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Life Insurance…

Life Insurance…. The Secure Investment Alternative. Presented by: Pam Budway, RHU Regional Marketing Consultant The Canada Life Assurance Company. Alternative Investments…. THE DOWNSIDE. Volatile, High Risk. Low Returns.

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Life Insurance…

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  1. Life Insurance… The Secure Investment Alternative Presented by: Pam Budway, RHU Regional Marketing Consultant The Canada Life Assurance Company

  2. Alternative Investments… THE DOWNSIDE

  3. Volatile, High Risk Low Returns What comes to mind when you hear the word “investment”? • Stocks • Bonds • Mutual Funds • Properties • GICs

  4. StocksThe 25 Year History TSX on total return basis 1975-2000 information taken from the Report on Canadian Economic Statistics 1924-2000, published by the Canadian Institute of Actuaries, September 2001

  5. Stocks • Requires precise market knowledge • Timing is everything • 100% of your attention

  6. BondsOntario Savings Bonds Rates Source: www.ontariosavingsbonds.com, August 2002

  7. BOND PRICE INTEREST Bonds • Low returns • Long lock-in terms • Inflation can have a corrosive effect • When interest goes up, bond price goes down

  8. Mutual FundsStocks vs. Mutual Funds(Fidelity Balanced) FBALX: Fidelity Balanced FundDJI: Dow Jones GSPC: S & P 500IXIC: Nasdaq Courtesy of Yahoo Finance, August 2004

  9. Mutual FundsRate of Returns (Fidelity Balanced) Courtesy of Yahoo Finance, August 2004

  10. Mutual Funds • Requires precise market knowledge • Timing is everything • 100% of your attention • Very similar risks as Stocks

  11. Properties • Poor choice in tenants • Downside market trends • Uncontrollable risks • i.e.: Fire, flood damage, etc. • Market saturation

  12. GICs • Low rate of return • Not tax-sheltered • Long lock-in terms

  13. Life Insurance… ADVANTAGES

  14. Why Life Insurance? • Death Benefit free of probate, executor and legal fees • Potentially Creditor Proof • Excellent investment choice for business owners

  15. Subject To: Stocks, Bonds, Mutual Funds, Bank GICs Probate Fees Up to 1.5% Legal Fees 3 – 6% avg. Accounting/Trustee Fees 2 – 5% avg. Fund Distribution ??? Privacy Public Record ** Creditor Protection Potential No Death Benefit Guarantees No Potential Estate Costs Up to 12.5% ** Where probate sought Stocks, Bonds, Mutual Funds, Bank GICs

  16. Why Life Insurance? • Tax Free Death Benefit • Peace of mind • Proceeds paid directly to the named beneficiaries, bypassing the will • Policy value accumulates Tax Sheltered

  17. More on Tax Sheltering • Is one of your client’s financial objectives to increase their net worth by accumulating additional assets through annual savings? • Are they thinking that those assets could be passed on to their heirs – children or grandchildren?

  18. More on Tax ShelteringWhat you may not know… • The income tax your clients will have to pay over their lifetime on non-registered savings may be equal to or more than the actual amount saved! • Your clients do not have to give up control of assets earmarked for grandchildren to avoid paying taxes on the growth!

  19. More on Tax ShelteringSection 148 of the Income Tax Act • A life insurance policy that qualifies under this act is an excellent planning tool that can be used to create a tax advantaged account • Account is totally accessible and under your client’s control while they are alive

  20. More on Tax ShelteringCase Study E.&O.E. • Insured • Male, age 40, non-smoker • Insurance Product • Universal Life, $2,250,000 face amount • $300,000 single premium • 6% projected annual growth rate • Alternative Investment  GIC • 47% Tax Rate on Interest • 6% projected annual growth rate

  21. Investment ResultsTax Sheltering Effect Male, Age 40, N/S, $2,250,000 Millennium UL w/ Bonus, 6% net of MER, Increasing DB, YRT to age 85 E.&O.E. V 7.0

  22. What does this mean?Case Study Over a 25 year period, your clients can potentially earn at least 3.35 times more with Life Insurance than a GIC Investment!

  23. Life Insurance… OPTIONS

  24. Using Life Insurance Strategies for Wealth Management • Cascading Life Insurance Strategies • Insured Income Strategies • Retirement Income Strategies

  25. Three important questions to ask your client… • Are you planning to leave an inheritance to your children and grandchildren? • Are you concerned about the security of this legacy? • Are you paying too much income tax?

  26. The Situation • Age 60 – 75 • Unregistered funds set aside as inheritance for children and grandchildren • Unlikely to ever need capital for living expenses

  27. The Problem • Don’t want tax burden and probate fees to be part of the inheritance • Concerned about access to funds • Paying too much income tax

  28. The SolutionCascading Life Insurance Strategy • Transfer unregistered assets into exempt life insurance policy • Child is life insured and contingent owner • Grandchild is beneficiary

  29. Subsection 148(8) of the Income Tax Act • Allows transfer of ownership of a life insurance policy to any taxpayer’s children free of tax • “Child” includes any natural or adopted child, a grandchild, step-child, or a son- or daughter-in-law • Child is only life insured on policy • Policy is transferred for no consideration • Must be a direct transfer

  30. Subsection 74.1(2) of the Income Tax Act • Attribution of income on property transferred to a minor • If the child realizes income from a transferred policy prior to age 18, income is taxable • Included in income of transferor

  31. Child is life-insured and contingent owner Name grandchild as beneficiary Set up tax-exempt life insurance policy At death of parent child becomes owner Enjoy reduced annual income tax bill Transfer unsheltered assets into policy How does it work?

  32. Cascading Life Insurance Strategy • The Result • Reduce current tax burden • Tax-sheltered accumulation • Immediate estate enhancement • Tax-free transfer of assets to future generations • Tax-free death benefit paid directly to beneficiary • Funds remain accessible and under client’s control

  33. Cascading Life Insurance StrategyBenefits for Grandparent • Generate after-tax estate value instead of unnecessary income • Reduced income tax payable • Maintain control • Access to funds in policy if needed

  34. Cascading Life Insurance StrategyBenefits for Child • Life insurance protection • Becomes owner of policy on parent’s death • Flexibility • Access to funds if needed • Reserve policy for child

  35. Cascading Life Insurance StrategyBenefits for Grandchild • Parent has life insurance protection • Beneficiary of tax-free death benefit • No probate fees • Significant growth of death benefit over long term

  36. Enjoy reduced annual income tax bill At death of parent, child becomes owner Grandchild is beneficiary Isn’t that the way it should be? X C C R A

  37. Life Insurance… OPTIONS

  38. Enjoy reduced annual income tax bill At death of parent, child becomes owner Grandchild is beneficiary What if the child needs access to immediate funds? X C C R A

  39. Insured Income Strategy Generating Additional Income Using a Leveraged Millennium Universal Life Plan • Life insurance protection • Tax-sheltered accumulation today • Tax-free access to funds in the future

  40. Use the universal life policy Maximize premium deposits Set up loan or line of credit Assign policy to bank as collateral Loan is repaid out of death benefit How Does It Work? Balance of death benefit paid to Grandchild

  41. Insurance Policy as Collateral Insurance Premiums Bank Loan $$$ Use Proceeds to pay off bank loan upon the death of the Insured. Tax-Free Death Benefit (after paying off the bank loan) How Does it Work? Insured • Ins.Company • Tax Sheltered Effect • Tax-Free Benefit Bank Insurance policies provide excellent tax sheltering capabilities, with a tax-free benefit! Beneficiary

  42. Benefits • Tax-free income stream • Tax-sheltered investment growth • Permanent life insurance protection • Tax-free death benefit • Choice of investment options • Flexibility

  43. Income Options • Single loan • Series of loans on an annual basis • Line of credit

  44. Repayment Options • Capitalized interest • Monthly interest payments • Repayment of principal

  45. Life Insurance… OPTIONS

  46. Retirement Income StrategyUsing Life Insurance • Case Study • Male, age 40, Non-Smoker • Requires life insurance • Looking for tax-sheltered growth on investments • Needs retirement income at age 65

  47. Retirement Income StrategyUsing Life Insurance • Set up a life insurance policy and pay premiums for the first 20 years (to age 60) • Upon turning age 65, receive an annual retirement income from your policy • Upon your death, remaining tax-free cash value and death benefit are paid free of legal and probate fees directly to your beneficiary, bypassing the will

  48. Male, age 40, N/S, $700,000 CLA Accelerator, Dividends buy Paid-Up Additions, Maximum Income from age 65-95 Premiums Payable for 20 Years $51,759 income from age 65 - age 95

  49. Retirement Income StrategyUsing Life Insurance • Living Benefits: • Total Premiums Paid from age 40 to 60: • $342,400 • Total Potential Retirement Income from age 65 to 95: • $1,552,770 • Total gain to age 95: $1,210,370

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