Insurance

There is nothing so certain as death and taxes...or so the saying goes. This certainly is true in Canada where there is a “deemed disposition” when a taxpayer dies. What this means is that a taxpayer is deemed to dispose of all his or her assets at fair market value immediately preceding death.

 

Or so the saying goes. This certainly is true in Canada where there is a “deemed disposition” when a taxpayer dies. What this means is that a taxpayer is deemed to dispose of all his or her assets at fair market value immediately preceding death.

How does this affect your assets?

  • For certain assets (e.g. stock investments, company shares, revenue property, collectables), if the fair market value is greater than the adjusted cost base then capital gains will result.
  • Fifty percent of capital gains are included in the deceased taxpayer’s income.
  • Revenue property could also attract additional tax in the form of recaptured depreciation.

There are some exceptions

  • Assets which are left to a spouse will have the gain deferred until the spouse dies or disposes of the asset.
  • A principal residence is not subject to capital gains.
  • Shares that the deceased owned in a Qualifying Small Business Corporation may qualify for the Lifetime Capital Gains Exemption where the first $800,000 of capital gain is exempt from taxation.

Registered Funds receive different tax treatment

RRSP, RRIF, TFSA and Pension Funds

  • A spouse who is left registered funds by her husband or his wife may roll those funds into his or her Registered Savings Plan or Retirement Income Fund and avoid paying income tax.
  • Registered funds left to anyone other than a spouse or qualifying disabled child are fully taxable as income. Some rules also apply to minor dependent children which involve spreading the tax by purchase of a qualifying annuity for 18 years less the age of the child at the time of acquiring the annuity.
  • Amounts paid to a beneficiary of a Tax Free Savings Account are not subject to income tax.

Other fees and costs

  • Funeral and other last expenses;
  • Probate fees;
  • Administrative costs and possibly legal fees.

Reduce or avoid the impact

Estate planning and life insurance solutions

Freezing the estate which has the effect of fixing the amount of tax payable on assets upon death and passing future growth to the next generation;

  • In conjunction with the above, the use of a family trust with the objective of multiplying the number of Lifetime Capital Gains Exemptions on shares in a Qualifying Small Business Corporation distributed to other family members.
  • The use of joint accounts. This strategy should be used with careful consideration and professional guidance.
  • Effective use of life insurance, both personally and corporately owned, which can provide sufficient liquidity at death to pay taxes with insurance proceeds rather than “hard dollars”. This can be especially true by using Joint Second-to-Die life insurance which will provide proceeds to pay the deferred tax upon the death of the surviving spouse.

While we often complain about the cost of living, the cost of dying can also be extremely high and could create significant problems for those we leave behind. With sound advice and planning the financial impact on your family and business partners can be softened and, sometimes, even eliminated.

Continue Reading

Critical Illness insurance was invented by Dr. Marius Barnard. Marius assisted his brother Dr. Christiaan Barnard in performing the first successful heart transplant in 1967 in South Africa. Through his years of dealing with cardiac patients, Marius observed that those patients that were better able to deal with the financial stress of their illness recovered more often and at much faster rate than those for whom money was an issue. He came to the conclusion that he, as a physician, could heal people, but only insurance companies could provide the necessary funds to create the environment that best promoted healing.

Why a Doctor Invented Critical Illness Insurance

Critical Illness insurance was invented by Dr. Marius Barnard.   Marius assisted his brother Dr. Christiaan Barnard in performing the first successful heart transplant in 1967 in South Africa. Through his years of dealing with cardiac patients, Marius observed that those patients that were better able to deal with the financial stress of their illness recovered more often and at much faster rate than those for whom money was an issue.  He came to the conclusion that he, as a physician, could heal people, but only insurance companies could provide the necessary funds to create the environment that best promoted healing.  As a result, he worked with South African insurance companies to issue the first critical illness policy in 1983.

Medical practitioners today will confirm what Dr. Barnard observed – the lower your stress levels the better the chances for your recovery.  When one is ill with a serious illness, having one less thing to deal with, such as financial worry, can only be beneficial.

Your Life Could Change in a Minute!

Case Study A – Lawyer, Male 55

Tom was a successful lawyer with a thriving litigation practice.  He had recently started his own firm and was recruiting associates to build the practice.  He was a single father assisting his two adult children in their post-secondary education.  Tom had always enjoyed good health, ate well, exercised regularly and was a competitive highly ranked (senior class) tennis player.

In 2006, at age 55, he was diagnosed with prostate cancer.  In addition to the emotional angst and anger at receiving this diagnosis he also was concerned about the financial impact this illness could have on both his practice and his support of his children. Fortunately, five years earlier at the urging of his financial advisor he had purchased a critical illness policy.

Within weeks of his diagnosis Tom received a tax free benefit cheque for $250,000.  He immediately called his advisor to tell him how elated he was that the advisor had overcome his initial objectives to purchasing the policy 5 years earlier.  He went on to say that with having the financial stress alleviated he was certain he would be able to tackle the treatment and concentrate on recovery in a positive manner.

Today, Tom is cancer free, his practice is thriving, and his children are successfully working in professional practices.

Case Study B – Retired Business Owner, Female 52

Christina at age 52 was enjoying a good life that came partially from the sale of her business a few years before.   Her investments were thriving and everything looked rosy.  Then 2008 came along.  As if the stock market crash was not enough, in December of 2008, Christina suffered a stroke.  Fortunately, it was not a severe stroke.  At first the doctors thought that it was actually a TIA as many of her symptons were minor. The next morning the MRI results confirmed that it was indeed a stroke and it had caused some minor brain damage.

Christina made a remarkable recovery and within a few short months was almost back to where she was before the stroke.  If you didn’t know Christina you wouldn’t have any idea that she had even had one.

As a successful business owner and mother, Christina had always been a big believer in the advantages of owning critical illness insurance.  At first, she had some concern that because her stroke was not that serious and she had recovered so quickly, that her claim might not qualify for payment.  These fears turned out to be unfounded as days after the stroke she received claim cheques for $400,000.

During her recovery period, Christina was fearful of having another stroke which caused her some stress however, she is certain that not having any financial worries during this time aided in her almost total recovery.

These two case studies, although quite different in circumstances illustrate some key points about Critical Illness insurance:

  • A life threatening illness or condition can strike anyone regardless of age or health;
  • Financial security reduces stress which can assist in the recovery process;
  • You do not have to be disabled to be eligible for a Critical Illness benefit;
  • Although you need to be diagnosed with a life threatening illness, you do not have to be at “death’s door” in order to have your claim paid;
  • The benefits are paid tax free to the insured

Call me to see if critical illness is right for you or use the social sharing buttons below to share this article with a friend or family member you think might benefit from this information.

©iStockphoto.com/ Dean Mitchell

Continue Reading

Canada Pension Plan – Should You Take it Early?

Canada Pension Plan – Should You Take it Early?

The new rules governing CPP were introduced in 2012 and they take full effect in 2016. The earliest you can take your CPP Pension is age 60, the latest is 70. The standard question regarding CPP remains the same – should I take it early or wait?

While you can elect to start receiving CPP at age 60, the discount rate under the new rules has increased. Starting in 2016, your CPP income will be reduced by 0.6% each month you receive your benefit prior to age 65. In other words, electing to take your CPP at age 60 will provide an income of 36% less than if you waited until age 65.

CPP benefits may also be delayed until age 70 so conversely, as of 2016, delaying your CPP benefits after age 65 will result in an increased income of 0.7% for each month of deferral. At age 70, the retiree would have additional monthly income of 42% over that what he or she would have had at 65 and approximately 120% more than taking the benefit at age 60. The question now becomes, “how long do you think you will live?”

Assuming that an individual has $10,000 of CPP pension at age 65, and ignoring inflation (CPP income benefits are indexed according to the Consumer Price Index), the following table compares the total base income with that if benefits are taken early or late:

 

CPP Benefit Commencement

Total benefit received Age 60 Age 65 Age 70

One year $ 6,400 $10,000 $ 14,200

Five years $32,000 $ 50,000 $ 71,000

Ten Years $64,000 $100,000 $142,000

The question of life expectancy can be a factor in determining whether or not to take your CPP early. For example, according to the above table if you take your pension at age 60, by the time you reach age 65; you would already have received $32,000 in benefits. With $10,000 in pension income commencing at age 65 the crossover point would be age 73 (the point at which the total income commencing at age 60 equals the total income commencing at age 65). If you were to die prior to age 73, you would have been better off taking the earlier option.

If your choice is to delay taking the pension until age 70 instead of 65, the crossover would not be reached until age 85.

Some individuals may wish to elect to take the pension early and invest it hoping that the income from age 60 combined with the investment growth will exceed the total income that would be received by starting at 65.

Remember, if you elect to take your pension before 65 and you are still working, you must continue to contribute to CPP. After age 65, continuing contributions while working are voluntary. On the plus side, these extra contributions will increase your pension under the Post-Retirement Benefit (PRB).

Reasons to take your CPP before age 65

  • You need the money – number crunching aside, if your circumstances are such that you need the income then you probably should exercise your option to take it early;
  • You are in poor health – if your health is such that your life expectancy may be shortened, consider taking the pension at 60;
  • If you are confident of investing profitably – if you are reasonably certain that you can invest profitably enough to offset the higher income obtained from delaying your start date then taking it early may make sense. If you are still continuing to work, you could use the CPP pension as a contribution to your RSP or your TFSA.

Reasons to delay taking your CPP to age 70

  • You don’t need the money – If you have substantial taxable income in retirement you may want to defer the CPP until the last possible date especially if you don’t require the income to live or support your lifestyle;
  • If you are confident of living to a ripe old age – if you have been blessed with great genes and your health is good you may wish to consider delaying your CPP until age 70. Using the earlier example and ignoring indexing, if your base CPP was $10,000 at 65 then the pension, if delayed until age 70, would be $14,200. If you took the higher income at 70, you would reach the crossover point over the age 65 benefit at age 84 and after that would be farther ahead.

This information should help you make a more informed choice about when to commence your CPP benefits. Even if retirement is years away it is never too early to start planning for this final chapter in your life. Call me if would like to discuss your retirement planning.

As always please feel free to pass on this article to friends, family and colleagues using the share buttons below.

Continue Reading

Investing in today’s environment is not for the faint of heart. However, fortunately for Canadians, Segregated Fund products offered by many life insurance companies provide a safety net for nervous investor

Investing in today’s environment is not for the faint of heart.  However, fortunately for Canadians, Segregated Fund products offered by many life insurance companies provide a safety net for nervous investors.

Fund products present some interesting opportunities for people looking to get more security in their investment portfolios without sacrificing their potential for growth.

100% Maturity and Death Benefit Guarantee

At a time when most companies are reducing their guarantees to 75%, a few companies still offer 100% guarantees for both maturity value and death benefit.   

At the maturity date, the value of the investment will be the greater of the market value or 100% of the sum of deposits less any withdrawals taken.  In other words, at maturity (minimum 15 years), your worst-case scenario is receiving full value for all of your deposits.

At death, the 100% guarantee will ensure that your beneficiary receives the greater of the market value of your Segregated Fund or the sum of all your deposits less any withdrawals taken.

Reset Feature for Maturity and Death Benefit Guarantee

Resets can have significant value in a volatile market.  With this feature you have the ability to:

Reset the maturity guarantee value (usually more than once per year).  Accordingly, you can lock in your investment gains at maturity.  With each reset you also have the option of designating a new maturity date.

Automatically reset the death benefit guarantee, locking in your investment gains at death.  (The frequency of the reset varies by company). How Significant are Reset Options?  You Decide.

John invested $500,000 in a segregated fund and selected a technology fund as the investment choice.  The technology boom saw that investment grow to $850,000 and John wisely exercised his reset option.  Shortly afterward, the dot.com bubble burst and the investment value fell from $850,000 to $300,000 with no significant recovery.  This same bubble burst devastated many investors. Meanwhile, John was able to recover not only his original investment but also the full $850,000 at his maturity date.

Designation of Beneficiaries Enables Protection

One fact about Segregated Funds that is often overlooked is that as a product of a life insurance company, you can name a beneficiary for the proceeds at your death.  This creates the potential that your segregated fund investment may be free from the claims of creditors or potential litigants. 

Investing Using a Balanced Portfolio Close to Retirement

Volatile investment markets create a significant amount of stress and emotional turmoil, particularly amongst older investors.  The closer you get to retirement, the higher the stakes. Therefore, many investors have forsaken the potential of higher returns for a significant portion of their portfolio.  While this does reduce risk, it probably will result in lower returns.

By using Segregated Funds and taking advantage of the 100% Maturity Guarantee and reset options, one could achieve balance in their portfolio without necessarily locking in low yields. 

Estate Conservation for Mature Investors

The 100% death benefit guarantee means that you can remain invested in an equity portfolio while not risking the estate value of your investment portfolio. Regardless of what happens in the market, your investment fund is totally guaranteed at your death.  This guarantee is applicable to contracts purchased before age 80.  For contracts purchased after age 80 the guarantee is usually 75%.

By naming a beneficiary, upon your death, all of your segregated fund investments will flow to your beneficiary without any probate fees, administrative costs or risk of any Wills Variation Act litigation.

Capital Protection

Market downturn is not the only risk to which capital can be exposed.  For many professionals and business owners there are situations that may involve litigation either by creditors or other parties who feel they have a claim against your personal and business assets.  By naming a preferred beneficiary, this risk is potentially eliminated.

Complicated Estate Protection

For domestic situations involving previous marriages and the desire to protect capital for present or previous family members the beneficiary designation could be made irrevocable.  The irrevocable beneficiary designation confers rights and protection on the beneficiary, which would not be as enjoyable through the “primary beneficiary” title.

Another advantage of Segregated Funds is that the use of named beneficiaries allow for a confidential transfer of wealth at death. In uncertain times having the comfort of a maturity and death benefit guarantee provides investors with a significant safety net.

Please give me a call me to see if Segregated Funds will compliment your current investment strategy or use the social sharing buttons below to share this article with a friend or family member you think might benefit from this information.

Continue Reading

Can Probate Be Avoided?

Can Probate be Avoided?

Executors often find that the probate process can be both time consuming and expensive. Planning strategies exist that may eliminate or reduce the requirement of having assets probated.

What is probate?

Probate is a legal procedure that validates a deceased’s will and confirms the executor’s authority to carry out the testator’s wishes. This provides assurance to third parties such as financial institutions and land registry offices that the executor has the power to deal with assets according to the will.

Are all wills subject to probate?

There is no requirement that every will must be probated. Proper planning can eliminate the need for probate and also, the type of asset involved will generally dictate whether or not probate is required.

What is the cost of probate?

  • This will depend on the province. At the low end, Alberta has a flat maximum fee of $400, while at the upper end Ontario has a levy of $15 per thousand on estates valued in excess of $50,000. British Columbia has fees of $14 per thousand (estates over $50,000) plus a filing fee;
  • Property which is owned in another province may attract fees based on that province’s fee schedule.

What are advantages to probate?

  • When Letters of Probate are obtained, financial institutions, transfer agents, land registry offices and other third parties can safely transfer the assets to the intended recipients;
  • The time frame for any court challenges to the will or estate is usually measured from when the probate was granted. This limits the period of when legal action might be taken.

What are the disadvantages to probate?

  • The process can be time consuming and complex;
  • Depending on the jurisdiction the cost of probate along with the legal fees can be expensive;
  • The process is open to public scrutiny so information about the estate distribution is made public.

7 Tips to avoid probate

There are a number of strategies to, if not avoid probate entirely, reduce the value of the assets that would otherwise be exposed to probate.

  • Make sure you have a will – Probate fees will be applied automatically if you die intestate (without a will);
  • Gifting prior to death – this can reduce the value of the estate, so it has to be done with care. It is important that all control over the gift must be relinquished. Be careful as there may be income tax considerations, (capital gains etc.), as well as possible property transfer taxes;
  • Use named beneficiaries whenever possible – moving assets to vehicles such as life insurance, annuities, and segregated funds is a great way to avoid probate. The bonus here is that it also allows the proceeds to be paid quickly and directly to the beneficiary. This also applies to registered investments such as RRSP’s, RRIF’s, TFSA’s and pensions;

To avoid the unintended future inclusion of these assets in your estate if the named beneficiary dies, you should consider naming a successor (contingent) beneficiary;

Named beneficiaries also provide a confidential transfer. The exception to this is in Saskatchewan where probate rules dictate that beneficiaries to insurance products be listed even though the proceeds are not subject to probate;

  • Use of Joint Tenancy – Holding assets in joint tenancy with a spouse, child or other family member will avoid probate as the asset passes automatically upon death to the other individual. Using joint tenancy to avoid probate fees should involve careful consideration as there will be a loss of control once it is jointly held and the asset will be exposed to the joint tenant’s creditors;
  • Use of Trusts – Transferring assets to a trust will remove the asset from the estate. The use of an alter-ego or joint spousal trust can be very effective for this purpose. Be careful of appreciable assets that may attract a taxable disposition upon transfer;
  • Transferring assets to a corporation – Except for outstanding mortgages on real estate which are deductible, generally probate fees are charged against the gross value of an estate asset. If an estate asset was purchased with borrowed money, it may be beneficial to transfer that asset to a limited company. This will reduce the value of the estate and the company share value will be the asset less the debt used to acquire it;
  • Multiple Wills – Not all assets are subject to probate. It is becoming popular to have two wills – one for those assets that are probatable and one for those that are not. For example, someone who owns private company shares may wish to use a second will to transfer those assets as private company shares are not subject to probate. If assets are held in another province with lower probate fees there may be an advantage to have a separate will dealing with those assets;

The strategy of multiple wills is not available in all provinces and the use of multiple wills may create problems with the new Graduated Rate Estate tax with respect to testamentary trusts.

Please note that legislation governing probate and the fees that are levied vary by province so not all the ideas presented here will apply to every province. This article does not apply to the province of Quebec. Careful planning is advisable with all estate planning considerations and it is important to seek professional advice when considering these strategies.

We are here to answer any questions you may have on this complicated issue. As always, please feel free to share this article by using the share buttons below.

Continue Reading

Shared Ownership Critical Illness

Shared Ownership refers to a concept where more than one party owns an interest in an insurance policy. The most common of these arrangements is where the corporation is the owner and beneficiary of the death benefit and the shareholder or employee owns the cash value of the policy.

Recently there has been growing interest in applying this strategy to a Critical Illness policy. Although the CI policy does not have cash value, there is usually an option to have a Return of premium (ROP) in the following situations:

  • Upon death – If the insured dies without having submitted a claim for critical illness the premiums paid are refunded;
  • Upon Termination – If the policy reaches its termination age without a claim being made, the premiums paid are refunded;
  • Upon Surrender – If the policy is surrendered without a claim, premiums paid are refunded.

Who should consider this arrangement?

Anyone who owns shares in a corporation and wishes to protect that corporation against loss if one of the shareholders or other key employee is diagnosed with a critical illness.

How does it work?

A Shared Ownership Agreement is drafted documenting:

  • That the corporation will own, pay for and be the beneficiary of the CI coverage on the key shareholder or employee;
  • That the shareholder will own and pay for the Return of Premium option upon the surrender of the policy.

Who benefits?

Under this arrangement the company is protected against loss but should no critical illness occur the shareholder/employee will receive a financial benefit as the premiums paid will be refunded.

Is this really an important planning strategy?

Case Study

Barry applies for $500,000 of lifetime critical illness coverage with a return of premium benefit upon surrender. His company lawyer drafts a Shared Ownership Agreement, which stipulates that the corporation owns and is beneficiary of the $500,000 CI benefit while Barry owns and pays for the ROP benefit.

Premium Structure

  • The total annual premium for the policy is $ 9,131.
  • The Corporation pays the cost of insurance $7,003
  • Barry personally pays the ROP benefit of $2,128

How does Barry Benefit?

Twenty years later, when Barry turns 60, he determines that the CI coverage is no longer required. His company cancels the policy and Barry exercises his return of premium option. Barry receives a cheque from the insurance company for $182,628 Tax Free.

This represents an after tax rate of return on Barry’s annual ROP premium ($2,128) of 12.5% compound interest.

Consider this*,

  • One in three Canadians will develop life threatening cancer;
  • Half of all heart attack victims are under the age of 65;
  • Each year 50,000 Canadians suffer a stroke with 75% of all victims being left with a disability.

The CI Shared Ownership Strategy can result in significant financial benefits for the individual shareholder while the Corporation enjoys the protection of its key employees against loss from a critical illness.

Call me if you would like to explore whether this strategy will benefit you and your company. Or feel free to use the sharing icons below to forward this to someone who might find this of interest.

For Barry’s case study, Industrial Alliance’s Transition Critical Illness product to age 100 with Flexible Return of Premium was illustrated. Of course, results will depend on age and amount plus product features will be vary by company.

*Source: RBC Insurance

Continue Reading

Lifetime capital gains exemption for 2016

Continue Reading

Does your Business Qualify for the Small Business Gains Exemption?

As a business owner, you may be aware that when you dispose of shares in your business you could receive an exemption on all or a portion of the capital gains that ordinarily would be taxable. This is due to the Lifetime Capital Gains Exemption which says that, for 2016, up to $824,1761 of capital gains is exempt from taxation.

The Lifetime Capital Gains Exemption (LCGE) is available to individuals who are disposing of or deemed to have disposed of:

  1. Qualified Small Business Corporation (QSBC) shares;
  2. Qualified farm property; or
  3. Qualified fishing property2.

For the shareholder of a small business corporation this valuable benefit could reduce or eliminate the tax bill that otherwise would be payable upon the sale or succession of the company. The important thing to understand, however, is that the exemption is not automatic. There are some conditions that must be met. In order for the business to be considered a QSBC and therefore qualify for the Small Business Gains Exemption (SBGE) there are two main rules:

Rule # 1 – Ownership of Shares

During the 24 months immediately preceding the disposition the shares must not have been owned by anyone other than the individual tax payer or a related person;

Rule # 2 – Use of Corporate Assets

Also, during this 24 month period;

    1. 50% or more of the fair market value of the corporate assets must have been used in an active business conducted primarily in Canada;
    2. At the time of the disposition (sale or upon death of shareholder), all or substantially all (defined as 90% by the CRA) of the fair market value of the assets must have been used to produce active business income. Some examples of corporate assets which could put a corporation offside with respect to its being a QSBC are cash, bonds, non-business related real estate and other investments.

In situations where corporations do not qualify for the SBGE due to failing to meet the 90% rule, remedies are sometimes available which may provide a solution. This will usually involve a “purification” of the corporation to distribute or transfer the non-business related assets. Some examples as to how this could be accomplished are:

  • Paying a taxable dividend to shareholders;
  • Paying down any bank debt or accounts payable;
  • Pre-paying corporate income tax installments;
  • Purchasing new assets which will be used in the business to produce active business income.

There is another area in which careful attention is warranted. In order for a business to be a Qualified Small Business corporation it must first be a Canadian controlled private corporation (CCPC). Should there be a sale of shares to either a non-resident or a public corporation, there may be a denial of the capital gains exemption as the corporation may no longer be a CCPC. This could also be the case where a non-resident executor is named in the shareholder’s will and the shareholder dies.

The rules governing whether or not an individual who owns shares in a small business corporation receives a capital gains exemption are complex and often confusing. It is important to obtain professional advice when undertaking the appropriate planning.

If I can be of assistance to you, please do not hesitate to contact me. As always feel free to share this article by using the share buttons below.

Notes:

  1. The 2013 federal budget increased the LCGE to $800,000 for 2014 with indexing commencing in 2015.  The indexed amount for 2016 is $824,176.
  2. The 2015 federal budget increased the maximum LCGE for Qualified farm or fishing property to the greater of $1 million and the indexed LCGE realized on the disposition of qualified small business corporation shares.  When indexing increases the SBGE to $1 million then both SBC shares and farm and fishing property will enjoy the same LCGE.
Continue Reading

Whole Life Insurance: A Whole New Investment Class

 A Whole New Investment Class

The recent developments in investment markets and the volatile performance that has resulted have brought about a new appeal to an old workhorse.  For investors looking for a diversification in their investment portfolio and a more tax efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.

Why is Whole Life Insurance a good investment?

  • The tax advantaged steady growth, combined with significant estate benefits are the primary reasons why Participating Whole Life is now being thought of as a new investment class.
  • Unlike other accumulation policies such as most Universal Life policies, mutual funds and other equity investments, the cash and dividend value of a Whole Life policy cannot decrease as long as premium payments are made.

 Who should consider Whole Life Insurance as an investment?

  • Anyone looking for stable returns on their investment portfolio
  • For those that have corporations and are accumulating surplus, the use of Whole Life in the corporation not only provides the same stable, tax deferred returns but also provides opportunities for Capital Dividend Account planning.

What is Whole Life Insurance?

  • It is permanent life insurance protection – meaning it won’t expire before you do!
  • It has level guaranteed premiums for the life of the policy. (Shorter premium paying periods are often available)
  • It has tax advantaged cash value growth.
  • It can pay annual dividends (participating whole life).
  • Dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax advantaged growth is “paid-up additions”.
  • The assets of the participating pool are professionally managed and largely in fixed income investments. Management fees are extremely low (as low as 0.072% management fee) and the funds have very little volatility.
  • This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred. At death it is paid to the beneficiary tax-free. 

Can I access the cash value of the policy?

  • During the lifetime of the insured, the cash values can be accessed by way of partial or total surrender, or policy loan.
  • Income tax may be payable on withdrawals. However, one alternative to avoid paying income tax is to use the policy as collateral and borrow from a third party lender. And if structured properly, the interest on the loan may be tax deductible.

Favourably compares to a long term, high yield bond

  • Today most portfolio managers recommend that a prudent investor have a diversified portfolio with a significant portion in fixed income investments, such as bonds, term deposits, etc.
  • Many investment managers suggest one third to 40% of an investment portfolio be in these types of investments for balanced growth.

Including participating whole life in your portfolio can produce some significant results, and reduce overall volatility.

Whether investing as an individual or via a corporation, the significant results that can be achieved by using Participating Whole Life are worth investigating.

Please call me if you think you would benefit from this strategy or use the social sharing buttons below to share this article with a friend or family member you think might find this information of value.

Continue Reading

Pay Attention to Your Beneficiary Designation

It’s more important than you think

Naming a beneficiary is a valuable feature of life insurance and segregated funds policies so it is important to carefully choose your beneficiaries.

Estate – the default choice

Many people choose to name their “estate” as their beneficiary.  Although this is an easy short-term solution, it is important to review the risks of doing this.  If you are stuck for a significant “other” beneficiary, don’t forget to change it to a more appropriate option later.  Why?

  • The proceeds will be subjected to probate fees and the benefits received will be co-mingled with all the other estate assets which may be exposed to various third parties.

What’s in a name?

Simply naming an individual or trust as beneficiary will keep the proceeds out of the insured’s estate and also protect the death benefit from the claims of creditors or litigants.

VIP Beneficiary

A “preferred beneficiary” is a spouse, parent, child or grandchild and receives VIP treatment in the form of protection.  All the proceeds of the life insurance product (including Segregated Funds) are protected against claims of the creditors or litigants of the life insured not only upon his or her death, but any cash values in that policy are also protected during the lifetime of the insured.

  • A minor “preferred beneficiary” will require a trustee for their portion until they reach the age of majority.
  • Note that the preferred beneficiary status does not apply to siblings.

Trust your trustee

Think carefully about to whom you assign the task of trustee.  It can be a difficult role to fill, often challenged by trying relationships. Be sure to discuss the role with your intended trustee and make sure they are comfortable with it and understand the responsibilities of the role.

Contingency Plan

Often parents of minor children are concerned about would happen should they both tragically pass away at the same time.  For this reason, the children are often named as “contingent beneficiaries”.  If the children are minors, the trustee named to act on their behalf, will receive the proceeds directly upon the death of their parents avoiding any estate considerations.

As life changes, so do beneficiaries

If you have an older life insurance policy it is probably a good idea to review the named beneficiary as your circumstances may have changed.

It may be time for a change if……

  • You have divorced – If you have a divorce agreement that required you to maintain your spouse as the beneficiary, have the conditions of that requirement now expired (e.g. children are now of age) and is no longer required?
  • If you have remarried – is your ex-spouse still named as the beneficiary?
  • If a policy was assigned to the bank or other lending institution – have the assignment removed if the loan is paid off.
  • If you have new dependents – children, grandchildren or even dependent parents.
  • If your children are now grown up – and have families of their own, does this change how you want your life insurance proceeds to be paid?
  • If your children are married, their spouses may have access to these proceeds too. Is their relationship solid, or is their a risk of half of your life insurance proceeds being paid out as part of a divorce settlement? Perhaps you should consider naming your grandchildren as beneficiaries instead?

The need for life insurance no longer exists

Often, older individuals find they have no one to whom they wish to leave their insurance proceeds.  In this situation, naming a registered charity will provide a charitable tax deduction in the full amount of the proceeds at death.

Let’s review your beneficiary designations and make sure your life insurance proceeds end up where you want them to be.  As always, feel free to use the sharing icons below to forward this article to someone who might find it of interest.

Continue Reading