Universal Life Insurance

Thomas A. Rogers,
CIM, FCSI, CFP
Investment Advisor to
Portfolio Investors

Insurance is a Vital Option
from my
Financial Planning Service

An Investment to Defend your Registered Retirement Plan
against the Ultimate and Inevitable Tax on its Entire Value

Introduction
The context
for the investment

Dilemma
The Damocles sword
of The Tax Collector

Universal Life
Turning the table
on The Tax Takers

Tax Free
Compounding Capital !
Eh? What's the catch?

Free Choice
Investing Capital Portion
You are free to choose

The Cost
What are the costs?
How is return affected?

Show Me
Some comparisons with
taxable investment elsewhere.

Flexible Features
Additional Advantages
You will be pleased to know about.

More Insurance Investing
Other ways to use insurance
to your investment advantage.

Introduction

An Analysis of
The Comparative Advantage of
Insuring Retirement Plans against Federal and Provincial Estate Taxes
by
Thomas A. Rogers

- As an investor, you have a duty to safeguard your own well being and, you also have a duty to your beneficiaries to protect the assets you will be leaving to the benefit of others.

- One major threat to the preservation of your capital is the income tax and probate fees that can be levied against your estate. A particularly vulnerable area is your Registered Retirement Savings Plan or your Registered Retirement Income Fund.

- An effective way to protect these assets is through the purchase of Universal Life Insurance if it can be demonstrated that it is competitive to other investment alternatives of a conservative nature available to you.

- This analysis is designed to assess the comparative advantage, and in some cases the potential for disadvantage of the Life Insurance investment option.

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Dilemma

The Tax Dilemma
Challenging the Surviving Intact of your RRSP or RRIF

Under current tax legislation when a person dies, without a surviving spouse or a dependant child, the value of his or her Registered Retirement Savings Plan or Registered Retirement Income Fund as the case may be.....

is considered to be taxable income in computing income for the person's final tax return ......

In the event this is a substantial amount, which most often it is; most, if not all of it will be taxed at the highest rate possible. In Ontario this is presently 52.7%.........

If your registered plan was worth $100,000 when you died, your estate would receive only $47,300 less applicable probate fees....

What can you do about it ? Topic Menu

The Defence

Defend with Universal Life
Turning the Table on the Tax Takers

Universal Life is composed of two attractive investment components......

No.1 is the Life Insurance itself, and No.2 is the compounding investment in the Capital Account.....

The portion designated to Life Insurance is based on its face value, your age and your health.......

The amount free to compound in the Capital Account must be in relation to your insurance face value....

Why? Because the Capital Account is allowed to compound..Sheltered from Tax

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Tax Sheltered

Yes! Tax Sheltered Compounding
No catch but reasonable restriction

The portion of your investment allocated to your Capital Account is not subject to tax while in the policy.

It continues to compound sheltered from tax while the insurance remains in force.

All proceeds paid to your named preferred beneficiary is received tax free too. No probate fees either!

This preferred beneficiary receives the face value of the insurance tax free too. No probate fees either!

Legislation restricts the amount you can allocate to compound tax sheltered in your Capital Account.

The portion invested to compound sheltered from tax bears a specific relationship to the insurance value.

Generally if you're not in 'old age' the tax sheltered allocation may exceed the insurance portion.

How's it invested? Topic Menu

Free Choice

The Choice is Yours
Allocate or Rotate among Selections

You may select the investment medium for your tax sheltered Capital Account.

Your rate of return is determined by the performance of the your selected option such as the following:

Equity Options linked to TSE 300 or S&P 500 index growth.

A rolling 5 year interest rate fund or 3, 5, and 10 year Guaranteed Investment Options.

A combination of Income and Equity as managed by expert external investment advisors

Any mixture you decide upon periodically as most suitable based on your own judgement.

There are other investment options offered by other Insurance Companies. The above is representative.

What's the cost effect? Topic Menu

The Cost

The Policy Costs
What are they? What's their Effect?

Policy costs are to cover commission, administrative expenses and policy taxes.

These costs are generally amortized or smoothed out over the first decade.

Some companies grant annual bonuses to clients which can sometimes completely defray these charges .

While costs and the insurance portion are overcome by the tax sheltered Capital Account, the advantage over the alternative investment is secured by the insurance value.

As costs and insurance premium have been surpassed, tax sheltered compounding accelerates its lead.

Funds withdrawn from Capital Account are taxable. See flexible features for an alternative.

Examples Please Topic Menu

Click on the moving icons
in the examples below The Investment Advantage of Universal Life Insurance
compared to
a Taxable Investment of the same amount.

The Human Story Joint Policy Performance Single Policy Performance
Male Age	Female Age	Joint Age	Face Value	Insurance + Portion	Compound Portion	= Total Investment	Alternate Investment	Chosen Return
65	64	51	$100,000	$1,314	$2,387	$3,701	$3,701	8%
	59	na	$100,000	$1,636	$2,606	$4,242	$4,242	6.5%
72	72	60	$150,000	$3,810	$4,214	$8,024	$8,024	6.5%
44	43	30	$380,000	$1,380	$4,001	$5,381	$5,381	8%
66		na	$400,000	$15,024	$1,306	$16,330	$16,330	6.5%

flexible features ?

Examples shown are for illustration purposes only, rates are subject to change.

Topic Menu

Insured Investor receives: Policy Value + Tax Free Compounding Capital Value + after tax value of Retirement Plan
Uninsured Investor receives: After Tax Value of Compounding Investment + after tax remainder of Retirement Plan.

Dave & Shirley
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- Dave and Shirley are retired school teachers with combined RRSP assets of $100,000.

- The surviving spouse will receive the other's Retirement Plan tax free, upon the first death as a rollover.

- Accordingly they have opted for a joint "Last to Die" Universal Life policy.

- Actuarially this procedure enables their insurance premium to be that of an individual male of only 51 years.

- Their marginal tax rate has been averaged at 41.7% for this comparison.

- Illustrated is their insurance advantage vs an equal amount in a taxable 8% investment.

Charmaigne
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- Charmaigne would like as much as possible of her estate to go to her two struggling creative children.

- She has built up a reasonable RRSP after her pension contributions. She is now receiving her pension.

- She has other savings too which she has invested conservatively for income rather than capital gain.

- From a tax perspective the only truly vulnerable asset she has is her RRSP.

- Her marginal tax rate is 41.7%. She invests on a relatively low risk basis following a balanced approach.

- Illustrated is her insurance advantage vs an equal amount in a taxable 6.5% long term investment.

Andrew and Maria Martin
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- Andrew, a retired Executive, through diligence and prudence has accumulated considerable means.

- Ordinarily, purchase of life insurance for Estate preservation might not be economic at his age.

- However, a joint last to die policy with Maria (72 also) results in an insuring age of 60.

- The Martins have grandchildren they would like to have as beneficiaries rather than Revenue Canada.

- Channelling a portion of designated estate assets into Universal Life prevents further taxation of its earnings.

- This is feasible provided the Universal Life investment can compete on a total return basis.

- They have asked if this can be demonstrated assuming a long term balanced portfolio return of 6.5%

Ron and Sally
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- Ron is 44 and Sally is 42. Their joint 'last to die' policy is based on an insurable age of 30 !

- Ron's Mom is elderly and in 'tentative' health, his Dad died a few years ago.

- The savings and insurance proceeds coming to Ron and Sally will give them a large investment portfolio.

- Ron is secure in his career with a major Canadian bank and is currently at the mid management level.

- The couple have two pre-teen daughters, own their home and have paid off their mortgage.

- Their RRSP's total $200,000 and are estimated to peak at $1,000,000 several years into retirement.

- The face value of their equity linked Universal Life policy will be an additional major accessible asset.

- Grateful for his parent's prudence, Ron wishes to ensure a similar financial security for his children.

Insured Investor receives:- Policy Value + Tax Free Compounding Capital Value + after tax value of Retirement Plan
Uninsured Investor receives:- After Tax Value of Compounding Investment + after tax remainder of Retirement Plan.

Michael Peters
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- Michael has 2 RRSP's worth $600,000. A 'regular' plan and a 'locked in' plan.

- He wants tax protection so his niece will receive the full benefit of his plans when he dies.

- He is not able to benefit from a lower insurable age via a joint policy as he is single.

- Unsure about his future financial requirements, he is reluctant to make a large annual commitment.

- He has requested a comparative analysis with minimal contribution to tax free compounding.

- This example demonstrates the significance of the investment portion in concert with the insurance benefit.

- With the investment portion minimized the insurance benefit on its own eventually becomes uncompetitive.

- However, there is a solution for Michael owing to the flexibility of Universal Life. See flexible features ?.

Extra Benefits

Flexible Features
More
Useful aspects of Universal Life

The Tax Sheltered Capital Account may be accessed at anytime. Amounts withdrawn prior to death will be taxable as ordinary income to a minor degree in the early years, if at all, but do become more fully taxable in later years. However....

Rather than withdrawing funds, investors may borrow the cash value of the Capital Account. Interest paid or accrued may be tax deductible while income continuing to be earned within the policy compounds tax free. (turning the tax table again!)

So long as sufficient funds are available in the Capital Account, clients may elect to have premiums paid from that source. In fact....

In most cases, assuming the anticipated growth of the tax sheltered Capital Account and the level insurance over funding by maximized premiums in the early years, sufficient resources will accumulate after 4 to 6 years to fund the insurance premiums life long !

By continuing full premium payment for a few additional years, the compounding of the tax sheltered Capital Account will continue to grow even after covering the insurance premium on its own.

After a policy has been in force for a few years, cost offsetting special bonuses are paid into the compounding tax sheltered Capital Account. One company increases the selected/linked growth rate up to 1% beginning in the 6th year in addition to the special bonus just mentioned

As well as providing an immediate estate benefit from the insurance value, Universal Life provides a means for accumulating tax sheltered future wealth to augment (if necessary) the retirement funds available from Retirement Income Funds or other Pension Funds...

Too often investors are limited in their allowable Registered Retirement Savings Plan contributions due to the contributions made to their company pension plans. The Universal Life compounding tax sheltered Capital Account is a viable alternative or adjunct to the RRSP.

Here's another viable alternative: Besides Universal Life's long term insurance benefit, the provision of a compounding tax sheltered Capital Account enables many parents to provide a funding source similar to the more complex and 'contingent' Registered Educational Savings Plan.

A Final and important reminder, you may select from several attractive policy riders to protect this valuable asset in the event of accident or failing health.

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Other Ways of
Insuring to Your Investment Advantage

Depending on your circumstances, Insurance products can be used as part of a plan to help you preserve the value of your estate, enhance your portfolio, minimize taxes and ensure your beneficiaries are provided for. Here are some of the ways:

As in the RRSP defence, defend against tax on large unrealised capital gains taxable upon demise.

Insured Annuities dramatically improve yield over GIC's, secure higher rate for life and protect capital.

Universal Life provides means to transfer wealth tax free and reduce tax on investment income.

Segregated mutual funds offer guarantee against capital loss, creditor and probate protection.

Charitable Annuities offer unique tax advantages over other forms of charitable giving.

Guaranteed Interest Annuities pay proceeds directly to a named beneficiary thus by-passing probate.

Explanations with illustrations are available on each of the above. Please enquire.