Personal retirement account A retirement savings strategy. Show clients a tax-preferred solution to enhance retirement income

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1 Personal retirement account A retirement savings strategy using PARTICIPATING life insurance Show clients a tax-preferred solution to enhance retirement income

2 2 Personal retirement account

3 Here s the story: Allan, 42, works in the oil and gas industry as a financial analyst. His home is paid for and he faithfully maximizes his RRSP and TFSA contributions. After funding his existing savings programs and lifestyle expenditures, he estimates his excess cash flow is approximately $25,000 per year. Allan is on track to retire at age 65. Despite his diligent planning, he has some concerns. Tax efficiency is important to Allan. He wants to minimize the taxes he pays each year on his investment income. He realizes his estate will have considerable expenses, including income and capital gains taxes, estate administration fees and other costs. He wants to ensure the value of his estate is protected for his nieces, nephew and future generations. To achieve his desired retirement lifestyle, Allan estimates he ll need income of $30,000 after-tax per year in addition to what may be generated by his registered investment and pension plan portfolio. The challenge To help address these concerns, Allan has started to build a balanced non-registered portfolio that will benefit from tax-preferred investment income in the form of deferred capital gains and dividends. Allan understands the returns in this portfolio are not guaranteed. He also knows when he needs these funds for income during retirement, he ll have to pay capital gains taxes on any withdrawals. Because he s in the 45 per cent marginal tax bracket, taxes on these gains could be significant. Does Allan have another option? The solution Personal retirement account The personal retirement account (PRA) is one strategy that could help Allan. By using the combined insurance and cash value components of a Sun Par Protector participating whole life policy as a PRA, Allan can meet his need for both additional income during retirement and estate protection, in a tax-efficient way. Personal retirement account 3

4 Here s how the personal retirement account works: Allan makes payments to a Sun Par Protector policy during his working years. This gives him the opportunity to earn policyholder dividends over time, which accumulate on a tax-preferred basis. At retirement, Allan collaterally assigns the policy to a lending institution to secure a loan or a series of loans. This series of loans can be used to provide additional income during his retirement. At death, the loan is paid from the policy proceeds. After the loan is paid, the balance can be distributed to Allan s beneficiaries. The details Allan designates the beneficiaries to his policy. The policy proceeds never pass through Allan s estate and so do not become subject to probate tax. But because there s a collateral assignment, the insurance company issues one cheque payable to the lending institution and the beneficiaries jointly. This is because the amount owing under the loan may vary from day to day as interest accumulates and loan payments are made. The financial institution and Allan s estate trustees must determine the correct amount of the loan owing under the loan agreement and with the consent of the beneficiaries the loan is paid. Once the loan is paid, the balance can be distributed amongst the beneficiaries. Accumulation and retirement Allan makes payments to his Sun Par Protector policy during his working years. Cash value accumulates within the policy. At retirement, Allan collaterally assigns the policy to a financial institution. The financial institution grants tax-free loans to Allan, based on the value of his Sun Par Protector policy. Allan can use the loan proceeds to supplement his retirement income. 4 Personal retirement account

5 At death Tax-free death benefit Financial institution Nieces and nephew While policy loans and policy withdrawals could also provide a reliable source of income, there are a few details Allan should be aware of: A policy loan is a disposition for tax purposes. Policy loan amounts in excess of the policy adjusted cost basis would be taxable. Depending on the timing of the policy loans, Allan may have to take considerably larger loans to provide him with the $30,000 after-tax income he is looking for. A policy withdrawal is also a taxable disposition. To access the cash value within the policy, Allan would have to surrender the paid-up additional insurance purchased by dividends. This previously purchased paid-up additional insurance would not be eligible to earn future dividends, reducing the long-term cash values within the policy. This will also result in a larger decline in the death benefit than the amount of the withdrawal itself. THE BENEFITS Personal retirement account and Sun Par Protector Under current tax rules, the collateral assignment of a policy is not considered a taxable disposition. Because efficient tax planning is important to Allan, the personal retirement account strategy may provide a significant tax advantage over both policy loans and policy withdrawals. As a permanent life insurance policy, the Sun Par Protector death benefit net of outstanding loans and accumulated interest can be received by Allan s beneficiaries tax-free, helping to preserve the value of his estate. Participating whole life insurance policies can benefit from the steady and consistent past performance of the Sun Life Participating Account. Due to the guaranteed cash values and potential steady dividend growth of the Sun Par Protector plan, lending institutions may be willing to lend a larger amount against the policy cash value than they would against an asset more exposed to market volatility. Personal retirement account 5

6 Things you need to know While the personal retirement account strategy provides an effective way to enhance retirement income, there are some additional issues that Allan should be aware of: While collateral assignment of the Sun Par Protector policy provides some benefits for Allan, it also involves him giving up certain rights. These include the ability to make changes to the policy and access cash values through a withdrawal or policy loan. Each lender has specific terms and conditions regarding assignment and their lending criteria. The loan interest rate and the actual dividends credited to Allan s policy are not guaranteed. If the results differ from the illustrated values, fewer funds may be available for borrowing. If Allan lives past his projected life expectancy, loan interest may accumulate at a faster rate than the cash values of his Sun Par Protector policy. This may mean that loan repayments are required or additional assets may need to be pledged as collateral to ensure the loan continues to satisfy the conditions of the agreement. CONFIGURING THE POLICY Allan purchases a $500,000 Sun Par Protector policy with the 20 pay guaranteed premium payment option. He chooses paid-up additional insurance as the dividend option. His premiums for the base insurance amount are $15,730 per year. He also adds the plus premium benefit, bringing his total premium to $23,150 per year. Allan plans to make payments for the full 20 years, at which time no further premiums will be required. It is important to note that total policy cash values and total death benefits are based on the current dividend scale and are not guaranteed. Beginning in year 24, the year following retirement, Allan can collaterally assign the policy to a lending institution. Assuming an annual loan interest rate of 7 per cent, Allan could receive annual tax-free loans of $30,000. He intends to take loans for a period of 14 years, which coincides with his life expectancy of age 79. As a financial analyst, Allan is a numbers person. He wonders whether he could do better by investing the $23,150 insurance premium in a diversified portfolio of equities and fixed-income investments. He estimates a long-term return on a balanced portfolio of 6 per cent. The personal retirement account strategy compares the net cash and death benefit values with that of an alternative investment and assumes the same deposit and income amounts. 6 Personal retirement account

7 Net estate benefit $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500, Alternative investment Personal retirement account Net estate benefit (at death) Personal retirement account Alternative investment Age 65 $1,846,059 $835,604 Age 75 $2,135,150 $889,432 Age 79 (Allan s life expectancy) $2,196,553 $918,194 Age 85 $2,415,843 $1,180,415 Age 90 $2,535,699 $1,455,301 Alternative investment values assume an annual rate of return of 6 per cent. Personal retirement account values assume the current dividend scale. The net estate benefit represents the amount available for Allan s beneficiaries after deferred capital gains have been paid on the alternative investment and the accumulated loan has been repaid for the personal retirement account. While both options can provide Allan with $30,000 in after-tax additional income each year, the personal retirement account strategy provides Allan with a significant increase in after-tax wealth that can be distributed to his beneficiaries at death. Personal retirement account 7

8 The result A Sun Par Protector policy used in conjunction with the personal retirement account strategy can help Allan reach his short- and long-term objectives. Allan may access a tax-efficient income stream of $30,000 per year to supplement his retirement lifestyle ($420,000 over his retirement period). His tax-preferred Sun Par Protector policy helps minimize the taxes Allan pays on his investment income each year. If Allan dies prior to retirement, his beneficiaries would receive between $500,000 and $1,800,000 on a tax-free basis. These amounts are significantly higher than if the insurance premiums of $23,150 had been invested in a balanced portfolio earning 6 per cent. If Allan lives past his projected life expectancy, the net estate benefit of the PRA solution would stay above $2,000,000 after age 100. A large number of assumptions were used in preparing the cases shown in this booklet. Dividends are not guaranteed and may be higher or lower than shown here. No one should implement this strategy without first reviewing a proposal for life insurance and a personal retirement account illustration that discloses all of the assumptions and risks. Personal retirement account AND Sun Par Protector Using the personal retirement account strategy with Sun Par Protector makes sense for Allan because of his desire for an additional stream of income during retirement. Premium payments made to a Sun Par Protector policy provide Allan with exposure to the Sun Life Participating Account through the crediting of policyholder dividends. The investment return experience of the par account is normally the most important factor influencing the earnings available to be credited as policyholder dividends. The Sun Life Participating Account is managed with a long-term perspective. Due to the long-term investment philosophy of Sun Life Financial and the stable cash flows into the 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 the long-term investment strategy, a large well-established par account and careful management contribute to strong, stable returns for par policyholders. The low volatility and potentially strong returns of the participating account bode well for clients looking for a solution to build a stable and consistent stream of income during retirement. 8 Personal retirement account

9 Allan, 42, is a financial analyst with excellent cash flow who wants to minimize taxes and preserve his lifestyle. If you have a higher-than-average income, you ve probably discovered that earning more before retirement doesn t guarantee you ll have the income you want during retirement. Taxes, whether earned on investments during your working years or incurred when funds are withdrawn during retirement, can reduce your after-tax income and deplete the amount available for your beneficiaries. Allan works in the oil and gas industry as a financial analyst and is in the top marginal tax bracket. His home is paid for, he faithfully maximizes his RRSP and TFSA contributions, and he has worked hard to build a tax-efficient investment portfolio. While Allan is on track to retire at age 65, he estimates that even with his RRSP, pension and non-registered savings, he ll need an additional $30,000 each year in after-tax income to achieve the lifestyle he desires during retirement. Accessing $30,000 per year from his non-registered investment portfolio through withdrawals may mean incurring significant capital gains tax, further eroding the value of his assets. Tax efficiency is important to Allan. He wants to minimize the taxes he pays each year on his investment income. Managing an equity portfolio may involve rebalancing, forcing deferred capital gains to be realized and creating additional income. He realizes his estate will have considerable expenses, including income and capital gains tax and estate administration fees. Allan wants to ensure the value of his estate is protected for his beneficiaries. 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 When you re looking for tax efficiency before, during and after retirement 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 allan The challenge Allan will need an additional $30,000 per year in after-tax income during retirement. 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 Guide to leveraging a life insurance policy: A guide for lawyers, accountants and insurance advisors, this booklet reviews several methods of accessing the cash value of an exempt life insurance policy, including a number of third-party leverage structures, with a balanced discussion of benefits and risks. Using life insurance as collateral for personal and business planning. Personal retirement account 9

10 LIFE INSURANCE Participating whole life What s the bright idea? Participating life insurance from Sun Life Financial The bright idea behind the personal retirement account 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 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. 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 product s features and benefits. 10 Personal retirement account

11

12 The backup you need. With Sun Life Financial, you get the best behind-the-scenes support around. As one of our distribution partners, your own estate planning consultant or insurance specialist will be your first line of support. Plus, if you need additional assistance, we re here to help. Visit us around the clock to check out our broad range of tools and support services, including our proprietary sales concepts, Financial Advisor bulletins, a wide assortment of reference articles and case studies, needs analysis software and full product guides. The Sun Life Financial Sales and Marketing Resource Team For telephone consultation or advice, call us toll-free from 8:30 a.m. to 4:30 p.m. (ET) at SUN/4786, options 1, 4, 1. Your call will be answered in person by an expert who understands your needs and can answer your specific questions about our products, software, and sales support tools. Regional support You can call the regional distribution office near you to arrange for face-to-face case assistance or consultation on advanced tax and estate planning issues. Call SUN/4786, options 1, 5. For more information about Sun Life Financial, call SUN/4786 or visit Sun Life Financial is a leading international financial services organization providing a diverse range of protection and wealth accumulation products and services to individuals and corporate customers. Chartered in 1865, Sun Life Financial and its partners today have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China and Bermuda. Sun Life Financial Inc. trades on the Toronto (TSX), New York (NYSE) and Philippine (PSE) stock exchanges under ticker symbol SLF. Sun Life Assurance Company of Canada,

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