INSURED ANNUITY STRATEGY. Help your clients increase their after-tax income with universal life, without reducing the estate for their heirs.

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1 INSURED ANNUITY STRATEGY Help your clients increase their after-tax income with universal life, without reducing the estate for their heirs.

2 Here s the story Dennis and Rosemary, ages 68 and 64, have worked hard over the years to save for their retirement. They both retired several years ago. Their children are now living independently and no longer need their parents financial support. Dennis and Rosemary have several sources of retirement income. While confident they have enough savings to last through their retirement years, they feel they need to do more to maximize their income. It s also important to them to leave a legacy for their children. They aren t prepared to take a lot of risk with their investments especially now that they are retired. Their goal is to generate as much after-tax income as they can, while at the same time preserving as much capital as possible to leave for their beneficiaries. Dennis and Rosemary have some retirement income from registered retirement income funds (RRIF), their teachers pension plans, government pension plans and personal savings. They also have $700,000 invested in a portfolio of non-registered guaranteed investment certificates (GICs) and $100,000 in Canada Savings Bonds (CSBs). They are planning to use some of the interest as income. They also have a mortgage-free home a potential source of future capital or income in case of health care expenses or other financial needs. The challenge Create a strategy that increases after-tax income and also preserves their estate for their family. Dennis and Rosemary want to increase their current income to allow them to do some travelling. To finance this, they plan to use the interest they have been accumulating on their investments. However, if the income proves insufficient over time, they may have to withdraw capital which could deplete their estate. As a result, their current strategy maximizes neither their income potential nor the estate they hope to leave behind for their family for the following reasons: Since Dennis and Rosemary aren t comfortable with a high degree of risk, they have placed their non-registered money in interest-bearing investments. These investments are currently earning less interest than they require for their desired lifestyle needs. Interest income is fully taxable. If they need to withdraw any capital for additional income, it will reduce the value of their estate. On death, estate transfer costs will further erode the estate. 2 INSURED ANNUITY STRATEGY

3 Making the most of our retirement income from savings can be a challenge for many of us. Dennis and Rosemary have worked hard to build up their savings, but their current strategy isn t maximizing what they have. Here s a strategy that will help give them the benefit of increasing their after-tax retirement income, as well as the comfort of providing an estate for their family. The solution for Dennis and Rosemary presents a strategy that may work for your retired clients. The solution The insured annuity strategy maximizes after-tax income from savings and preserves capital for your clients heirs. It s retirement income plus an inheritance. Dennis and Rosemary have a good income from their RRIFs, their teachers pension plans and government plans. They use $500,000 (a portion of their savings) for an insured annuity strategy. Since money used to purchase a payout annuity cannot be accessed after the sale, they do not use all of their capital. They still have $300,000 invested for other expenses and emergencies. They use $818 to make the first monthly payment of a joint last-to-die universal life insurance policy with a $500,000 death benefit. They use the remaining $499,182 to buy a monthly pay joint life payout annuity with no reduction on the first death and a five-year guaranteed period. This plan provides them with a predictable, guaranteed income for life (both Dennis and Rosemary are insurable and qualify for life insurance). A portion of the annuity income is used to make monthly insurance payments leaving the balance available for their spending needs. Insured annuity strategy $500,000 Payout annuity income ($499,182) monthly payments Permanent life insurance ($818) 34% more after-tax annual income 1 and $500,000 tax-free for heirs 1 Applies to Dennis and Rosemary s situation only. Other scenarios will have different results. INSURED ANNUITY STRATEGY 3

4 The result Dennis and Rosemary could receive 32 per cent higher after-tax retirement income from the insured annuity strategy compared to interest income from their savings and investments, even after making the life insurance payment. The insurance provides a tax-free estate benefit which replaces the capital they used to buy the annuity. Dennis and Rosemary after-tax income comparison 2 Income Current strategy Insured annuity $20,000 $15,000 $10,000 $5,000 $0 Additional income Existing income The table below shows the expected financial results of the current and recommended strategies assuming the marginal tax rate is 45%. The current strategy column of the table shows how their money might perform if they left the $500,000 in their fixed income portfolio at a 4% interest rate and used the interest as income. The insured annuity column demonstrates that even after making the minimum payment for their life insurance and payment of taxes due on the annuity, their spendable income could be 34% higher than the income they would earn with their current strategy. Annuity income is a combination of earned interest and a return of the payment used to purchase the annuity which makes the taxable amount much lower than interest income from fixed income investments. Current strategy Insured annuity 2 Annual income $20,000 $27,209 Less: tax payable $9,000 $2,603 Net income $11,000 $24,606 Less: insurance premium $0.00 $9,816 Disposable income $11,000 $14,790 a 34% increase! Increase in disposable income $0.00 $3,790 Equivalent annual pre-tax yield 4.0% 5.4% Estate value $500,000 $500,000 2 The comparison is based on rates as of September 22, 2012, for a Sun Life Financial joint life annuity and a joint last-to-die SunUniversalLife policy. Applicants must be insurable to qualify for life insurance. To better ensure the annualized minimum payment is sufficient for life, only the guaranteed investment options available with SunUniversalLife should be used. Otherwise, you may need to make additional payments to compensate for any negative returns. 4 INSURED ANNUITY STRATEGY

5 PLANNING CONSIDERATIONS Of course, every client is different so you may require different types of annuities and life insurance to help implement the insured annuity strategy. You may want to take the following points into consideration when recommending the insured annuity strategy. Apply for insurance coverage first to make sure your client qualifies before committing the capital to buy the annuity. Confirm the maturity date of the existing GIC investments. While GICs are generally not cashable prior to maturity, cashable term deposits may be subject to a market value adjustment (MVA). Be sure to verify this before implementing this strategy. A short-term loan may be required in some cases and the cost of the loan should be considered. You do not have to place both the life insurance and annuity plan with the same company. Make sure clients understand this strategy results in a loss of liquidity. Ensure prospective buyers have other sources of liquid reserves for emergencies. Ensure clients understand they are locking in interest rates for the life of the annuity. Interest rates fluctuate over time. Discuss the risk of interest rate changes with prospects. Discuss with them how much GIC rates would need to increase in order to get a gross income higher than the income in an insured annuity. This case study uses a joint life annuity with a five-year guarantee. Many clients don t want a zero guarantee and pricing for payout annuities sometimes provides better income when a five-year guarantee is selected. The objective is to balance the best return with your clients other goals. Product considerations Each case must be considered individually. Choose the products that best fit both the attitudes and objectives of your client. Payout annuity options Single life annuity with or without a guarantee period monthly or annual payments Joint life annuity with or without a guarantee period with or without a reduction on first death monthly or annual payments INSURED ANNUITY STRATEGY 5

6 Tax considerations In the majority of cases, clients will prefer a prescribed annuity with a level taxable portion for the life of the annuity. However, there are cases where a non-prescribed (accrual tax) annuity may be a better option. The taxable amount under accrual taxation is based on interest earned less the expenses on the annuity. Typically, this will result in higher taxable amounts in early years and lower amounts in later years than would be the case for prescribed taxation. Example: The client(s) expect an inheritance or additional sources of income that would push them into a higher tax bracket in the future. The default option for individually owned life annuities is a prescribed annuity. They must elect a non-prescribed status at the time of application. Where there are health issues, a rated life policy and an annuity may still work in some cases. Permanent life insurance This is usually a minimum-funded, level-cost universal life insurance policy such as SunUniversalLife. Alternatively, a client may decide to prepay the future insurance costs in early years while they have other sources of income or may purchase a guaranteed permanent product such as Sun Limited Pay Life. Once the payment period is over, they can use the full after-tax annuity income for their retirement goals. 6 INSURED ANNUITY STRATEGY

7 AN EFFECTIVE SOLUTION FOR CORPORATIONS What if a large amount of the funds Dennis and Rosemary planned to use for their retirement were in a holding company? How do they maximize their after-tax income from the company while still maintaining the value of the corporate assets for their beneficiaries? The corporate insured annuity can provide a higher after-tax income for life than other fixed income investments held within a corporation, and an equal or greater benefit for their children on death. By revisiting the earlier example, we see how effective the insured annuity strategy can be if Dennis and Rosemary s portfolio is held within a corporation, normally a holding company with assets gained from the income or sale of an operating company. In this situation, they are faced with a number of challenges in planning long-term goals: Being conservative, their holdings are in low-risk, interest-bearing investments that may not produce enough income to meet their needs. The interest income is fully taxable at the corporate rate. Net income from these investments is then paid out from the company to Dennis and Rosemary and taxed again as taxable dividends. If the corporation is wound up on death, the proceeds are paid as taxable dividends to their beneficiaries. The corporate insured annuity works in similar fashion to a personal insured annuity using existing assets to purchase an annuity and then applying a portion of the annuity income to fund an insurance policy. The benefits of this strategy for corporate-held investments are apparent in most cases: The corporate-owned annuity provides a greater after-tax income than other fixed income investments held within a corporation. Corporate annuities must be purchased on a non-prescribed or accrual tax basis, which means the taxable amount of the annuity income is higher in early years and reduces over time. As a result, the after-tax income increases over time. Net cash flow from the annuity is used to purchase corporate-owned insurance to replace the assets on death. This insurance can be a level-cost universal life insurance policy or another type of permanent coverage. On death, the insurance proceeds in excess of the adjusted cost basis generate a credit to the company s capital dividend account which can be paid out as tax-free dividends to shareholders. The remaining annuity income, once tax and insurance payments are deducted, is paid out as taxable dividends. This generally provides a higher net income than fixed income investments held within a corporation. INSURED ANNUITY STRATEGY 7

8 The result The corporate insured annuity can provide a greater, increasing lifetime income than fixed income investments, while ensuring your client s estate value is maintained for their beneficiaries. Let s take a closer look at the numbers. Dennis and Rosemary s corporation uses $818 to make the first monthly payment of a $500,000 corporate-owned joint last-to-die, level-cost SunUniversalLife policy. The corporation uses the remaining $499,182 to purchase a corporate-owned non-prescribed joint annuity on their lives with no reduction on the first death and a five-year guarantee. The annuity provides an annual pre-tax income of $27,209 3 for life. The annual taxable amount of income reduces gradually, generating an increasing after-tax income over time. The monthly insurance payments of $818 3 are deducted from this income ensuring the capital used to purchase the annuity is restored to beneficiaries on death. The net cash flow in the holding company after tax and insurance payments are deducted is 24 per cent greater in 20 years than an interest-bearing investment earning four per cent annually. This works out to an equivalent annual pre-tax yield of 4.9 per cent for the corporate insured annuity strategy! A death benefit of $500,387 is payable as a tax-free dividend from the company on death in 20 years an increase to beneficiaries of 47 per cent compared to the alternative strategy! 3 The comparison is based on rates as of September 22, 2012, for a Sun Life Financial joint life annuity and a SunUniversalLife policy. Applicants must be insurable to qualify for life insurance. To better ensure this annualized minimum payment is sufficient for life, only the guaranteed investment options available with SunUniversalLife should be used. Otherwise, you may need to make additional payments to compensate for any negative returns. A corporate tax rate of 50 per cent was used in the comparison. 8 INSURED ANNUITY STRATEGY

9 Advantage to estate INSURED ANNUITY STRATEGY 9

10 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 insured annuity strategy to your clients. INSURED ANNUITY STRATEGY TOOLS Personal and corporate insured annuity client fact sheets: These one-page prospecting tools explain how the insured annuity strategy works for individually and corporately-owned assets. They highlight the advantages of the strategy and encourage your clients to contact you for more information. Payout annuity brochure: This four-panel brochure explains how our payout annuity can be the right income solution for your clients. It explains how the product works, as well as the various features and options available. Payout annuity illustration: This easy-to-use tool is located in the quick links section of the advisor site located at 10 INSURED ANNUITY STRATEGY

11 Personal and corporate insured annuity illustration: Use Eos to present your clients with a clear and simple comparison of the insured annuity strategy versus their current plan. Sun Limited Pay Life PRODUCT FEATURE SHEET Sun Limited Pay Life client guide: Introduces the features and benefits of the product guarantee Three easy steps to guaranteed protection* Sun Limited Pay Life gives you life-long insurance protection without life-long payments. Choose from 10-, 15- or 20-year payment periods or the pay to age 65 option. You can guarantee those payments by investing in one of the guaranteed accounts we offer. By making additional payments to your policy you can take advantage of the full range of investment options to maximize your tax-preferred growth. SunUniversalLife CLIENT GUIDE SunUniversalLife client guide: This guide and the investment account options booklet can provide you and your clients with details about the product s features and benefits. Life s brighter under the sun WHAT S THE BRIGHT IDEA? SunUniversalLife The bright idea behind the insured annuity strategy 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-deferred 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. * FPX is a trademark of The National Post Company INSURED ANNUITY STRATEGY 11

12 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 marketleading 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, Digital-09-12