LEGACY BUILDER. Marketing Reference Guide FOR ADVISOR USE ONLY

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1 LEGACY BUILDER Marketing Reference Guide FOR ADVISOR USE ONLY

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3 CONTENTS Introduction Marketing Strategy and Implementation Tactics Target Market....7 Product Support Taxation Tips and Traps Marketing Support Materials

4 Introduction Many financial plans have a capital base or surplus cash flow, which is not needed, but rather, is intended to be passed on as a legacy to family or a favourite cause. The Legacy Builder strategy, whether structured as a Personal Legacy Builder or a Corporate Legacy Builder allows individuals to optimize the use of any excess capital or cash flow not required for the current generation to provide a much larger benefit for heirs and favourite causes. The strategy utilizes the strengths of permanent life insurance, including the immediate creation of a large, tax-free, estate benefit. If the policy chosen has a cash value component, then the strategy may also utilize the tax-sheltered accumulation of cash not required to fund the cost of insurance and administration charges within the guidelines of an exempt policy as defined under the Income Tax Act of Canada and associated regulations. The illustration system can support the Legacy Builder strategy utilizing any of Empire Life s life insurance products. As this strategy relies on a permanent solution, please note that all of Empire Life s life insurance products provide coverage to age 100, at which time they become paid-up. This is a rather unique product design structure and demonstrates the ultimate flexibility available by selecting a product solution from Empire Life. Links have been built from the illustration system to AddCalc.net. Additionally, the account management teams and Tax & Estate Planning Team members have a Financial and Estate Planning Strategy Suite that has special software support for this strategy. They are prepared to work with Advisors on cases, producing the various scenarios requested and ensuring that the process between submission and commission is as smooth and efficient as possible. Special access may be granted for direct use of this software. Speak with your Account Executive for more information. 4

5 Marketing Strategy and Implementation Tactics The Personal Legacy Builder is a strategy designed to optimize the value of that portion of the estate, which people do not intend to spend. It is set up to provide a guaranteed, basic tax-free investment earmarked for future generations or favourite causes. How does it work? Conventional investments are taxed each year and/or create a large tax bill upon the death of the owner. Income earned can disqualify elders in particular from many government tax credits and benefits. These assets are also difficult to pass on to heirs without probate and associated valuation and transfer costs. The Personal Legacy Builder uses excess capital or income to purchase a permanent life insurance policy. It creates an immediate and larger after-tax legacy compared to other investments. Funding options Deposits can be made on a monthly or annual basis, either for a set period of time or for the life of the owner. Optional lump sum deposits may be accommodated as well. Actual deposits and results vary with the age, sex, health and tax bracket of the individual. Each individual s legacy plan has unique objectives and equally unique cash flow considerations. This program has been set up to handle a variety of funding options. The Legacy Builder Strategy is supported by both the Financial & Estate Planning Strategy Suite and by AddCalc.net. In AddCalc.net, this strategy may variously be referred to as: Annuity Estate Maximizer For the older client with surplus pension income this concept provides a tax effective program to maximize bequests. The best policy is T100 + side fund or universal life with level mortality charges Charitable Insurance For those with surplus income and a desire to make a significant gift to a charity on their death while receiving tax credits on the annual contributions to a tax sheltered life policy Income Shelter To finance a future will bequest from current savings, this concept will tax shelter earnings and provide superior inheritance values (use maximum deposits for at least 10 years) RRIF Estate Maximizer For those with surplus retirement income and a wish to transfer the value of some capital in registered investments tax-free to beneficiaries on death. Under the Financial and Estate Planning Strategies Suite, the strategy is covered under Personal Legacy Builder. 5

6 Personal Legacy Builder The Legacy Builder Strategy creates a larger net estate value than traditional outside investments. This may be augmented by any cash accumulation within the product solution, which during the lifetime of the owner grows on a tax-sheltered basis based on current legislation. It can later become part of the tax-free estate benefit. Properly structured, the legacy builder benefit may also escape probate and associated estate settlement expenses. Growth in an outside investment is not tax-sheltered; it attracts income tax each year. At death, benefits typically must pass through probate and may be subject to administration, valuation, and professional fees. Why set up a Personal Legacy? For qualified individuals, the personal legacy builder offers: a large, immediate estate value an increasing value driven by tax-sheltered growth of extra deposits based on current legislation a tax-free value at death reduced time and costs for estate settlement if a named beneficiary(s) is chosen possible creditor protection for individual and beneficiary(s). The illustration and figures can be driven by specifying an initial estate (or death) benefit, a deposit amount or funding stream. All of Empire Life s products may be used to help ascertain the comparative performance of specific cost of insurance structures and product solutions and provide an optimal product solution compared to conventional methods of building a legacy. The software support is designed to provide Advisors with broad flexibility and provide clients with the option of funding a specific, target legacy builder, optimizing the ultimate legacy value and/or optimizing the tax-sheltering capabilities of certain product alternatives. The account management teams can assist with customized software support to illustrate the Legacy Builder Strategy. 6

7 Tax-effective way to invest savings not needed for retirement income; optimize estate value for heirs; insurance increases estate immediately; additional investments permitted under the plan grow on a tax-deferred basis and paid out tax-free at death. Target Market The Legacy Builder Strategy is designed to position the value of permanent life insurance as an effective, estate planning tool. The strategy illustrates how permanent life insurance offers an opportunity for clients to increase the net worth of their estate significantly and do so with guarantees and a worry-free approach not available with other alternatives. Key concepts include the tax-free estate benefit, tax-sheltered accumulation within specially designed product options, funding flexibility, and simple, hassle-free administration. An important consideration of this strategy is that beyond the attractive financial advantages it offers to clients, it positions benefits in terms that clients can relate to in a positive, simple manner. Target clients may not be interested in leaving a large estate to others, but certainly are attracted to the notion of leaving a mark, being remembered, making a difference, not being forgotten feelings that resonate well with the term leaving and building a legacy. This strategy is designed primarily for people: interested in significantly enhancing the net worth of their estate to provide a meaningful legacy for future generations or favourite causes age 50 plus with above average income in the upper tax brackets with sufficient disposable income to commit to substantial deposits or reallocation of existing capital to complete the program with adequate assets and cash flow to assure an ongoing, comfortable lifestyle for themselves 7

8 Product Support The Personal Legacy Builder strategy can be linked and supported by most of Empire Life s insurance products. All of our current life products provide coverage to age 100 at which time they become paid-up, remaining in force until death, provided no cash has been removed, nor changes made by the policy owner. That said, Advisors and clients should consider various factors, which need to be factored into the selection of a specific product. The funding schedule, the amount of funding required to maintain the program, the degree of involvement that the client wishes to have in ongoing investment decisions for excess deposits, the desire for a maintenance-free solution, the source of the cash flow or assets to be used, any desire for tax-sheltered growth, the desire for a growing legacy vs. a set amount and the amount and degree of guarantees preferred will all play a role in determining the optimal product solution. Taxation Current legislation permits a number of things that make both the strategy and the use of insurancebased product solutions attractive and possible. Estate, survivor or death benefits are currently treated as tax-free payouts provided that the funding uses tax-paid monies or assets and that the funding comes from personal vs. corporate sources. The Income Tax Act of Canada permits the cash value of an exempt life insurance policy to accumulate on a tax-deferred basis. (Section 148, Section 12.2) An exempt test policy is defined in Income Tax Regulations 306 and 307. Exempt testing is performed on every policy anniversary. CRA has confirmed that all elements of a policy that are paid out as a death benefit should be included in the calculation. (Interpretation Letter # , Nov. 2/01). Most insurers, including Empire Life, take steps to ensure that the exempt status is preserved, by limiting the amount of deposits that can go into the exempt account, moving excess deposits or growth into a separate overflow account which is subject to annual, accrual taxation, moving overflow monies into the exempt account when deposit room is created and increasing the estate or death benefit of the 8

9 policy in accordance with the terms and conditions of the particular policy as well as the prescribed limits set by regulations. Empire Life s permanent, participating life insurance plan, Optimax and our universal life plan, Trilogy permit policy owners to fund the policy at a level in excess of what is required to keep the policy in force. These additional deposits are limited by the Maximum Tax Actuarial Reserve (MTAR) rules. Regulation 307(1)(b) defines the accumulating fund of a policy as the MTAR that an insurance company may hold for the policy. The additional deposits that are allowed, give the policy owner the opportunity to take optimal advantage of the tax sheltering available under Section 148. Conventional alternatives like term deposits and bonds, do not offer the advantage of tax-sheltered growth. This means that returns are lowered by the tax imposed on growth and less money is available for reinvestment. Tips and Traps An illustration simply demonstrates how a particular policy will perform given a set of assumptions. It is not a guarantee of current or future performance. One assumption inherent in an illustration is that all premiums and deposits are made beginning with the approval date of the application and on every premium or deposit anniversary. Many applications, particularly on older individuals and couples are submitted on a cash on delivery (COD) basis. When choosing a product solution like universal life, specifically a level death benefit option, with or without Return of Premium (ROP), it is very important to understand and communicate the implications of mismatching of the effective date of the policy and the date of receipt of the initial and subsequent premiums/deposits. The cost of insurance for a life insurance coverage is charged monthly on the portion of the Sum Insured that represents the Net Amount at Risk. The Net Amount of Risk for each Life Insurance Coverage differs according to the Death Benefit Option of the Policy. Here are explanations of how the Net Amount at Risk is calculated for the various Death Benefit Options available under Empire Life s Trilogy universal life contract. 9

10 Increasing Sum Insured When selecting Increasing Sum Insured, the cost of insurance and the net amount of risk will remain level while the legacy/death benefit will increase or decrease depending on the Tax-Exempt Account Value. One reason for differences between the values reported in an annual statement or in force illustration and the original illustration is that deposits are not made precisely when due, and the initial premium or deposit is not submitted when the policy is approved. This generates a difference in values because interest is not actually earned on excess deposits (over cost of insurance and administration fees) until the Company receives and processes the monies sent by the policyholder. The illustration assumes all premiums and deposits are made coincident with the effective date of the policy and each premium or deposit anniversary, whether monthly or annually. Level Sum Insured Under this legacy benefit/death benefit option, the Cost of Insurance and the Net Amount at Risk will increase or decrease depending on the Tax-Exempt Account Value while the legacy benefit/death benefit will remain level. When implementing a product solution using this option, you can see the impact of mismatching the effective date of the policy and when the Company actually receives and processes premiums and deposits submitted by the policyholder. This may occur when less than the planned deposit is submitted or when there is a delay in settling the policy, even by several weeks. When there are no deposits and hence no Tax-Exempt Account Value at the outset of the policy being approved, then the Net Amount at Risk is equal to the full Death Benefit. This results in lower values even after the first policy year. When a limited pay structure is set up, this may mean that additional deposits are required or that the policy will not make it to the target paid-up date. At worst, the policy may lapse. The situation is exacerbated when backdating is chosen, i.e. an earlier date is chosen as the effective date, generally to preserve insurance age. The monthly charge is applied back to the effective date of the policy. 10

11 The Monthly Charge for the policy is equal to the sum of the following: 1. the monthly administration fee of $10; 2. the total of the Costs of Insurance for the Insurance Coverages; 3. the total of the Additional Benefit costs, if any; and 4. the total of the extra charges for rated Insurance coverages and/or Additional Benefits, if any. As precautionary steps, Advisors should endeavor to do the following; Compare the true costs of backdating to issuing the policy at current issue age. The backdating of a policy set up as a Level Sum Insured with a limited pay funding structure and using accelerated payments/ Quick Pay should not be entertained. In essence this approach is simply pre-funding the minimum premium and assumes perfect consumer behaviour as there is absolutely no extra funding to cover any contingencies. Collect enough monies from the policyholder to cover all the monthly charges of the policy for the period between the approval date of the policy and when the premiums and deposits are actually processed, in addition to the planned premium. Generally, one to two months worth of monthly charges will suffice, but each situation is different. Request that the effective date of the policy coincide with the date of receipt of the initial premium/ deposit. New Business can set an effective date into the near future. It is very important that the Advisor delivers the policy, collects all settling requirements and submits them to the Company before the effective date. On an exception basis, the policy can be reissued by redating to address the mismatching of the effective date and the processing of initial premiums and deposits. In all cases, Advisors should request an inforce illustration on the first and subsequent anniversaries as a measure of expectations against experience. In addition to requesting annual inforce policy illustrations, actual policy transaction history can be tracked and reviewed monthly, using the Empire Life Business Centre website to ensure that policy transaction activity actually matches plan. 11

12 Level Sum Insured Plus Return of Premium This legacy/death benefit option available under the Company s universal life product, Trilogy, has a Cost of Insurance that is calculated in a similar fashion to Level Sum Insured. The Cost of Insurance and the Net Amount of Risk will increase or decrease depending on the Tax-Exempt Account Value and the total of the premiums paid. The legacy/death benefit is the total of the face amount plus all premiums paid. The Net Amount at Risk is the sum of the legacy/death benefit plus the premiums paid minus the Tax-Exempt Account Value. Here, particularly when the initial premium is not paid coincident with the approval date of the contract, this affects both the legacy/death benefit available (lowers it) and the Net Amount at Risk (raises it). As precautionary steps, Advisors should endeavor to do the following: Compare the true costs of backdating to issuing the policy at current issue age. The backdating of a policy set up as a Level Sum Insured Plus Return of Premium with a limited pay funding structure and using accelerated payment/ Quick Pay should not be entertained. In essence this approach is simply pre-funding the minimum premium and assumes perfect consumer behaviour as there is absolutely no extra funding to cover any contingencies. Collect enough monies from the policyholder to cover all the monthly charges of the policy for the period between the approval date of the policy and when the premiums and deposits are actually processed, in addition to the planned premium. Generally, one to two months worth of monthly charges will suffice, but each situation is different. Request that the effective date of the policy coincide with the date of receipt of the initial premium/ deposit. New Business can set an effective date into the near future. It is very important that the Advisor delivers the policy, collects all settling requirements and submits them to the Company before the effective date. 12

13 On an exception basis, the policy can be reissued by redating to address the mismatching of the effective date and the processing of initial premiums and deposits. In all cases, Advisors should request an inforce illustration on the first and subsequent anniversaries as a measure of expectations against experience. In addition to requesting annual inforce policy illustrations, actual policy transaction history can be tracked and reviewed monthly, using the Empire Life Business Centre website to ensure that policy transaction activity actually matches plan. Please review the attached examples taken from the Trilogy policy contract. Example of Cost of Insurance Assume that the Sum Insured is $500,000 and the Tax-Exempt Account Value is $10,000, $25,000 or $50,000. The Level Cost of Insurance rate structure has been chosen and the Cost of Insurance rate is $0.50 per $1,000. The premiums paid-to-date totals $20,000. Increasing Sum Insured The Cost of Insurance and the Net Amount at Risk will remain level while the Death Benefit will increase or decrease depending on the Tax-Exempt Account Value as shown in the following table: Tax-Exempt Account Value Death Benefit Net Amount At Risk Cost of Insurance $10,000 $510,000 $500,000 $0.50 x 500 = $ $25,000 $525,000 $500,000 $0.50 x 500 = $ $50,000 $550,000 $500,000 $0.50 x 500 = $

14 Level Sum Insured The Cost of Insurance and the Net Amount at Risk will increase or decrease depending on the Tax-Exempt Account Value while the Death Benefit will remain level as shown in the following table: Tax-Exempt Account Value Death Benefit Net Amount At Risk Cost of Insurance $10,000 $500,000 $490,000 $0.50 x 490 = $ $25,000 $500,000 $475,000 $0.50 x 475 = $ $50,000 $500,000 $450,000 $0.50 x 450 = $ Level Sum Insured Plus Return of Premium The Cost of Insurance and the Net Amount at Risk will increase or decrease depending on the Tax-Exempt Account Value and the total of premiums paid as shown in the following table: Tax-Exempt Account Value Death Benefit $10,000 $520,000 $25,000 $520,000 $50,000 $520,000 Net Amount At Risk $500,000+$20,000-$10,000 =$510,000 $500,000+$20,000-$25,000 =$495,000 $500,000+$20,000-$50,000 =$470,000 Cost of Insurance $0.50 x 510 = $ $0.50 x 495 = $ $0.50 x 470 = $ Other factors can contribute to differences between performance and illustrations. Of particular concern are those situations where guarantees are used in all the assumptions and a limited payment scenario is generated, particularly when the Cost of Insurance rate structure is limited pay, like Empire Life s Annual Renewable Term to 85/15 (ART 85). Differences are accentuated when pre-funding of the minimum premium is illustrated with no allowance made for mismatching of the effective date and the date that the Company receives and processes premiums. Please note these additional factors that can affect the performance of the product solution. Excess deposits are not placed into investment options that provide rates of return that match the illustration. Excess deposits are placed into the daily interest account instead of one of the Guaranteed Interest Options (GIOs), generally the longest-term option offering the highest minimum rate guarantee. Actual premiums and deposits are made monthly instead of annually to conform to the illustration. Actual extra deposits are not made at all or are not made when scheduled. Backdating of a policy to save age, as mentioned earlier, will cause discrepancies in account values and funding requirements, particularly in limited pay scenarios. The rate of return in the illustration is higher than either performance or the minimum guaranteed rate. The current rate available when the policyholder actually deposits the premiums and excess deposits may be lower than the rate used in the illustration. Remember an illustration, even when using guarantees, does not guarantee that performance will match the illustration. Please refer to the previous tips for Advisors on how to minimize any discrepancies between the illustration and actual performance. 14

15 Marketing Support Materials Personal Legacy Builder summary This one page document is used as both a stand-alone piece and forms part of the standard output of the Legacy Builder Strategy illustration. Personal Legacy Strategy Brochure This brochure can be printed off and shared with existing or prospective clients. It summarizes how the strategy works, why it is worth considering, how it can be funded and for whom it is designed in the marketplace. Personal Legacy Builder Strategy Fact Finder This four-page worksheet can guide Advisors and clients through a systematized process aimed to arrived at identifying and quantifying the need and desire for a Legacy Builder strategy using an insurance-based product solution. Life Expectancy tables The Tax and Estate Planning team can provide customized, general life expectancy tables as a tool to help determine the age of mortality of a client to be used optionally as a target or measure for a specific estate value. A selection of the more commonly used tables is included in a kit. Sample Prospect Letter for Legacy Builder This one-page letter is perfect for introducing current and prospective clients with the benefits of the Legacy Builder strategy and a simple means to introduce yourself and show them the value your services provide. 15

16 The Empire Life Insurance Company (Empire Life) offers competitive individual and group life and health insurance, investment and retirement products to help you build wealth and protect your financial security. Empire Life is among the top 10 life insurance companies in Canada 1 and is rated A (Excellent) by A.M. Best Company 2. Our vision is to be the leading, independentlyowned, Canadian financial services company committed to simplicity, being easy to do business with and having a personal touch. 1 Source: Office of the Superintendent of Financial Institutions (OSFI), based on general and segregated fund assets 2 As at June 22, 2011 The information in this document is for general information purposes only and is not to be construed as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance made on or misuse or omissions of the information contained in this presentation. Please seek professional advice before making any decision. Trademark of The Empire Life Insurance Company. Policies are issued by The Empire Life Insurance Company. Investments Insurance Group solutions info@empire.ca ENG-09/11