Episode 217: Why “Buy Term and Invest the Difference” Fails High-Net Worth Canadians

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Are you still relying on “buy term and invest the difference”—without realizing it may be the wrong comparison for your actual wealth strategy?

Many high-income Canadians and incorporated business owners are unknowingly measuring permanent insurance against the wrong benchmark. The real issue isn’t whether market investments outperform a policy—it’s whether your risk-off capital is sitting idle, under-earning, and over-taxed. If you’re holding piles of cash, GICs, or fixed-income assets for safety, you may be missing out on a structure that protects liquidity, enhances tax efficiency, and strengthens long-term wealth planning. This episode reframes how to segment your capital, why traditional advice often falls flat for higher-net-worth households, and how the right structure can expand both stability and opportunity.

You’ll learn:

• Why “term vs. permanent” is the wrong comparison—and what fixed-income bucket permanent insurance truly replaces.
• How high-net-worth Canadians can access tax-exempt compounding, liquidity, and optionality unavailable in traditional fixed-income tools.
• The powerful estate and corporate tax advantages that can turn safe dollars into a far more efficient long-term wealth asset.

Press play to rethink your risk-off capital—and uncover a smarter, more flexible way to build and protect your wealth.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
  

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

High-net-worth Canadians and incorporated business owners are rethinking traditional advice like “buy term and invest the difference” as they build a modern Canadian wealth plan focused on financial freedom and long-term security. Instead of relying solely on RRSP optimization, real estate investing in Canada, or basic fixed-income tools, many are integrating permanent insurance into their financial buckets to create a more tax-efficient investing and legacy planning strategy. By balancing salary vs. dividends, using smart capital gains strategies, and aligning personal vs. corporate tax planning, entrepreneurs can design financial systems that support early retirement, a modest-lifestyle wealth approach, and robust passive income planning. Permanent insurance plays a strategic role by enhancing corporate wealth planning, offering flexible corporation investment strategies, and strengthening estate planning in Canada—all while helping business owners diversify, protect their assets, and move closer to true financial independence in Canada.

Transcript:

If you’ve ever been told to buy term and invest the difference, you’re not alone. It’s one of the most repeated pieces of financial advice out there. Dave Ramsey, Primarica, your account, maybe even your brother-in-law has said it before. But here’s the problem. Most Canadians who follow that advice aren’t comparing the right things. And for high income professionals, incorporated business owners and families building multi-generational wealth, it often leads to the wrong decisions.

Yeah, yeah, so today, in this episode, what we’re going to be doing is we’re gonna unpack, you know, exactly where permanent life insurance fits inside high net worth Canadian financial systems and why, and when also term insurance does make sense and investing the difference does make sense because we’ll be the first to say, like, it makes sense for certain individuals, but I think where…

where you hurry that term and you start to go like, well, I shouldn’t do that. But you have to first ask yourself, like, should you not do that? Or is that just like, everyone shouldn’t do that? Because that’s what we wanna talk about here, is that we believe that for certain individuals, that advice makes sense. And for certain individuals, it’s actually hurting you to believe that statement.

Yeah, now before we dig in, I also wanna speak to those out there that are going, oh shoot, know, they’re not talking about, they’re talking about permanent insurance or, can you talk about ETFs or whatever? Here’s the thing. The reality is, that there is such a huge missed opportunity, especially for high net worth individuals and incorporated business owners that we don’t wanna compare ETFs. We don’t wanna talk about saving 0.2 % on an MER fee because that is not actually gonna be the game changer for you.

We actually wanna take you down this path and make you understand how you can be better with your capital in making sure that you put the money in the right buckets along the way. So let’s break it down. We’re gonna break it down into three steps. The first is we’re gonna talk about the problem, like why the argument for buy term and invest the difference actually falls flat.

Also going to talk about looking at things through the right lens. So we’re going to get refocused and we’re going to start comparing permanent insurance to what we should really be comparing it to, which is not our growth assets, but rather our fixed income assets. And then finally, the third one is why it’s such a superior structure for specifically high net worth Canadians as well as incorporated business owners.

All right, so let’s dive in here specifically with this first kind of analysis, which is like why by term invested difference is comparing the wrong things. Because I think when we think about by term investing the difference, you’re thinking about I’m going to compare permanent, like let’s imagine, in my comparison world, I have a permanent insurance policy that people tell me that I’m going to, it’s dividend paying, so I’m going to earn.

you know, it’s like an investment, it’s going to earn a return. But that return isn’t going to be like, super high. So it’s like a return isn’t like what if I could just put it in the stock market, then why would I want to keep this versus, you know, put it over there. So if I buy term, and then take the difference, like think about the money that I would have used to buy the permanent insurance, because because people say, it’s expensive.

and then I put that in the stock market, then on that portion I’m gonna earn whatever that rate is on say the index fund or whatever I put that. And therefore what you’re doing is you’re growth in say the stock market or whatever, it could be private, like whatever investment you put in, you’re comparing the growth on that investment with the growth on a permanent insurance policy and saying well why wouldn’t I want that? And part of it is you’re thinking about

the permanent insurance as a main driver for life insurance and for protection about your life, which is why you might want to get term insurance. But that, in our opinion, you’re comparing the wrong things if you’re looking at it like that.

100%. Yeah, like if we really think about this, when you fund a permanent insurance policy, specifically a higher early cash value policy, so again, it’s gotta be structured in a specific way for this to happen. We’re actually trying to replicate fixed income like growth. So you’ll never see someone who’s considering putting money in a GIC. You’ll never have somebody say, no, no, no, don’t put money in a GIC. Put it in the S &P 500 because over 20 years,

the S and P 500 is going to do better. And like that, you never see that comparison because they’re two completely different assets and for two completely different purposes. And we would argue that when we fund permanent insurance, it’s not to take care of our current insurance need, but yet instead to kind of get a win-win so that we can have it dubbed for more than one thing. So one thing would be for our safe assets.

and to also add additional protection and legacy protection specifically. So it’s less likely that we’re gonna die in the next 10 or 20 years. And therefore term insurance is a great move to protect yourself in those particular cases. But if I have money sitting in fixed income like products, like money markets, high interest savings accounts, GICs, or any other type of safe investment,

this is what we should be comparing because I’ll tell you this much. If you take $10,000 per year, put it into a permanent insurance policy, even if we structure it to be the most high cash value as possible, you’re still gonna do better over the longterm as an investment return by taking $1,000, putting it in a 20 year term policy and investing 9,000 into mutual funds, ETFs or other market investments earning say eight or 9 % per year.

The math is easy, like that will win. But the difference is the dollars that we’re using to fund the permanent insurance policy should not be the same dollars that you’re using to fund your mutual fund, your ETF, your real estate, your growth assets. It should be the safe buckets. And that’s really what we want to unpack here. Buying term and investing the difference is suggesting that someone is comparing taking a dollar from equities.

and putting them into permanent insurance and then saying which one’s going to win when in reality that is not what we want to be using permanent life insurance for.

Right, right, so when you’re thinking about, you know, replace, like you were mentioning, like replacing your fixed income portion. So talk to us about, you know, that fixed income portion. What are current business owners allocating for their fixed income portion of their portfolio? You know, how does permanent insurance actually acting as an accurate comparison? Because I think that’s, in a way, the next step here.

Yeah, well, a lot of people when they talk about their asset allocation, right, we usually use a split. We’ve talked about it on the show many times before that, you know, the traditional balance portfolio was like a 60 % equities, 40 % bonds and sort of fixed income like assets. That was the traditional portfolio. But here’s the part that people usually don’t factor into that asset allocation. They usually are only looking in their investment bucket to talk about those numbers.

But when you zoom out, you see that they have cash on the sidelines. They have an emergency fund. Business owners are extremely guilty for having so much cash on hand, which is not a bad thing. It’s called being safe. It’s called being prudent. It’s protecting yourself in case business gets slow. Heck, if there’s a guy down South that, you know, mentions the word tariffs, all of a sudden, you know, the markets are in a frenzy and you’re not sure where the next dollar is going to come from.

So it makes sense, but that also means that most high income earners, high net worth individuals and specifically business owners actually have a lot less of their portfolio, their entire net worth in growth assets like equities and more in fixed income than they recognize. So even though they might consider themselves to be a high risk or risk tolerant investor,

The reality is they have a lot of money that’s sitting essentially on the sidelines, might be inflating away, right? Meaning that it’s worth less and less with every passing day and maybe generating a small return in terms of dividends or interest and then giving a good chunk of it away to taxation when those dollars could be put in a much better position.

I like to look at it as a thing like, you know, you think about the 60 40 split, I like to look at it as like risk on capital versus risk off capital. And I think that’s the comparison you need to think about, right? Because it’s like risk on capital is like the growth engine. It’s the stocks, the real estate, the private equity, the crypto, you know, it’s it’s volatile, but it’s it’s there for growth. That’s why you allocate 60 % of your portfolio for that. Or maybe it shifts as you get older, right? Like you the

You know, the whole age rule. it’s like, but then there’s a risk off capital, which is your safety, your stability. You know, this is like your cash, your GICs, your bonds, like what you were talking about. And that’s the part that we want to be making sure is, in a way, the way that we do it, that replacement. Like you’re comparing your risk off capital to the buy term, invest the difference in a way. So it’s like.

that’s really what you should be should be looking at in terms of comparison is how do we how do we want to think about our risk off capital because we want the risk app on capital to do its thing. But the risk off capital is like what’s the good spot for that like is GIC the best spot for that if I’m just looking to safeguard my assets safeguard like maybe it’s part of my emergency fund but maybe not but it’s like it’s just the part that’s steady and if it’s the part that’s steady and

I can’t, you know, it’s stuck maybe in my portfolio, let’s say with my broker or wherever that fund is living. Maybe it’s at your bank, right? Like it’s there, but it’s up there. It’s inaccessible at times if it’s in a true 40 % portfolio. Like you’re saying a mutual funds or maybe it’s in say bonds specifically that you’ve allocated yourself if you’re direct, you know, you’re direct investing or managing your own account. like it’s stuck up there, but it is safe.

The question is, that the best vehicle for it? And could I achieve, if you’re only, because a lot of times that part is like I’m getting safety, but I get some growth. Like there’s some growth there, right? So if your goal is those two buckets, like safety and growth, some small growth, then is there any other vehicles that can actually make, like achieve both of those?

and more, which is why, that’s just why we say like, my term invested difference isn’t an accurate comparison and why permanent insurance is actually a better vehicle for that component.

100%. And you know, the piece, ⁓ you know, that’s really important for us to recognize as well is that oftentimes, you know, when we have a dollar hit our bank account, we earn a dollar wherever it came from. When you, what you choose to do with that dollar oftentimes comes down to essentially two dramatic ends of the spectrum. One is should I keep it on hand just in case, meaning I might need it next month. Maybe I need it like next year. Who knows when I need it, but

I don’t want to send it off to my quote unquote investment bucket. I don’t want to send it to my RSPs, tax free savings or any other type of investment because I might need it. And therefore everyone who is developing enough cash and capital, they’re going to have a lot of this money sort of sitting on the sidelines. And the reality is regardless of your tax bracket, but specifically if you’re inside of the business with that money in the highest tax bracket, that’s what passive income is being taxed at.

you’re essentially not only earning a small amount on those dollars, but it’s actually dwindling away due to the taxation. So it’s actually impacting negatively the compound rate on those dollars. So the money’s safe. You can access it almost anytime. And I say almost because again, GICs might have a lock-in period or if it’s bonds, hey, bond market’s volatile. But in reality, these other buckets, the dollars are there and you can grab them whenever you want.

Why we suggest that you take some of those dollars, not every single dollar that’s there, but some of those dollars and you allocate it to a long-term policy is that now you’re getting it to do two things at once. The safety is there, the volatility is completely gone because it will not go backwards, and we have access through liquidity in a tax-efficient manner to access those dollars if we do have an emergency.

if we do see an opportunity or if we just need a little bit of extra cash or we change our mind on purchasing something over time. So every person has an opportunity for this. However, if we look at the math, the lower your net worth is, the more important growth assets are for you. And I wanna say this again, I wanna pause for a moment and I want that to sink in. The lower your net worth is, the more important long-term growth assets are for you. Why?

because your volume is so low that you have to lean on growth in order to potentially have the chance to raise your wealth or to increase your wealth. What happens on the other end of the spectrum as your wealth increases, as your net worth increases, what you start to recognize is that actually the risk isn’t worth the reward for you.

you have grown your pile to a place that you actually don’t need as much money into risk on assets. Of course, we’re going to keep some in risk on assets that would, you know, no reason not to. However, the volatility that goes along with it definitely hurts a lot more because the number, the absolute value of your net worth can go up and down much more drastically with that volatility. And therefore as our net worth increases,

more and more Canadians, high net worth individuals and business owners actually are wishing that they have a big enough bucket that they can put into like a permanent insurance policy so that they have more stability, more of that volatility buffer available to them. So this is a really tough issue because oftentimes we’re looking at every dollar as if it’s either growth or into a policy in this particular argument when in reality,

We’re just talking about finding the right dollars and sending the right number of them to the important bucket for you at your specific point in the journey.

Right, right. So, when we think about kind of step three of the process here for what we outlined at the beginning of this episode is that if we want to talk about that superior structure, this is where the dollar that you want to put into say your fixed asset or fixed income bucket or your safety bucket, your wealth reservoir bucket can be, you know, we’re using a permanent insurance policy to do that type of work with. it actually I think gives you

it gives you like four huge benefits, one being you’ve got tax exempt growth where under our current test, exempt rules, we’ve got cash value compounds, it’s gonna compound tax free inside there. Think of your tax free savings account, that’s exactly, or in your RSPs, that’s what it’s doing inside there. It’s growing tax free as that growth happens. You’re not gonna have any,

Annual in no tax on on any interest because it’s inside there. You got no passive income clawback You’ve got no drag on the compound compounding even if you do want to use it for liquidity It’s that compounding is going to be there. So that’s an important part Kyle. What about liquidity control optionality?

Yeah, so the liquidity and control piece is really key. A lot of people look at it and think, if I put money into a policy, I’m never going to see those dollars back in my lifetime. When in reality, when we design a policy in this way to act as a fixed income asset, it’s quite the opposite. We actually want to utilize this tool with leverage, meaning we want to grow our fixed income bucket so it continues to grow throughout our lifetime, completely tax-free, as you argued.

and we’re able to borrow against that policy for cashflow. And I call it cashflow because it’s not recognized as income and therefore it is not taxable. When you build your net worth and when you fill up all these other buckets, you’ve got money in an RSP, maybe you’ve got a pension if you’re a T4 employee, or maybe you’ve got investments in your non-registered or your corporate accounts.

when you take money and income from those buckets, you are going up the tax brackets. And this tool becomes such an imperative and important tool so that high net worth and high income business owners and investors are able to actually access more money without triggering more high taxes. The bigger my income is from year to year, the closer we get to that highest tax bracket where we’re gifting 50 % of our income away.

So being able to lean into an asset that’s been growing tax-free, that will eventually pay out to my estate tax-free and being able to utilize those dollars while I’m living is a massive, massive ninja move that makes liquidity and control such a key piece with this particular structure.

Right, right. As a business owner, in a corporate business owner, when we have this policy, it gives us this added benefit too. Talk to us also about the capital dividend account and what happens for a state and legacy thinking when things go down the road. Because like what you said, if you’re doing the whole buy term and invest the difference, you’re trying to accomplish this one thing where your term insurance is really your safety and it’s protecting your life.

the way that we’re comparing accurately, you’re replacing a fixed income portion of your portfolio, but you’re getting, say, the safety, you’re getting the small growth, but you also get these other benefits that come along for the ride.

Yeah, unlike a T4 employee, someone who has been receiving income, they have to pay tax on it. The only way they get money back is if they put it into an RRSP and they get that credit back in that year, but then they pay on the other end when that RRSP grows and they take that income. If a incorporated business owner were to fund a policy, they get the added benefit of a capital dividend account credit. So here’s how it works. I’m an incorporated business owner.

my active income on the first $500,000 of my earnings every single year that stays in the corporation is taxed here in Ontario at 12.2%. That means that I get to keep 88 cents of every dollar that my corporation earns and I can actually fund a policy. I can also invest in other things as well. So don’t get me wrong. We’re not suggesting this is an all in strategy, but when I buy the insurance in the corporation, the insurance

policy gave me more insurance for less money compared to someone who’s in the highest tax bracket at a personal level. They’re buying insurance with $0.50 while my business is buying with $0.88. So that’s the massive quick win right there. But over time, the policy will continue to grow in compound regardless of whether it’s in the corporation or not. But because it’s in the corporation,

I’m able to leverage those dollars for other assets. I can do it for cashflow. I can do it for all kinds of different things. But when I do pass or the insured individual passes, the key person that’s been insured in the business, when they pass the death benefit will pay out completely tax free to the corporation. Now this isn’t where it stops though. The corporation gets all of that death benefit completely tax free.

So you may have put say a million dollars into the policy and maybe five million comes out and the capital dividend account gets a credit of the net death benefit, meaning the death benefit minus the adjusted cost basis. But here’s the crazy part. If you live an average age of life, chances are your adjusted cost basis has actually been grind away all the way to zero.

and the entire death benefit would be credited to the capital dividend account so that it can flow out to your heirs, whoever is now holding the shares of your business that you’ve passed through your will. So it’s a massive, massive win. A million dollars in the corporation that passes through a policy may turn into $5 million in personal hands. Whereas if they didn’t pass through a policy, that million dollar retained earnings would be worth about $610,000.

in personal hands. There is a massive difference. And once again, we’re only funding that policy with the dollars that we want to be allocating to our fixed income portion of our portfolio.

That’s the important part there. The fourth, you know, big benefit here is what we call optionality and really what you’re when you’re getting with your permanent insurance, you know, your dividend paying or permanent insurance policy is, is you’re getting in a way you’re getting freedom here, you’re getting freedom of worry of what the next life, you know, providing the errors is going to look like. Obviously, there’s death benefit there like you just outlined. There’s there’s freedom of

of being able to make choices for growth and choices for investment because now you have access to capital when before it was locked up. So you can say borrow against that policy to go invest in this or do both. Like you can still get your whole life policy and then take and borrow the money to go invest in the index fund anyway, you know?

you still could do it. But and you got two uses for the same dollar. You know, you’ve got you got, you know, worry, you know, your freedom of worrying about, you know, the tax freeness of like, what that’s going to look like, like they do all of these, it does all of these things. So, you know, your GICs, if you stick to this whole like, buy term, invest the difference, or think about your fixed income portion as GICs and a combination, can’t do all of those things. So Kyle, when we kind of wrap here, and you think about, you know, what are some of the

big takeaways and the big steps we want to think about, what would you say are some of those big steps we want everyone to kind of take a wave today?

Yeah, well, I hope the big takeaway here is that when you hear something like buy term and invest the difference, like the answer is like we agree when talking about growth dollars, the dollars that should be going into your growth bucket, a hundred percent. That would be a great move. But when it comes to the dollars that are not inside those growth assets, you’ve got to start asking yourself first of all, why not? Like why aren’t they in growth assets?

And you know, when I see incorporated business owners come to us all the time, we’ve got people routinely with $500,000 sitting in a corporate account or in GICs or a million dollars. Sometimes we had one client, John, I’m sure you remember, about $4 million that were in GICs. They didn’t want to put all of that money into long-term investments because of the what ifs. I can’t argue with people on that move. Now I did encourage them to put some in into those growth assets, but ultimately at the end of the day,

If you haven’t put those dollars into long-term assets, you have to ask yourself why. And if the why is because you don’t want the market volatility, you don’t want the unknown, you don’t want the risk, those dollars should be working harder for you inside a policy until you change your mind. And why I say until you change your mind is because of that optionality, the liquidity that’s available. If you change your mind, you can use leverage to put it into growth assets.

If we ever see another 2008 and now condos are worth, you know, 40 % of what they were worth a couple years ago, heck, borrow against your policy in order to put it into growth assets. Then it doesn’t have to be an either or, but what we encourage people to do is to not let those dollars sit on the sidelines, lose a ton of money to passive income and essentially miss out on an opportunity to essentially prepare yourself for a legacy that lasts over the longterm.

Right, right. So I would say, you know, first you want to like segment your capital, like know what is your growth money and what is your safety money. You have to decide that. And that’s partly why, you know, buying permanent insurance, we said at the top of this episode, isn’t for everyone. Like there are people that’s like, I don’t have a lot of growth money. I don’t have a lot of safety money yet. So I’m in the building process and therefore maybe, you know, getting that term insurance is your move right now.

One is you gotta know what that capital looks like. So segment that capital. The second is you need to compare the apples to apples. You gotta take a step back and go like when I think about those two buckets, the growth money, the safety money, the risk on versus the risk off, am I comparing the right things? Because I think when we started with that, when people start saying buy term invested, they’re comparing the wrong things. So we wanna compare.

the correct things, you wanna compare like to like. The third thing we want you to remember is value optionality. Are you buying freedom? Are you looking for that freedom? Like liquidity, control, tax-free compounding, estate, efficiency matter, all these things matter to us and they matter to many of our clients, which is why they choose this to act as their fixed income portion of their portfolios, because it gives you that optionality. hopefully these are your three big takeaways from today’s episode.

Awesome. Awesome. So friends, if this helped you reframe how you think about your wealth and specifically how you’ll be thinking the next time you come across the idea of buying term and investing the difference and that it’s actually a much more nuanced and important decision for you to be making along your wealth journey. Here are some next steps for you. First off, you can consider taking our wealth health assessment.

It’s one of the best starting points to see where your inefficiencies are in your system and where you can focus your attention next. You can find that over at CanadianWealthSecrets.com forward slash pathways. And of course, if you’re an incorporated business owners, we have a free self-paced masterclass where you can decide how to maximize your retained earnings with structures like what we’ve discussed here today. And that’s over at CanadianWealthSecrets.com forward slash masterclass.

And finally, if you’re ready to talk to someone like me about your personal situation, you can grab a spot in our calendar over at CanadianWealthSecrets.com forward slash discovery.

Just a reminder, the content you heard here today is for informational purposes only. You should not construe any of the information as legal tax investment or financial advice. One more reminder, Kyle Pearce is a licensed life and accident and sickness insurance agent and the president of corporate wealth management here at Canadian Well Secrets.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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