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 Issue 175, September 2001 Issue 175
September 2001
 
Editors: Carl Spiess, CFP, CIM, FMA, FCSI, MBA, Director, Wealth Management
              Allan McGlade, CFP, CLU, Senior Wealth Advisor

Featured Articles

 

From time to time, we like to touch on financial planning topics and products that may be of interest to our clients. The following article features a unique type of insurance product – Universal Life Insurance.

Universal Life Insurance (UL)

Universal Life Insurance (UL) is a little known plan that can have a big impact on your retirement income. It combines life insurance and an investment account in one package. 

These policies are designed to enhance your portfolio, minimize taxes, preserve the value of your estate and ensure that your heirs are taken care of. They are named for their ability to accommodate an individual’s changing needs.

Who should consider this type of policy?

Universal Life is not for everyone. In our experience, it is best suited for individuals who:

  • are in good health,
  • are taxed in the highest bracket,
  • have paid down non-tax deductible debt such as their mortgage,
  • have maximized their RRSP and pension contributions (both spouses), and still have funds that they want to shelter from taxes until they retire,
  • have disposable income and a good cash flow,
  • can commit to a savings plan over the longer-term.
How does it work?

The cash deposits you put into your Universal Life policy pay for the premium on the life insurance component of the plan and the remainder goes to the investment portion, where it is sheltered from taxation (subject to Income Tax Act limits). This allows the excess to grow tax deferred, allowing it to accumulate and be paid out as part of the tax-free death benefit received by your selected beneficiary. Proceeds of the benefit are normally distributed without the costs and delays of probate and executor fees. This means that the heirs will have liquid funds that will help pay for any funeral costs, estate taxes and other expenses that may arise.

How can I use this to supplement my retirement income? 

The Universal Life Policy can be used as collateral for a loan1 which provides an income stream upon retirement that is tax-free. The loan is designed so that the maximum loan plus its interest never exceeds 50-75% of the accumulated policy cash value. Interest on the loan is capitalized and is repayable on death. At death, the basic death benefit, in addition to the tax-deferred accumulation, is paid out on a tax-free basis. Part of the total death benefit is used to satisfy the outstanding balance of the loan while the remaining amount is paid out to one’s estate or named beneficiaries on a tax-free basis.

What types of investments are available?

The investment component of the plan can be allocated to a variety of different options, including a savings account, guaranteed investment account, indexed account or portfolio averaged account. This will depend on your comfort level and individual situation.

Here’s an example:

A couple, both aged 40 and non-smokers, purchase a Universal Life policy with an initial death benefit of $850,000. They make annual deposits of $20,000 for 15 years. Let’s look at how their Universal Life plan might develop over the next 50 years, assuming a 6% rate of return2. Let’s assume further that the couple chooses to enhance their income by taking out a series of tax-free loans beginning at age 65 against the value of their insurance policy. The loan will pay them $26,666 per year of tax-free capital for 25 years. The outstanding loan balance of $2,273,830 is repaid at their death, using proceeds from the policy’s $5,588,632 death benefit. The remaining $3,314,802 death benefit that is left once the loan has been paid will be paid out to the couple’s beneficiaries. As you can see from the chart below, the couple has succeeded in enhancing their retirement income tax-free while at the same time protecting their family with a life insurance policy that accumulates tax-free and pays a tax-free death benefit.

Initial Death Benefit $ 850,000
First year deposit $ 20,000
Total deposits by age 90 $ 300,000
Annual tax-free advances at age 65 $ 26,666
Total tax-free advances over 25 years $ 666,650
Projected benefit at age 90 $ 5,588,632
Outstanding loan balance at 8%3 at age 90 $ 2,273,830
Net estate value at age 90 $ 3,314,802
Internal Rate of Return, after tax, assuming death at age 90 6.57%

1 Based on current tax rules, you must satisfy credit criteria to qualify for the loan.
2 For illustration purposes only. Rates are not guaranteed
3 Based on current rates - which may vary.

Universal Life Policies are available to suit many income levels. To find out if this product is appropriate for you or to request more information, please contact us at 1-800-387-9273 or via e-mail at: carl_spiess@scotiacapital.com.

Fund News

Effective this October, Maxxum Funds will become a formal part of Mackenzie Financial, with full switchability of funds. The Janus and Scudder brands also fall under the Maxxum name as well. 

This merger will result in a number of changes. In particular, the seven Canadian mutual funds under the Maxxum banner will transition to Mackenzie's investment team. 

Maxxum's president and CEO, John Wood, has left to pursue other opportunities, as well as several of the fund managers that were with Maxxum prior to the merger. 

Dynamic has introduced a new fund. The Dynamic Diversified Income Trust Fund. The objective of this new fund is to generate tax-efficient income for your non-RRSP account through investments in Income Trust units. 

Do you know who the beneficiary is on your RRSP? 

More importantly – do we? Please contact us if you would like to confirm the beneficiary on your account. If you would like to change your beneficiary, download the form and send it to us or you can contact us by phone (1-800-387-9273) or e-mail.

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Need More Information?
Call your Investment Team at 1-800-387-9273 or E-mail us at carl_spiess@scotiacapital.com.

ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rate(s) of return is (are) the historical annual compounded total return(s) including changes in (share or unit) value and reinvestment of all (dividends or distributions) and does (do) not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.  See more disclaimers ...

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