Cascading life insurance
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The document summarizes a cascading life insurance strategy that allows clients to transfer assets between generations while minimizing taxes. It involves purchasing a permanent life insurance policy where the client's adult child is the life insured and owner. The client's non-registered assets are transferred into the policy. Upon the client's death, ownership can be transferred to the adult child without estate taxes. The adult child can then access the cash value or maintain the policy to provide death benefits to the client's grandchild beneficiary, avoiding taxes and probate fees. Marketing materials are provided to help advisors explain the strategy to clients.
Cascading life insurance
- 1. Cascading life insurance Transferring assets between generations while minimizing tax Would your clients like to know how to transfer assets between generations tax-efficiently to ensure the full value of the non-registered investments they’ve set aside as an inheritance is received by their heirs? M any clients have built-up significant wealth in registered and non-registered investments. A portion of this wealth has been set aside as an inheritance for their children or grandchildren since these assets are not required during retirement. The annual income generated by these assets typically attracts annual taxation. Some clients are concerned about the safety of their investments and don’t want the tax burden or probate fees to impact the value of their estate. MARKETING GUIDE E s tate p l anning s o l uti o n s
- 2. Estate planning solutions The Cascading life insurance strategy is a simple way to preserve your clients’ wealth for their loved ones. E state planning ensures an individual’s personal property is managed effectively while they’re alive and that their wishes, such as distribution of assets and minimization of taxes, are carried out following their death. The goals of estate planning can include preserving your wealth by taking advantage of tax-planning opportunities, conserving assets, supporting dependants and ensuring equity in estate distribution. Life insurance can fund these goals.
- 3. The Cascading life insurance strategy is designed for individuals who: Have annual tax obligations from non-registered investments n Want to leave an inheritance to heirs n Want to control their legacy n Are worried about leaving their family with a large tax burden n The situation Your client has worked hard to achieve a degree of financial success and has set aside non-registered investments funds as an inheritance for an adult child or a grandchild. Your client doesn’t want the tax burden and probate fees to reduce the legacy they leave behind. Although your client is unlikely to ever need the money, he or she is concerned about the safety of the investments and having access to funds should their circumstances change. Additionally, your client is in a high marginal tax bracket and is frustrated with paying a significant amount of tax annually on the growth of his or her assets. The strategy Clients can reduce the amount of income tax they pay on the growth of their non-registered assets each year. This is achieved by purchasing a tax-advantaged permanent life insurance policy from Canada Life™. To pass the inheritance on to their heirs, the adult child of your client is the life insured and the designated contingent owner of the policy. That same adult child’s son or daughter (the grandchild) is named as the beneficiary of the policy. Transferring non-registered assets into a life insurance policy will reduce the future tax burden since funds invested in a tax-advantaged life insurance policy allow for accumulation of cash value inside the policy (within legislative limits), without paying income tax on growth. At your client’s death, because of certain income tax provisions applying to life insurance policies, the ownership of the life insurance policy can be transferred to their adult child (who is the only life insured on the policy) without your client’s estate paying any tax on the cash value growth. The transfer is also free of probate, executor and legal fees. Upon the transfer of ownership of the policy to the client’s adult child, he or she will be able to access the cash value in the policy while he or she is living. Alternatively, the adult child can maintain the policy with the death benefit proceeds to be given to your client’s grandchild as the named beneficiary, again without taxes, probate or legal fees. The life insurance policy’s cash value remains completely accessible and in your client’s control while he or she is alive in the event that they do require additional income.
- 4. Case study Cascading life insurance strategy versus alternative investment Let’s look at a 65-year-old woman non-smoker. She has $125,000 in non-registered funds and has a marginal tax rate of 46 per cent. Her adult child is a female age 45 non-smoker. The adult child will be the only life insured on the policy for the amount of $750,000 and the designated contingent owner of the policy. The grandchild, the insured’s son or daughter, will be the named beneficiary of the life insurance policy. Cascading life insurance strategy using Millennium limited-pay cost of insurance (COI) The client’s main interest is to provide an inheritance, so let’s look at a comparison of long-term, after-tax estate values. As you can see the Cascading life insurance strategy provides a vastly enhanced estate value from the first year. After-tax estate value comparison $1,000,000 $800,000 $600,000 Assumptions $400,000 20-year COI duration $200,000 $0 Face amount is $750,000 1 2 3 4 5 6 7 Ye ar Lump sum deposit of $125,000 Alternative investment after-tax estate value Life insurance policy estate value Interest option: guaranteed interest option earning three per cent rate of return In the first year, $92,920 is deposited to the unsheltered Millennium Account. It will then be moved to the tax-advantaged environment of the Millennium policy over the next three years. Alternative investment: five per cent rate of return This example isn’t complete without the illustrations for the life insurance policies. Each page of the illustration with the same date contains important information. Please read them carefully. The taxation on the Millennium Account will decline as the funds are moved into the policy. In the fourth year, there’s no tax payable at all. The tax payable on the interest income from the guaranteed investment certificates will continue to grow year after year. The Cascading life insurance strategy provides: n Permanent life insurance protection and control of capital in a tax-advantaged life insurance policy n Potential for tax-advantaged accumulation within the life insurance policy Potential to transfer the policy’s cash value growth tax-free to an adult child (who is the only life insured on the policy) n Death benefit proceeds transfer tax-free to named beneficiaries at the death of the life insured n The elimination of probate fees at death of the life insured with a named beneficiary other than the estate (not applicable in Quebec) An immediate estate enhancement n n
- 5. Marketing materials and support Are you thinking about leaving an inheritance for your children and grandchildren? Are you concerned about the security of this legacy? Cascading The situation You’ve worked hard to achieve a degree of financial success and have set aside non-registered investment funds as an inheritance for an adult child or a grandchild. You don’t want the tax burden and probate fees to reduce the legacy life insurance you’ll leave behind. Although you’re unlikely to ever need the money yourself, you’re concerned about the safety of your investments and having access to the funds should your circumstances change. Also, you’re in a high marginal tax bracket and are frustrated with paying significant annual taxes on the growth of these assets. Transferring assets between generations while minimizing tax Cascading life insurance client brochure – form #46-5543 The strategy Are you thinking about leaving an inheritance Purchase a tax-advantaged permanent life cash value growth. The transfer is also free of probate, for your children and grandchildren? insurance policy from Canada Life™ with your executor and legal fees. Upon the transfer of ownership Are you concerned about the will have adult child as the life insured and the designated of the policy to your adult child, he or shesecurity contingent owner. Your grandchild (the child of the access this legacy? in the policy while he or she of to the cash value life insured) is named as the beneficiary of the is living. Alternatively, your adult child can maintain the policy. By transferring your non-registered assets policy to be passed on at their death to your grandchild into the policy, you’ll reduce your future annual tax as a death benefit, again without taxes, probate or You’ve worked hard tax-advantaged degree of financial success and have set burden. Funds invested in ato achieve a life legal fees. insurance policy allow for accumulation of cash aside non-registered investment funds as an inheritance the policyadult child for an remains completely The cash value in value inside the policy You don’t want the taxand or a grandchild. (within legislative limits), burden and probate fees to reduce whilelegacy alive in accessible and in your control the you’re you don’t have to pay income tax on this growth. to ever need the money yourself, you’re you’ll leave behind. Although you’re unlikely the event that you do require additional income. At your death,about the safety of your investments and having access to the funds should concerned because of certain income tax Canada Life’s wide range of permanent cash value life provisions applying to life insurance policies, you a high marginal tax bracket and are frustrated your circumstances change. Also, you’re in insurance products allows you to customize your life may transfer ownership of the life insurance policygrowth of these assets. with paying significant annual taxes on the insurance coverage and match your investment goals to your adult child (who is the only life insured on with your risk tolerance. the policy) without your estate paying any tax on the Cascading The situation life insurance Transferring assets between generations while minimizing tax How it works: The strategy While living This brochure provides enough detail on this strategy to capture your client’s interest and promote a call or meeting. At death Purchase a tax-advantaged permanent life cash value growth. The transfer is also free of probate, insurance policy from Canada Life™ with your executor and legal fees. Upon the transfer of ownership Tax-exempt life of the policy to your adult child, he or she will have Adult child adult child as the life insured and the designated Non-registered assets insurance policy becomes owner contingent owner. Your grandchild (the child of the access to the cash value in the policy while he or she life insured) is named as the beneficiary of the is living. Alternatively, your adult child can maintain the Grandchild continues Adult child is Grandchildto be passed on at their death to your grandchild policy. By transferring your non-registered assets policy is to be the named life insured and into the policy, you’ll reduce your future annual tax the beneficiary benefit, again without taxes, probate or as a death beneficiary contingent owner burden. Funds invested in a tax-advantaged life legal fees. insurance policy allow for accumulation of cash The cash value in the policy remains completely value inside the policy (within legislative limits), and accessible and in your control while you’re alive in you don’t have to pay income tax on this growth. the event that you do require additional income. At your death, because of certain income tax The Cascading of insurance cash value life Canada Life’s wide range lifepermanent strategy Permanent life insurance protection and you provisions applying to life insurance policies,control of insurance is designed for individuals who: your life products allows you to customize capital in ownership of the may transfer a tax-advantaged life insurance policy insurance coverage and match your investment goals Have annual tax obligations from to yourimmediate estate is the only life insured on An adult child (who enhancement with your risk tolerance. non-registered investments the policy) without your estate paying any tax on the Potential for tax-advantaged accumulation within the Want to leave an inheritance to heirs life insurance policy Want to control their legacy Potential to transfer the policy’s cash value growth taxfree to an adult child (who is the only life insured on Are worried While living At deatha large about leaving their family the policy) with tax burden The Cascading life insurance strategy provides: Estate planning solutions As you know, the use of this sales strategy doesn’t guarantee acceptance of the coverage amount applied for. Here are some tips to speed up the underwriting process for life insurance sales based on sales strategies illustrating how life insurance can fund the financial need: How it works: Death benefit proceeds transfer tax-free to named Tax-exempt life Non-registered at the death of the life insured beneficiaries assets insurance policy Canada Life’s Cascading life insurance Adult child strategy is abecomes owner simple way to preserve your wealth for those you love. The elimination of probate fees at death of the life Grandchild continues Adult child is insured with a named beneficiary other than the estate Grandchild is to be the named (not applicable in Quebec) life insured and the beneficiary beneficiary contingent owner n Clearly indicate which sales strategy you’ve presented on the Rep’s report section of the application under Purpose of insurance or include a cover letter outlining the sales strategy used and how life insurance can fund the financial need. n The proposed coverage will require financial underwriting and the proposed insured must qualify financially for the coverage once a life insurance application is submitted. Canada life’s usual financial underwriting principles for personally owned life insurance policies will apply. n All amounts of life insurance inforce and applied for will be taken into consideration when determining the amount of insurance for the life insured. For more information about this and other estate planning strategies, contact your The Cascading life insurance financial advisor. Estate planning solutions strategy provides: Permanent life insurance protection and control of capital in a tax-advantaged life insurance policy An immediate estate enhancement Potential for tax-advantaged accumulation within the life insurance policy Potential to transfer the policy’s cash value growth taxfree to an adult child (who is the only life insured on the policy) Death benefit proceeds transfer tax-free to named beneficiaries at the death of the life insured The elimination of probate fees at death of the life insured with a named beneficiary other than the estate (not applicable in Quebec) The Cascading life insurance strategy is designed for individuals who: Have annual tax obligations from non-registered investments Want to leave an inheritance to heirs Want to control their legacy Are worried about leaving their family with a large tax burden Canada Life’s Cascading life insurance strategy is a simple way to preserve your wealth for those you love. Cascading life insurance client PowerPoint presentation – available on RepNet For more information about this and other estate planning strategies, contact your financial advisor. This presentation can be used one-on-one or in a group setting for a client seminar. It comes complete with speaker notes. Underwriting guidelines for the Cascading life insurance strategy: A parent or grandparent can apply for insurance on the life of an adult child or grandchild (the life insured). The life insured doesn’t have to be named as an owner of the policy, provided that: n n The adult child or grandchild whose life is to be insured is named as the contingent owner of the life insurance policy and they sign an addendum to the life insurance application on delivery (sample attached). In the case of a minor child, the parent or guardian’s signature is required on the addendum. By signing the addendum, the life insured acknowledges that he or she has no policyowner rights at issue and that the future ability to purchase life insurance on his or her life could be affected by the amount of insurance issued in this policy.1 The estate or children of the life insured are named as beneficiary(ies). For additional tips and details on general underwriting guidelines for individual sales strategies, refer to RepNet under product info > sales strategies > Cascading life insurance > sales strategies and financial underwriting. For more information about Canada life’s Cascading life insurance strategy and other individual sales strategies supporting estate planning, contact your Canada life regional marketing centre. This information is also available on RepNet under Product info > Sales strategies > Cascading life insurance > Cascading life insurance catalogue. Marketing catalogue pieces can be ordered from your regional marketing centre. The addendum is treated in the same manner as an amendment (it must be completed by the life insured before policy delivery to the policyowner) and will hold up commission until the original signed addendum is received by Canada life. 1
- 6. For more information about our products and services, visit our website at www.canadalife.ca/repnet or contact your MGA, branch office or Canada Life regional marketing centre nearest you: British Columbia..............1-800-663-0413 Prairie...............................1-888-578-8083 . Toronto West................... 1-888-803-8333 Toronto City. ..................... 1-877-594-1100 . Eastern............................ 1-800-361-0860 . The information provided is accurate to the best of our knowledge as of July 2006, but laws and interpretations may change. This information is general in nature and is intended for educational purposes only. For specific situations, you should consult the appropriate legal, accounting or tax expert. Helping people achieve more™ Canada Life and design and "Helping people achieve more" are trademarks of The Canada Life Assurance Company. 46-5542-10-06