Life Insurance and Financial Planning Moving from Needing to Wanting. Or Why do High Net Worth Clients Buy Life Insurance. Important information

Transcription

1 Life Insurance and Financial Planning Moving from Needing to Wanting Florence Marino, LL.B., TEP AVP Tax & Estate Planning Group Or Why do High Net Worth Clients Buy Life Insurance Florence Marino, LL.B., TEP AVP Tax & Estate Planning Group Important information We've provided written material with this oral presentation to make it easier for you to take notes. Do not rely on the written material on its own because it may be incomplete or inaccurate without the additional context and information provided by the oral presentation. Because of this, and also because the presentation is of a technical nature designed for insurance professionals, the written material should not be redistributed. We have provided client-friendly material about many of our products and concepts on our advisor website at This presentation is for educational purposes only. It should not be construed as legal, tax or accounting advice. This presentation doesn't bind Manulife to provide, or to continue to provide, any of the concepts or products described in the presentation. It also doesn't limit Manulife's ability to change any of the procedures that may be described in the presentation. If this presentation contains competitive information, we've made every effort to ensure its accuracy as of the date of the original oral presentation. We can't, however, guarantee the accuracy and, if you have any questions regarding this information, you should contact the competitor directly. 1

2 Agenda Basic attributes Liquidity Diversification Investment Charitable Insurance 101 Tax-free death benefit Non-deductible premiums (unless used as collateral) Where corporately-owned, death benefit can flow to the shareholders tax-free via the capital dividend account (death benefit (-) adjusted cost basis of policy) Insurance 101 Tax-deferred accumulation of the investment component (becomes tax-free if paid on death) How much is permitted a function of age, death benefit, duration Product configuration can heighten the focus on investment component Creditor-protection with proper beneficiary designation Proceeds paid to beneficiary (including trust for beneficiary) does not pass through the estate 2

3 Insurance 101 Term insurance Universal Life Whole Life Why Liquidity needs Tax payable on death, and assets are not liquid Real Estate Private Company Shares Shares of Public Company (significant shareholder) 3

4 Liquidity needs Fund Buy/Sell Agreement Purchase business partner s shares Estate equalization Shares to one child, cash to the other child Liquidity needs Alternative solution: Borrow Use existing assets Liquidity needs Male 55 Female 55 Joint last-to-die 4% discount rate NPV comparison IRR at LE 7.11% 4

5 Liquidity needs Male 50 Single life coverage 4% discount rate NPV comparison IRR at LE 5.99% Asset diversification If you don t need the liquidity on death but have excess liquidities to invest does it make sense to invest in a life insurance policy? Asset diversification Male 65, Female 60 non-smokers Joint last-to-die whole life policy Initial death benefit - $1 million Deposits $80,000/yr x 6 years Performance credit scale: Current less 1% 5

6 Asset diversification At life expectancy yr 28 (ages 92 and 87) Total death benefit: $1.768 M Would require a return of 9.51% (interest) to provide the same estate value at life expectancy Asset diversification Male 58 non-smoker Corporate funds Universal Life Initial death benefit - $1M Deposits $50,000/yr x 10 years Projected return: 5% Asset diversification Alternative investment: 30% 4% 20% 4% 20% deferred cap 8% 30% realized cap 8% 6

7 Asset diversification At life expectancy $1.485 policy vs $1.163 investment Why Investment strategy Would you be interested in a long term investment With a 7.42% guaranteed return for life Non-redeemable before death Which matures at death 7

8 Investment strategy Insured annuity (Back-to-back) Corporate insured annuity (Corporate back-toback) Investment strategy Capital Life annuity Insurance $ Tax Investment strategy Insured annuities or How to Increase income Reduce income taxes Guarantee lifetime income Guarantee return of capital to estate 8

9 Investment strategy Investment strategy Why these results? Capital and interest payments Mortality assumptions in the pricing of annuities vs life insurance Taxable portion If personal is good, corporate must be better 9

10 Corporate insured annuity Corporate insured annuity Corporate insured annuity Advantages Enhanced return, guaranteed for life Provides a CDA credit Potential reduction of the value of the shares for purposes of calculating the capital gains on death 10

11 Why Charitable giving If we could show you how to... INCREASE the amount received by your estate REDUCE tax AND Provide for a SUBSTANTIAL GIFT to Charity Would you be interested? 11

12 Insurance funded charitable gift John (Mary) Holdco Kids Pfd $2 M Common Insurance funded charitable gift No Gift With Gift Charity 0 $1,000,000 Tax ( $500,000) 0 Insurance cost 0 ($462,000) Shares $2,000,000 $2,000,000 Insurance funded charitable gift Do nothing scenario: Tax payable upon the second death Tax on capital gain: $2 25% = $500,000 Balance left to the estate: $2 M pref - $500,000 = $1,500,000 12

13 Insurance funded charitable gift In their Wills, John and Mary provide for a $ 1 M gift to their favourite charity upon the death of the last spouse John and Mary purchase $ 1 M joint last-to-die policy on their lives Insurance funded charitable gift Tax on final tax return: Tax on cap gain: $2 25% = $500,000 Tax credit on donation $1 50%= $500,000 0 Value of the shares to the estate $2,000,000 Shares have $2M ACB Cost of the policy (26,475 x 10 yrs) + cost of 2.5 % net $462,000 Corporate insurance funded charitable gift John (Mary) Kids Pfd $2 M Common Holdco 13

14 Corporate insurance funded charitable gift Gift $1M Pfd Redeem $1M Life ins $1M John (Mary) Holdco Kids Pfd $1 M Common So Why do High Net Worth Clients Buy Life Insurance? Because they want to. 14

15 Thank you 15