personal retirement account Give your client s retirement plan some real leverage

Transcription

1 personal retirement account Give your client s retirement plan some real leverage A retirement savings strategy using universal life insurance

2 Here s the story Janet is 40 and a partner in a large law firm. Her annual income is $150,000 and she makes the maximum allowable RRSP contribution every year. Janet wants to retire when she s 65. Janet is concerned about the following issues: Janet estimates she ll need 70 per cent of her pre-retirement income to achieve the lifestyle she desires during her retirement. Her non-registered savings aren t enough to meet her income needs during retirement. Janet needs to bridge the income gap between her retirement at age 65, and age 71 when she ll start drawing from her registered retirement income fund (RRIF). When her children were younger, Janet recognized the need for income replacement insurance. Now that her children are growing up, her focus has shifted to estate planning. Janet knows her estate will have considerable expenses, including income taxes, probate fees and other costs. She also understands that leaving a sizeable legacy to charity could significantly reduce her final tax bill. As for many investors, traditional tax-preferred savings options make it challenging for Janet to reach her financial goals: the current $22,970 RRSP contribution limit is reached at an earned income of $127,611. the Defined Benefit Retirement Pension Plan limit may be reached with an earned income of $132,333 for plans with a maximum two per cent benefit formula. Plus, participation in such plans reduces RRSP contribution room. the maximum TFSA contribution is $5,500* per year. as income increases, the percentage of pre-retirement income that can be funded through registered plans decreases. The challenge While Janet could look for other options to meet her retirement income needs such as investing in non-registered securities, mutual funds, or segregated funds these possibilities are less than ideal. *Effective January 1, 2013, the TFSA contribution limit is $5,500. The $5,000 TFSA contribution limit will still apply to all years prior to personal retirement account

3 consider the drawbacks taxes payable on the income earned from investments reduces the return. in addition to requiring careful selection and ongoing management, growth equity funds and stock investing often involve frequent portfolio turnover to manage risk, forcing deferred capital gains to be realized. As a result, these options offer limited tax-preferred opportunities and may not be suitable for risk-averse investors. tax shelters such as real estate, film, oil and gas ventures and limited partnerships are high-risk investments that also require careful selection and ongoing management. But is there a better way for Janet to achieve her goals? The solution Personal retirement account One strategy that could help Janet is the personal retirement account (PRA). By combining the insurance and investment components of a SunUniversalLife policy, a PRA can help Janet meet the need for both supplemental retirement income and estate liquidity, in a tax-effective way. Here s how: Funds are invested and accumulate within a SunUniversalLife policy on a tax-preferred basis. These savings can be withdrawn to provide retirement income at a later date, or the policy can be leveraged as collateral for a loan, to supplement retirement income. In either case, the policy s tax-free death benefit can be used to pay taxes and final expenses, such as outstanding loans, leave bequests to charity, or simply maximize the beneficiaries inheritance. personal retirement account 3

4 Accumulation and retirement Janet decides to purchase a $250,000 SunUniversalLife policy. Janet makes payments to her SunUniversalLife policy during her working years. Cash value accumulates within the policy. At retirement, Janet collaterally assigns the policy to a financial institution. or Janet can make withdrawals from the funds accumulated in her policy. The financial institution grants tax-free loans to Janet, based on the value of her SunUniversalLife policy. Janet can use the loan proceeds to supplement her retirement income. At death Tax-free death benefit Financial institution Janet s beneficiaries 4 personal retirement account

5 Meeting your clients needs Consider why the personal retirement account using SunUniversalLife is the right solution for clients like Janet: Janet creates $38,000 of annual retirement income between ages through tax-preferred accumulation and income from annual loans to bridge the income gap between her retirement and when she intends to draw on her RRIF. if Janet dies prior to retirement, her estate receives up to $600,000 on a tax-free basis. These proceeds can be used to preserve her estate by paying the capital gains or other taxes and estate expenses owing at death, or to make a charitable donation. Janet s estate will continue to be entitled to over $450,000 if she dies between the ages of 65 and 95. Estate Value $750,000 $500,000 $250,000 0 estate value Age Alternate Investment UL Withdrawals UL Leverage Net estate value (at death) Age Universal life leveraged loans Universal life withdrawals Alternate investment 70 $497,603 $426,397 $212, $510,657 $434,855 $239,862 83* $521,588 $461,579 $263, $525,214 $543,101 $329,884 *Janet s life expectancy A large number of assumptions were used in preparing the case shown. 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 above strategy without first reviewing an insurance product illustration and PRA illustration disclosing all of the assumptions and risks. Samples of the documents used to produce the above case will be provided on request. personal retirement account 5

6 If you have higher than average income, you ve probably discovered a worrying fact: earning more before retirement doesn t guarantee adequate income after retirement. You will reach the maximum allowable contribution for registered plans with an income of $124,722. As your salary grows, the gap between current employment income and potential retirement income grows even wider. Take Janet, for instance. She wants to retire at age 65. Janet estimates she ll need 70 per cent of her pre-retirement income to achieve the lifestyle she desires during her retirement and her non-registered savings aren t enough to meet her retirement income needs. At age 40, she is a partner in a large law firm who has two teenage children, an income of $150,000 and an RRSP that just can t keep up. Janet considers investing in non-registered securities, mutual funds or segregated funds, but these aren t ideal because the tax payable on the income earned reduces the return. Growth equity funds and stock investing often involve frequent portfolio turnover to manage risk, forcing deferred capital gains to be realized. These options offer limited tax-preferred opportunities and may not be suitable for risk-averse investors. Tax shelters such as real estate, film, oil and gas ventures and limited partnerships are high-risk investments that also require careful selection and ongoing management. 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 PRA strategy to your clients: pra strategy tools Bridge the gap when your income outstrips your rrsp Client fact sheet: This one-page sheet sets out how the PRA strategy works, highlights the benefits, and encourages clients to contact you for more information. the personal retirement account a retirement savings strategy using tax-exempt life insurance meet Janet the challenge Janet will need an investment to generate an additional $38,000 in after-tax income each year to bridge the income gap between her retirement at age 65, and age 71 when she ll start drawing from her Registered Retirement Income Fund (RRIF). PRA illustration: Illustrate the benefits of the PRA strategy with figures and graphs using Sun Life Financial s Eos software. The software demonstrates the advantage of the PRA strategy by comparing the net estate benefit of an exempt life insurance solution to taxable investments. Client reports: To help you illustrate the results of using the PRA 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. LEVERAGING A LIFE INSURANCE POLICY A GUIDE FOR LAWYERS, ACCOUNTANTS AND INSURANCE ADVISORS Using life insurance as collateral for personal and business planning. Guide to leveraging a life insurance policy: A guide for lawyers, accountants and insurance advisors, this booklet reviews several methods of accessing cash value of an exempt life insurance policy, including a number of thirdparty leverage structures, with a balanced discussion of benefits and risks. 6 PERSONAL RETIREMENT ACCOUNT

7 What s the bright idea? SunUniversalLife The bright idea behind the personal retirement account is SunUniversalLife. Besides providing your clients with a flexible financial planning tool, SunUniversalLife gives you the confidence to deliver: optimal tax-preferred growth, competitive, guaranteed level cost of insurance, a bonus option that combines a guaranteed investment bonus starting in year two with a unique cost of insurance discount controlled by the client, or a no-bonus option that provides lower management fees on investment account options, a large selection of competitive, tax-preferred investment options, including three exclusive Financial Post Index (FPX)* accounts and seven institutional managed accounts, tax-free access to policy funds if required in future as a result of disability. SunUniversalLife tools SunUniversalLife CLIENT guide For further information about the versatility of SunUniversalLife, our client guide, advisor guide, and investment account options booklet can provide you and your clients with full details about the product s features and benefits. SunUniversalLife provides permanent life insurance protection to meet your long-term needs plus the opportunity for tax-preferred growth in savings. It s designed for people like you who want security, diversified investment opportunities, guarantees and greater flexibility. This flexibility allows you to customize your policy at issue and adjust it as your needs change in the future. What s inside How your SunUniversalLife policy works Types of coverage Custom-design your policy * FPX is a trademark of The National Post Company. PERSONAL RETIREMENT ACCOUNT 7

8 We re here to help We ve been a trusted and reliable company for over 145 years. As a leading international financial services organization, we continue to build on that strong foundation with a focus on market-leading products, expert advice and innovative solutions. Our team of insurance- and investment-focused sales directors, living benefits specialists, and advanced tax and estate planning specialists understand your needs and work with you to help you make the best decisions. Contact your Sales Director or visit today. Life s brighter under the sun Sun Life Assurance Company of Canada is a member of the Sun Life Financial group of companies. Sun Life Assurance Company of Canada,