Prominent in the '90s, the term “estate bond” is an old concept of the life insurance industry that mathematically proves how life insurance can protect and transfer certain assets that otherwise may be left vulnerable to market-related erosion or taxation.

Though investment assets and life insurance are indeed different parts of your financial plan, they can work in unison to create wealth. How they work together goes far beyond the adage "buy term and invest the difference," which simply uses term insurance at a level of basic financial planning, unlike the alternative, advanced features of the estate bond, built right into a tax-planning manoeuvre.

The tax deferral of the estate bond
The concept is an estate-encompassing idea because it is designed to work upon the death of the insured. Not an investment designed for short-term financial planning, it can multiply the tax-free wealth that one passes on to heirs.

The estate bond is ideal for the investor who has already maximized his or her tax benefits using an RRSP and/or has significant investments in vehicles deferring capital gains tax. This investor may enjoy a thriving business enterprise, hold a large fund or stock portfolio, and want to maximize some capital  that will be left to heirs.

Let's look at a situation where a couple would like to leave $150,000 to their six grandchildren to help them all purchase their first home as well as enhance their future.

How it works: An initial $150,000 acquires a joint last-to-die life annuity. This life annuity will pay $7,000 per year after tax (after the marginal tax rate is paid), which is then used to purchase a permanent life insurance contract (on either spouse, or both spouses’ lives) with a face value of $450,000.

At this stage of the financial planning, the $150,000 (in terms of estate value) becomes tripled to the value of $450,000, which will one day pass to the estate tax free!

Ask your financial advisor to compare the numbers of permanent life insurance as projected growth (some use tax-sheltered GICs and tax-advantaged segregated funds to enhance the face value growth) versus taxable investments such as equity mutual funds and/or GICs. In most cases, the estate bond (along with certain benefit guarantees) will far outperform the initial capital invested as far as the after-tax value passed on to the estate is concerned.

The estate bond is definitely an estate-planning tool to maximize wealth payable to heirs after death. True, there is far less liquidity in the life insurance contract. This is why it is an advanced planning concept for the wealthier client who has already amassed enough money to guarantee a good retirement lifestyle. Because monies are paid to beneficiaries tax free, you know the government can't take any tax bite out of this wealth bequeathed to your loved ones.