achieving more together insured inheritance strategy
TRANSCRIPT
Achieving More Together
Insured inheritance strategy
Achieving More Together
Important considerations All comments related to taxation are general in nature and are
based on current Canadian tax legislation for Canadian residents, which is subject to change. For individual circumstances, consult with a tax professional.
An exempt life insurance policy -- i.e. the savings element is exempt from annual accrual taxation -- is defined in regulations 306 and 307 of the Income Tax Act (ITA). The Act provides that if a policy is to be exempt, the conditions set out in the regulations must be met. The regulations determine the maximum premiums that can be paid while still keeping a policy exempt.
Any premium for a Millennium universal life insurance policy that would exceed the maximum premium is put in an account outside the policy (Millennium Account) and credited with interest. Canada Life will report the income to the policyowner each year.
This information is current as of May 2005.
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Agenda
Demographic statistics Insured inheritance strategy Case study #1 – James and Felicia Case study #2 – Ivan and Mary Summary
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Our population is agingNumber of Canadians over age 65
1978: 2.1 million
1988: 2.75 million
1999: 3.8 million
2006: 4.3 million*
2011: 4.8 million *
2016: 5.7 million *
* projectionSource: Statistics Canada
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Our population is aging
Life expectancy
48.2 51
69.376.3
82 85
0
20
40
60
80
100
1901 1973 TODAY
Male
Female
Source: Statistics Canada
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Increased net worthCanadian Net Worth (in Trillions)
4.2
1980’S 2004 Shift in makeup of Canadian net worth - from more than 50 per cent in real estate in the 1980’s - to over 50 per cent in financial instruments in 2004
Source: Statistics Canada
0.8
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DiscretionarySpending Power
PersonalWealthPopulation
Retired
Near-retired
Mainstream Workforce
Youth
14%20%
30%
Need and ability to payOlder Canadians control Wealth
Source: Statistics Canada
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Consider your client’s net worth cycle:
Some of your clients’ net worth will not be used in their lifetime.
Does it make sense to pay tax on the growth of their investments every year?
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Key questions to ask your clients
Do you have surplus capital that you don’t need? Do you have a desire to reduce annual taxes on
your investment income? Do you have heirs to whom you want to transfer
your assets? Are you concerned about the security of this
legacy?
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Ideal client profile
Your clients are: Generating more income than required for
living expenses In a high marginal tax bracket Paying more tax than they’d like to Concerned about giving up control of their
assets Concerned about the security of their legacy
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Canada Life’s Insured Inheritance strategy provides
Permanent life insurance protection Continued client control of capital in a tax-advantaged
product Immediate estate enhancement Tax-advantaged accumulation that passes tax-free to
beneficiaries upon death Flexibility to change the policy beneficiary, and coverage
amount (subject to any underwriting requirements) No probate fees on death benefit with named beneficiary
other than the estate (not applicable in Quebec)
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Insured inheritance funding options
1. Lump sum purchase of annuity to pay insurance premiums
2. Lump sum prepayment to a Canada Life’s Millennium universal life insurance contract
3. 10 pay out of capital to pay up insurance contract
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Clients: James and Felicia, ages male 67, female 65 Both worked in the public sector and are now retired They have 5 children combined from previous marriages They’re concerned about transferring monies to their 5
children They want to maximize their estate for their heirs and
distribute their assets equitably Want to retain control of their assets while they are alive
Case study #1
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Looking at James and Felicia’s assets...
James and Felicia require retirement income of $200,000
RRSPs and pension will supply $220,000 They are in a high marginal tax bracket. $100,000 of their non-registered portfolio is
clearly surplus to their income and capital needs
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$100,000 in fixed income investments – yielding 5
per cent before tax
– with a 45 per cent marginal tax rate
5 10 15 20 25
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
Years
Traditional taxable fixed income investments
Net investments Pre-tax investments
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Funding Option #1 -
James and Felicia used $100,000 to buy ten-year term certain prescribed annuity
Income of $12,096.96 annually– Taxable amount $2,096.96 annually– Tax payable $943.63 annually
$11,153 ($12,096.96 - $943.63) is used to fund Millennium for 10 years. The funding schedule purchases $318,000 of insurance
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0
500
1000
1500
2000
2500
3000
1 2 3 4 5 6 7 8 9 10
Year
Annuity Non-registered
Annual tax payable comparison
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Insured inheritance strategy: tax-advantaged accumulation
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Funding Option #2 James and Felicia use $100,000 to lump sum
fund a Millennium Universal life policy
Fully absorbed into the insurance contract in 4 years - tax payable on income earned “outside” contract
$100,000 lump sum deposit purchases $345,000 of insurance
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0
500
1000
1500
2000
2500
3000
1 2 3 4 5 6 7 8 9 10
Year
Insured inheritance Non-registered
Annual tax payable comparison
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Insured inheritance strategy: tax-advantaged accumulation
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Funding Option #3 James and Felicia transfer $10,000 a year from
non-registered assets to Millennium
The entire $10,000 can be deposited into the policy each year – No taxes are payable as the policy generates tax-
advantaged accumulation
$10,000 a year deposit purchases $284,000 of life insurance
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0
1000
2000
3000
1 2 3 4 5 6 7 8 9 10
Year
Non-registered assets moving to Insured inheritance
Do nothing
Annual tax payable comparison
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Summary of Funding Options
Funding Option #1
Funding Option #2
Funding Option #3
Cumulative insurance/annuity premium (10 years)
$111,530 $100,000 $100,000
Initial Face amount purchased
$318,000 $345,000 $284,000
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Summary of Funding Options
Funding Option #1
Funding Option #2
Funding Option #3
Alternative investment cumulative taxes payable (10 years)
$25,499 $29,302 $12,044
Insured inheritance cumulative taxes payable
$0 $2,302 $0
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Case study #2
Ivan is 63 years old and Mary is 61 Ivan and Mary Smith own Smith Tool & Die They have owned the business for over 25
years. The Smith’s have two grown children, neither of
whom is interested in continuing the business The employees have offered the Smith’s $7
million dollars for the company.
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Case study #2Capital gain $6,000,000
Inclusion rate 50%
Taxable capital gain $3,000,000
Marginal tax rate 50%
Tax Payable $1,500,000
Sale proceeds less taxes payable leaves $5,500,000 net After doing a full financial planning review, it is determined
that $4.5 million is sufficient to sustain their lifestyle needs
SO THEY HAVE $1 MILLION “EXTRA” AVAILABLE
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Before creating an illustration…Address the following questions:
HOW MUCH WILL $1Million BUY?
WHAT IS THE INSURANCE FOR? – Capital Gains on Investment Portfolio?– Tax on accumulating RRIF balance?– Does estate maximization motivate the client?
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Summary of Funding Options
Funding Option #1
Funding Option #2
Funding Option #3
Cumulative insurance/annuity premium (10 years)
$990,000 $1,000,000 $1,000,000
Initial Face amount purchased
$3,661,000 $4,448,000 $3,668,000
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Summary of Funding Options
Funding Option #1
Funding Option #2
Funding Option #3
Alternative investment cumulative taxes payable (10 years)
$244,270 $399,007 $131,738
Insured inheritance cumulative taxes payable
$0 $21,889 $0
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Canada Life’s Insured inheritance strategy
allows the client to maintain control by providing– Choice of investment options– Change premium payment– Change face amount– Change beneficiary
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Canada Life’s Insured Inheritance strategy provides
Permanent life insurance protection Continued client control of their capital in a tax-advantaged
environment A potentially higher transfer amount to beneficiaries (on the death
of the second insured) than traditional taxable investments Immediate estate enhancement Tax-advantaged accumulation that passes tax-free to
beneficiaries upon death Flexibility to change the policy beneficiary, and coverage amount
(subject to any underwriting requirements) No probate fees on death benefit with named beneficiary other
than the estate (not applicable in Quebec)
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Why Canada Life? Canada Life’s wide range of permanent life
insurance products allow clients to customize their insurance coverage to match their estate planning needs.
Permanent products– Whole life – Universal life
Term products
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Why Canada Life (continued…)?
Estate planning strategies· Preserve your wealth· Real estate, real solutions· Planned giving using life
insurance· Insured inheritance· Retirement income
enhancer· Insured RRIF· Insured annuity
Estate planning client material· Estate planning checklist· Annual review· If you die without a will
summary· Tax worksheet calculator· Preserve your wealth
calculator· Personal records
organizer· For your family· For your executor
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Next steps...
Talk with your clients about Estate planning and introduce them to Canada Life’s Insured Inheritance strategy
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Thank You