s. Since then, Lengvari has continued to develop this planning strategy to provide valuable benefits to business clients across Canada.

The information contained in this article is of a general nature only and should not be considered as personal investment or financial advice. For specific advice about your situation, please consult with your financial advisor.