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The Estate Bond

Growing your estate without undue market risk and taxes.

Often we see older investors shift gears near retirement and beyond.  Many become risk adverse and move their assets into fixed income type investments.  Unfortunately this often results in the assets being exposed to higher rates of income tax and lower rates of return – never a good combination.

Or maybe the older investor cannot fully enjoy their retirement years for fear of spending their children’s inheritance.

The Estate Bond financial planning strategy presents a solution to both of these problems.

How does it work?

  • Surplus funds are moved out of the income tax stream and into a tax exempt life insurance policy.
  • Each year a specified amount is transferred from tax exposed savings to the life insurance policy

In essence, we are substituting one investment (the life insurance policy) for another (fixed income assets).

The result?

  • The cash value in the life insurance policy grows tax-deferred and may also increase the insurance benefits payable at death.
  • Since the death benefit of a life insurance policy is received tax-free by the beneficiary this strategy results in a permanent tax shelter.

In other words, there is an increase in the funds available to heirs and beneficiaries after death and a decrease in the taxes payable before death. 

The Estate Bond in action

Robert, aged 60, and his wife Sarah, aged 58 are satisfied that they will have sufficient income during their retirement years.  They used the Estate Bond concept as a means to guarantee their legacy to their children and grandchildren.

Investment: $30,000 for 20 years into a Joint Second-to-Die Participating Whole Life policy which is guaranteed to be paid up in 20 years

Immediate Death Benefit: $892,078

Death Benefit in 30 years: $2,160,257 (at current dividend scale)

Cash Surrender Value in 30 years: $1,582,934 (at current dividend scale)*

* If surrendered, the cash surrender value would be subject to income tax but there are strategies that could be employed to avoid this tax.  Assumes using Participating Whole Life illustrated at current dividend scale.  Values shown in 30th year at approximate life expectancy.

Alternative investment in action

Investment: $30,000 for 20 years in a fixed income investment earning 2.5% AFTER tax

Immediate Death Benefit:  $30,000

Estate Benefit in 30 years: $1,005,504

It should be noted that obtaining this rate of return in today’s fixed income environment would be challenging. 

Additional benefits of the Estate Bond

  • The estate value of $2,160,257 in 30 years is not subject to income tax 
  • The proceeds at death, if paid to a named beneficiary, are not subject to probate fees.
  • If the beneficiary is one of the preferred class (spouse, parent, child or grandchild) the cash value and the death proceeds are protected from claims of creditors or litigants during the insured’s life time.
  • The use of life insurance with a named beneficiary also results in a totally confidential wealth transfer.
  • Robert and his wife can both enjoy their retirement without affecting their family’s inheritance.

The Estate Bond strategy is designed for affluent individuals who are 45 years of age or older and who are in reasonably good health. For those who meet these criteria and have surplus funds to invest, this concept can provide significant benefits and results.

Please call me if you have any questions about the Estate Bond strategy or would like to determine if it is right for you.  As always, please feel free to use the social sharing buttons below to forward this article to someone that would find it of interest.

 

©iStockphoto.com/MarkBowden

Budget 2015

On April 21, 2015, Finance Minister Joe Oliver tabled his first federal budget.  The provisions of the budget will be of particular interest to owners of small and medium sized businesses, seniors and families with children.  As well, those looking to make certain charitable donations will be encouraged by Oliver’s budget. Read More

Is it Time for your Insurance Audit?

Audit

 

Has it been awhile since you last looked at your insurance portfolio?

Are you a little vague in your recollection of all the coverage you have and why you have it?

Are you uncertain as to whether or not your portfolio reflects your current situation?

Just like going to the dentist for regular checkups is a necessary evil, reviewing your financial plan and products on a regular basis is also recommended.  Circumstances can change over time and making sure your protection is keeping pace is a worthwhile exercise.

A comprehensive audit should review the following:

  • Is the total death benefit of your life insurance appropriate to your needs? A current capital needs analysis can help to determine this.
  • If your current coverage is renewable term insurance should the policy be re-written before it renews at a substantial increase? Premiums for new coverage can be significantly lower than the renewal premium of an existing policy.
  • Is your need for life insurance permanent? If that is the case, you should ensure you have at least some of your needs covered by a permanent plan.
  • Are you nearing the end of the conversion period on your term policy? If yes, this may be the time to consider converting to permanent insurance.
  • Is your disability protection in place consistent with your current income? If you have changed jobs does new group coverage impact your personal plan?
  • Are the beneficiary designations still valid for your current situation? Has there been a re-marriage that may require changing the beneficiary or ownership of the current policy? 

In addition, the following are important to note:

  • If your policy is a Universal Life policy with cash value are the investment options still appropriate to market conditions and/or your risk tolerance?
  • If the policy is a Whole Life policy are the dividends adequate to now fund the premium should you wish to take a premium holiday?
  • If your policy was assigned to a lender as collateral for a loan and that loan has been repaid make sure the assignment has been removed.
  • Does your existing policy qualify for a reduction in premium?
  • If you have you stopped smoking you may qualify to have the premiums reduced to those of a non-smoker.
  • If your policy was issued with a substandard extra premium and your health has improved you may qualify to have the rating removed.
  • If your policy was rated as a result of participation in hazardous activities, e.g. flying, mountain climbing, heli-skiing this rating can be removed if you no longer are active in these activities.

If the current policy is for business purposes the following should also be reviewed:

  • If the policy was to fund a Shareholders’ Agreement or Partnership Agreement, does the amount and type of coverage still satisfy the terms of the agreement?
  • Are the ownership and beneficiary provisions of the policy still valid for Capital Dividend Account planning?

Reviewing your coverage on a regular basis is recommended.  If you think it would be beneficial to you, call me to arrange a time to do an Insurance AuditAs always, please feel free to use the social sharing buttons below to forward this article to a friend or family member you think might find this information of value.

©iStockphoto.com
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