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What the Wealthy Know

If you have ever thought that life insurance was something you wouldn’t need after you reached a certain level of financial security, you might be interested in knowing why many wealthy individuals still carry large amounts of insurance.  Consider the following:

• A life insurance advisor in California recently placed a $201 million dollar life insurance policy on the life of a tech industry billionaire;
• Well known music executive David Geffen was life insured for $100 million;
• Malcolm Forbes, owner of Forbes Magazine, was insured at the time of his death in 1990 for $70 million.

While life insurance is most often looked upon as a vehicle to protect ones family or business, the question that springs to mind is why would individuals with wealth need life insurance? 

The most common factor connecting people of wealth is that they have a substantial amount of deferred income tax that must be paid upon death.   In addition, they often have a strong desire to make a substantial donation to a favourite charity or educational institution.

“Life insurance is an efficient way to transfer money to your heirs.” – Malcom Forbes

In Canada, individuals are deemed to have disposed of all their assets at fair market value when they die, which often results in taxable capital gains and other deferred taxes coming due.  Paying premiums for insurance that will cover these taxes is almost always less expensive and more efficient than converting assets.

When allocating your investment dollars, it is helpful to understand what investments have the highest exposure to income tax.

Fully Tax Exposed

Investments which are taxed at the highest rate of income tax:

• Interest bearing instruments such as bonds, savings accounts, guaranteed investment certificates;
• Rents;
• Withdrawals or income from registered plans such as RSP’s or RPP’s.

Tax Advantaged

Investments which are taxed at lower rates of income tax:

• Investments which are taxed as a capital gain;
• Dividends;
• Flow through share programs;
• Prescribed annuity income.

Tax Deferred

Investments on which income tax is deferred until the asset is disposed of or the investor dies:

• Registered Savings Plans;
• Individual and Registered Pension Plans
• Investments producing deferred capital gains.

Registered plans, in addition to having the growth tax deferred also have the added advantage of the contributions being tax deductible.

Tax Free

Certain investment assets are totally free of income tax:

• Principal residence;
• Tax Free Savings Accounts;
• Death benefit of life insurance policies.

Life Insurance as an Investment

While the death benefit of life insurance policies is tax free, it is important to recognize that this also includes the investment gains made on the cash value portion of the policy.  With this in mind, many investors have discovered that by allocating a portion of long term investments to a Universal Life or Participating Whole Life policy, the results can be significant when compared to tax exposed or tax advantaged investments.

Life Insurance for Estate Planning

One of the main objectives of estate planning is to maximize the amount we leave to our families or bequeath to our favourite charities.  What many wealthy families have learned is that one of the easiest ways to accomplish this is to reduce the portion of the estate which is lost to the government to pay taxes at death.

While this helps explain why many individuals of wealth maintain life insurance, it also underscores the advantages of life insurance to anyone who will have taxes or other liquidity needs at death.  In addition, using life insurance as part of a charitable giving strategy can provide significant benefits to both the donor and the charity.

As Malcolm Forbes alluded to, for providing capital to protect your family’s future financial security, paying taxes at death and creating a charitable legacy, nothing is more efficient or effective than life insurance.

Please feel free to share this article with anyone who may find it of interest.

1 in 3 Canadians

What you need to know about your Group Long Term Disability

Having a source to replace your earned income in the event of an illness or accident is vital considering that on average, 1 in 3 Canadians will become disabled for a period of more than 90 days at least once before the age of 65. For those that are disabled for more than 90 days the average length of that disability is 2.9 years.

If you are one of the approximately 10 million Canadians covered under a group Long Term Disability plan (LTD) it’s important to understand what your coverage provides. Don’t wait until after you’re disabled to read the employee handbook, because you could have a few surprises!

How much coverage do I really have?

• Generally, employee benefit LTD plans are designed to replace up to 85% of your pre-disability after tax
• The amount of your benefit is determined by formula. These formulas vary so it’s a good idea to know what yours is.

When do I start getting benefits?

• Usually, you are eligible for benefits to commence after being disabled for a period of 90 or 120 days.

Is this benefit taxable to me?

• If the LTD premium is paid by you personally then the benefit will be received tax free.
• In groups where the employer pays the LTD premium, then the benefit when received will be taxable.
  • Should this be the case, make sure you discuss with your employer or insurer what your options are for having tax withheld if disabled so there will be no nasty surprises come tax time.

What else do I need to know when I enroll in an LTD plan?

• Pay attention to the Non-Evidence Maximum (NEM).  This is the maximum amount of disability benefit you would be entitled to without providing medical evidence.  You may be eligible to receive higher coverage if you take a medical examination.
• You should also be aware that LTD benefits are usually offset (reduced), by any disability benefits you might receive from CPP/QPP or Workmen’s Compensation.
• Any benefits paid as a result of an accident from an automobile insurance plan may also reduce your LTD benefits.
• Most group plans have a waiting period, usually three to six months, before a new employee is eligible to join the plan.
• If you were formerly a member of a plan at another employer, request that your new employer waive the waiting period.
• If you’re an employee who was actively recruited or is considered a valuable addition, you should also make this request.

Are there other options?

• All of the above could certainly result in you receiving less disability income than you thought you were entitled to.  If this is the case, consider purchasing an individual disability policy to “top up” your coverage.
• The good news here is that most Group LTD plans do not offset against personal disability income policies.

Please call me if you would like to discuss your personal situation or feel free to use the social sharing buttons below to share this article with a friend or family member you think might find this information of value.

Juvenile CI with ROP

Protection if you need it. A refund if you don’t.

Critical Illness Insurance – Not Just for Adults

Most of us have experienced or known someone whose family has been greatly impacted by a parent being diagnosed with a life-threatening disease or condition. But what about when it happens to children? Sadly, all too often children are affected by childhood diseases such as:

• Type 1 diabetes mellitus
• Congenital heart disease
• Cerebral palsy
• Cystic fibrosis
• Muscular dystrophy

The emotional and financial impact of these types of diagnosis can be devastating for a family.

Why would juvenile critical illness coverage make a difference?

• Provides funds to find the best treatment and care for your child – inside or outside of Canada
• Provides the financial resources to be able to focus on your child’s needs so you don’t have to worry about
  • Working
  • Extra childcare expenses for other children in the family
  • Extra expenses incurred by the illness
• Being prepared for this unexpected event will give you the priceless freedom to spend extra time with your child without the stress of financial concerns.

While most life insurance companies in Canada offer Critical Illness protection for adults, not all offer similar coverage for children. Of those that do, Sun Life provides a particularly unique policy when combined with a Return of Premium Option.

What makes Sun Life’s Juvenile Critical Illness Unique?

• Insures against 25 adult conditions, plus the above childhood illnesses.
• At age 24, childhood conditions drop off and the policy automatically continues as an adult plan.
• The Return of Premium Option provides an automatic refund of 75% of all premiums paid at age 25 or 15 years from the policy date whichever is later.
• The policy can be surrendered 15 years or later from that date for a refund of the balance of total premiums paid.

What happens when there is no claim?

Bob and Sally purchase $200,000 Critical Illness Term to 75 with Return of Premium Rider on their 5 year old son, Michael. The annual premium for the policy is $1,393 ($462 of this premium represents the Return of Premium Rider)

• At Michael’s age 25, an automatic refund of premiums returns $20,895. This represents 75% of the total premiums paid to date.
• Adding the Return of Premium Rider for a cost of $462 a year represents a tax-free rate of return of 7.26% on that portion of the premium.
• In Michael’s case, he can surrender the policy any time after his age 40 for a full refund of the balance of the total premiums paid.

Additional Premium Refund at surrender:

• Age 40 $ 27,860
• Age 45 $ 34,825
• Age 50 $ 41,790

Sun Life’s Critical Illness Insurance plan with the Return of Premium Option for juveniles is a very unique plan that provides peace of mind if you need the protection and a full refund of your premiums if you don’t.

If you would like to explore this exceptional plan in more detail please call me and I will be happy to assist. Also, feel free to share this article with anyone you feel would benefit from this information by using the share buttons below.

What is Key Person?

Most business owners understand that assets vital to the success of the enterprise should be insured. Premises are routinely covered for fire and/or theft; vehicles used to make deliveries, insured; machinery needed for manufacturing, also insured. Given that these tangible assets are instrumental in the success of the business, it makes good business sense that the business is protected in the event of a loss. But what about key employees? Many business owners overlook the impact on their business should a key employee die unexpectedly.

If you own or manage a company whose continued success is dependent on key people (it might even be you), it would be prudent to insure all key personnel whose death or incapacity would negatively affect profitability. Key persons are those who contribute to the continuing success and profitability of the enterprise.

What happens when an owner or key person dies or becomes disabled?

• The bank could lose confidence should an owner die, resulting in the calling in of loans and/or restricting on going credit required for the day to day operations of the business;
• If the bank did have outstanding loans with a business now facing continuing without the owner or key individual, the loan agreement could restrict dividends or distributions to the surviving shareholders or family members;
• Even if loans were not called, there would still be pressure put on the business to continue servicing debt while profits may be reducing;
• If the deceased or incapacitated key person possessed special skills and experience, or had a close relationship with the customers, a decline in revenue would most likely result;
• Suppliers might now demand payment up front if their confidence has been shaken;
• There may be considerable training and recruiting costs to replace the lost key employee.

What type of coverage is important?

Insuring against the death, disability and critical illness of a key person are all important.

Life Insurance Coverage

Determining the proper amount is often based on a multiple of earnings or an estimate of how much the business value would reduce with the loss of the key individual. As a rule of thumb, most insurance companies are comfortable life insuring a key person up to five times his or her salary.

A higher multiple could be available in special situations. The life insurance is owned and paid for by the company and should death occur, the proceeds are received by the company free of tax. One of the advantages of corporate owned life insurance is that any of the proceeds not required directly in the business can be disbursed tax free to the surviving shareholders or possibly family members. This would not apply to key person disability or critical illness insurance.

Disability Insurance and Critical Illness Coverage

When determining the amount of Disability and CI coverage an important question to consider is how long the disruption would last and the impact of losing that employee for possibly a long term disability. Key person disability protection or Critical Illness coverage is available that could be used in hiring a replacement, or to maintain company cash flow while the disabled employee recovers.

Having the proper amount of key person life, disability and critical illness insurance can often mean the difference between a company surviving the loss of an owner or essential employee and not. Call me if you feel this is something you would like to investigate in more detail.

Recover Your Long Term Care Costs

Will your family be affected by the costs of caring for an aging loved one?

Statistics Canada states that over 350,000 Canadians 65 or older and 30% of those older than 85 will reside in long term care facilities. With increasing poor health and decreased return on investments, the fear of facing financial instability in your declining years is real.

How will this impact your family?

Caring for an aging parent or spouse takes its toll emotionally and financially. Adult children with families and job pressures of their own are often torn between their obligations to their parents, children and careers. This often results in three generations feeling the impact of this care.

Is it important to you to have control over your level of care?

Consider this:

• The cost of providing for long term care is on the rise
• While many Canadians assume that full-time care in a long term care facility will be fully paid by government health programs; this simply is not the case. In fact, only a small part (if at all) of the costs of a residential care facility will be paid by government health care programs
• 28% of all Canadians over the age of 15 provide care to someone with long term health issues
• For the senior generation, the prospect of the failing health of a spouse puts both their retirement funds and their children’s or grandchildren’s inheritance at risk
• Capital needed to provide $10,000 month benefit (care for both parents) for 10 years is $ 1,000,000 (if capital is invested at 4% after-tax)

Advantages of the Long Term Care Back to Back Strategy

• Shifts the financial risk of care to the insurance company
• Allows for a comfortable risk free retirement
• Preserves estate value for future generations

When is the best time to put this structure in place?

• Remember, the older the insured, the higher the costs
• Do it early while you are still insurable!

Please call me if you think your family would benefit from this strategy.  Feel free to use the sharing icons below to forward this to someone who might find this of interest.

Occasional Marijuana Users

With the federal government heading towards the legalization of personal marijuana use some life insurance companies have announced that occasional marijuana smokers would now be considered as non-smokers on new applications for life insurance and in some cases critical illness insurance.

How significant is this change? Substantial!

As an example, for a male age 35, the standard smoker premium for $500,000 of 20 year renewable term is $1,070*. Now a recreational marijuana user can purchase that same coverage for 410 per year. *

Sun Life, BMO and Empire Life were the first three companies to make this change and many are extending the offer to Critical Illness coverage as well. Most insurance companies are expected to make similar announcements. For some companies, medicinal marijuana users are excluded from the new offering but may be considered on a case by case basis.

During the underwriting process the insurer will take into consideration the quantity and frequency of marijuana use. Generally, an individual who smokes up to two marijuana cigarettes per week and uses no other tobacco products (including e-cigarettes and nicotine in other form) will be treated as a non-smoker. Hashish usage may also receive similar treatment.

The insurance companies point to the fact that they have been monitoring the latest medical research into the effects of occasional marijuana use on health. BMO also points to statistics that show 18% of Canadian smoke marijuana occasionally for recreational purposes.

For those who have already been classed as a smoker due to marijuana use, the premium reduction will not be received automatically. It is necessary to request the change on the applicable application for change form. If there is no change in health and all the conditions are met the premiums will be reduced upon approval.

If you are affected by the new developments outlined here, contact us for more information. As always, please feel free to share this article with anyone you feel would find it helpful.