Individual investment strategy A tax-effective solution for building wealth An estate maximization strategy using participating life insurance
Here s the story: Matt, age 63, and Anna, age 60, are married and both are successful executives in the top marginal tax bracket. They are quickly approaching retirement and plan to begin in two years when Matt turns 65. They have planned carefully and expect to retire comfortably with income from their employer and government pensions, RRSPs and other benefits. Anna recently received an inheritance of $500,000 from her late mother. As they are debt free and expect their retirement income needs will be taken care of, Matt and Anna want to pass these funds, as well as the balance of their estate to their three grown children. Matt and Anna s goals are to: increase the tax-efficiency of their portfolio to help maximize the value of the assets they transfer to their children, minimize the impact that annual investment income will have on the clawback of their government benefits, and minimize their exposure to volatile asset classes or having to manage their investments on a continuous basis. Matt and Anna want to build a balanced portfolio that includes a diversified mix of equity and fixed-income investments. As they approach retirement, they intend to reduce the volatility of their portfolio and the time they spend managing it. They want the stability of returns associated with fixed-income and guaranteed investments, without sacrificing the long-term growth potential of equities. They ve worked a lifetime to build their estate and have paid their share of taxes along the way. Matt and Anna want to ensure the assets they ve earmarked for their children are used in the most effective manner and are protected from unnecessary taxes and estate costs. THE ESTATE PLANNING CHALLENGE To maximize the value of their estate for their children, Matt and Anna need to consider the following: The annual income generated from Matt and Anna s existing portfolio also means additional income taxes. To pay the tax bill each year, they draw funds from their portfolio, slowing its growth and reducing the size of their estate. Additional investment income may result in reduced Old Age Security (OAS) payments. OAS benefits must be repaid once Matt and Anna s individual net income exceeds the prescribed amount. 2 Individual investment shelter
While equity-based investments may generate tax-preferred income (i.e. dividends) on an annual basis, any deferred or unrealized gains from their portfolio must be included in income upon death. This may result in a large tax bill that limits the amount available to the beneficiaries. Deferred capital gains may also be triggered and taxes payable should Matt and Anna rebalance their portfolio periodically. Probate fees, legal and administrative costs may further reduce the size of the estate available to their beneficiaries. Their assets may be subject to probate which could delay the transfer of those assets at death. $ TAXABLE INVESTMENTS Annual investment earnings (taxable) Tax on deferred gains After-tax value Estate settlement cost to distribute estate assets Net value to beneficiaries INDIVIDUAL INVESTMENT SHELTER The Individual Investment Shelter (IIS) strategy will provide a way for Matt and Anna to address many of their concerns and estate planning challenges. The IIS strategy compares the net estate value of a tax-exempt life insurance policy to that of a traditional investment portfolio. Matt and Anna have the option to either fund the life insurance policy with their existing assets, or through excess income. By setting up an IIS, instead of holding their investments in a traditional portfolio, they enjoy multiple benefits. Funds accumulate within the policy on a tax-preferred basis. This helps to minimize the annual taxable income and potential OAS clawback. On the death of the second spouse, the full value of the insurance is paid out as a tax-free death benefit to their beneficiaries. If Matt and Anna name their children or grandchildren as beneficiaries to the policy, the death benefit will be paid directly to them without passing through the estate. In addition to helping avoid estate settlement costs and the delays associated with estate administration, this could also help reduce the potential conflicts that may arise during this difficult time. Individual investment shelter 3
Participating whole $ life policy No annual tax on growth accumulated in the policy No tax on life insurance death benefit Estate settlement cost to distribute estate assests Tax-free death benefit to estate if no named beneficiaries Net value to beneficiaries Tax-free death benefit paid directly to named beneficiaries No estate settlement cost on death benefits paid directly to beneficiaries IIS AND SUN PARTICIPATING WHOLE LIFE Using the IIS strategy with a Sun Par Protector plan makes sense for Matt and Anna, since they want to reduce the volatility within their holdings and minimize the time spent managing them. Premium payments made to a Sun Par Protector policy provide Matt and Anna with exposure to the Sun Life Participating Account. Due to the long-term investment philosophy of the par account and the stable cash flows into this account, Sun Life Financial can invest in longer-term holdings such as bonds (long- and short-term), mortgages, real estate, loans and equities. The combination of a long-term investment strategy, a large well-established par account and a prudent management philosophy contributes to strong, stable returns for par policyholders. As participating policyholders, Matt and Anna may be eligible to earn policyholder dividends. Depending on the dividend option selected, dividends can be reinvested within the policy to provide additional protection that grows over time. This additional protection also has a cash value that can be accessed should Matt and Anna require it. The amount and payment of any dividends are not guaranteed. MEETING YOUR CLIENTS NEEDS Let s look at how the IIS strategy would work for Matt and Anna. Based on their current financial situation and assuming a five per cent pre-tax annual rate of return, they could move $46,423 per year for the next 12 years from Anna s inheritance a taxable non-registered investment to a Sun Par Protector joint last-to-die policy with a coverage amount of $750,000. After 12 years, Matt and Anna would elect premium offset. 1 4 Individual investment shelter
Assuming the current dividend scale, any future dividends would be sufficient to cover the required premiums on the policy. Premium offset is not guaranteed and is dependent on the policy earning the non-guaranteed dividends, as illustrated below. The Sun Par Protector policy includes the life pay option and uses paid-up additional insurance as the dividend option. Matt and Anna have also added the plus premium benefit. This allows them to increase the amount of paid-up additional insurance purchased, resulting in a more rapid increase of total cash value and total death benefit. Total premiums for the plan are $46,423 which includes $28,183 for the base premium and $18,240 for the plus premium benefit. In addition to enabling Matt and Anna to purchase a $750,000 life insurance policy and benefit from the potential for tax-preferred dividend growth over time, this movement of funds will not impact their planned retirement in two years or their lifestyle during retirement. And the IIS strategy is flexible. Matt and Anna have access to the funds within their Sun Par Protector policy. The graph below shows that the IIS strategy helps Matt and Anna leave their children and grandchildren $750,000 to $1,000,000 more than if they had continued to rely on taxable investments. Plus, the increased estate value is a permanent feature of this strategy, ensuring their beneficiaries receive an increased benefit no matter how long Matt and Anna continue to live. $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 61 79 81 83 85 87 89 91 93 95 63 65 67 69 71 73 75 77 Anna s age Individual Investment Shelter Alternative investment A large number of assumptions were used in preparing the cases shown in this booklet. Performance will be higher or lower than shown here. Even a small change in one of these assumptions can have a dramatic impact on these projected results. No one should implement the strategy above without first reviewing an insurance product illustration and IIS illustration disclosing all of the assumptions and risks. 1 Premium offset is an administrative feature (not a contractual right under the policy) that may allow a policyholder to use dividends and accumulated value within the policy to help pay future premiums if certain conditions are met. The premium offset date is not guaranteed. It may occur sooner or later, or not at all, depending on future dividend scale changes. If and when the policy goes on premium offset, at some point the policyholder may have to resume out-of-pocket premium payments. Individual investment shelter 5
Matt, age 63, and Anna, age 60, have planned their financial futures carefully and are ready to enjoy a comfortable retirement. They estimate their income needs will be taken care of through their employer and government pensions. Matt and Anna s existing strategy raises a number of estate planning challenges that may be responsible for reducing the value of their estate. Taxes on investment income reduce the funds available for their estate. Additional investment income may result in reduced Old Age Security (OAS) benefits. Non-registered investment gains are taxed at death. Probate, legal and administrative fees may reduce the size of their estate. How can Matt and Anna maximize the value of their estate? A recent $500,000 inheritance from Anna s mother has made them think about their future estate plans. They want to ensure these funds and the balance of their estate at death, are passed to their three grown children. They want to maximize the value of their estate while minimizing exposure to unnecessarily risky asset classes. Making it easy Our goal is very simple to make it as easy as possible for you to sell and service our products. By providing your clients with a concrete summary of the issues that face them, you will be better positioned to help them structure an effective financial solution. That s why we offer the following tools that you can use to explain the benefits of the IIS strategy to your clients. INDIVIDUAL INVESTMENT STRATEGY TOOLS MaxiMize estate values, MiniMize risk Client fact sheet: This one-page sheet sets out how the IIS strategy works, highlights the benefits, and encourages clients to contact you for more information. INDIVIDUAL INVESTMENT SHELTER STRATEGY An estate building solution using participating life insurance Meet Matt and Anna The challenge Maximize estate value without taking unnecessary investment risk. IIS illustration: Using Sun Life Financial s powerful Eos software, you can accurately model the performance of your clients non-registered investments, and break it down by asset allocation, return by asset class, and portfolio turnover rate. Plus, by specifying their income requirements, you can determine the maximum insurance premium that can be funded from their investments, without compromising their retirement income goals. Client reports: To help you illustrate the results of using the IIS strategy, our powerful Eos software enables you to generate full-colour client reports based on their personal financial situations. In addition to a text explanation, the reports also provide a diagram explaining how the strategy works. 6 Individual investment shelter
LIFE INSURANCE Participating whole life What s the bright idea? Participating life insurance from Sun Life Financial The bright idea behind the Individual Investment Shelter is participating life insurance from Sun Life Financial. Besides providing clients with a flexible financial planning tool, participating life insurance from Sun Life Financial gives you the confidence to deliver: opportunities for tax-preferred growth, the opportunity to earn policyholder dividends, guaranteed lifetime protection and guaranteed cash values, a variety of dividend and coverage options and guaranteed premium payment periods. Sun Participating whole life tools Your guide to participating life insurance SUN PAR PRoTECToR SUN PAR ACCUmULAToR For further information about participating life insurance from Sun Life Financial, our Sun Par Protector and Sun Par Accumulator client guide, comprehensive advisor guide, and information on the Sun Life Participating Account can provide you and your clients with full details about the products features and benefits. Participate in your brighter future with Sun Life Financial Participating life insurance is a powerful tool that protects your family and assets while helping you reach your long-term goals. Individual investment shelter 7
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