Philip Levinson

Why pick segregated funds?

Segregated fund products can offer greater peace of mind for those looking to participate in the market but wanting the reassurance of insurance guarantees to help them sleep better at night. (photo from pxhere.com)

Looking for an investment option that can help you sleep at night? Segregated fund products can guarantee you’ll get back some or all of the money you invest.

Segregated fund products, available exclusively through insurance companies, provide the growth potential of market-based investments with the benefits of an insurance contract. They first came into popularity more than 25 years ago, when interest rates began to fall and conservative investors turned to them as a secure alternative to guaranteed investment certificates (GICs). They continue to provide a safe way to grow your assets while providing you with some protection from market downturns.

Are segregated funds a good investment?

Ninety-eight percent of Canadians surveyed as part of the 2015 Retirement Now report said it’s important to have some form of guaranteed income in retirement. At the same time, Canadians are living longer than ever before and many are underestimating their longevity and are underfunding their retirement.

Segregated fund products can offer greater peace of mind for those looking to participate in the market but wanting the reassurance of insurance guarantees to help them sleep better at night. They’re particularly suitable for those who are:

• Seeking enough return on their investments to reach savings goals.

• Looking for a broad range of quality investment options.

• Building their savings but looking for protection against market downturns.

• Seeking insurance benefits, including prompt estate settlement and guarantees.

• Looking for guaranteed income for life.

Segregated funds vs alternative investments such as mutual funds

Segregated fund products have some similar features to mutual funds in that they can hold a range of assets and enable you to benefit from holding a diverse mix of investments. They differ in that they offer the following unique benefits:

• Maturity guarantee: Even if the value of your investment declines, you are still guaranteed to get back 75% to 100% of the money you have deposited, less any withdrawals, in either 15 years or at age 100, depending on the type of product you have selected.

• Death benefit guarantee: Segregated fund products offer a 75% or 100% death benefit guarantee that can protect the value of your estate. The greater of your market value or death benefit will bypass probate and flow directly to your beneficiaries, depending on the type of product you have selected.

• Potential creditor protection: Small business owners and entrepreneurs can benefit from the fact that, under provincial insurance legislation, segregated fund products may offer protection against creditors in the event of a bankruptcy.

Segregated fund products also provide a variety of investment options to meet the needs of people in specific life stages:

• Competitive fees: In the past, segregated funds have typically been more expensive than mutual funds. But some of today’s segregated funds come with lower maturity and death benefit guarantees and carry management fees not much higher than standard mutual funds.

• Lock in market gains: Some segregated fund products provide the option of resetting the maturity guarantee up to several times a year. If your funds go up in value, you can lock in a higher guarantee.

• Guaranteed income options: Looking to fund your retirement? Some segregated fund products are designed to function like an annuity and provide you with a guaranteed income for life.

• Naming beneficiaries on non-registered accounts so that it bypasses the estate and goes straight to the beneficiaries. This is a good tool for estate planning and to avoid any wills variation issues.

• Designate an irrevocable beneficiary who needs to sign off on any account withdrawals or changes. Owner retains control while providing a gift to children or grandchildren.

Philip Levinson, CPA, CA, is an associate at ZLC Financial, a boutique financial services firm that has served the Vancouver community for more than 70 years. Each individual’s needs are unique and warrant a customized solution. Should you have any questions about the information in this article, visit zlc.net or call 604-688-7208.

Disclaimer: This information is not to be construed as investment, legal, taxation or account advice, nor as an offer to sell or the solicitation of an offer to buy any securities. It is designed only to educate and inform you of strategies and products currently available. The views expressed in this commentary are those of the author alone and are not necessarily those of ZLC Financial. As each situation is different, please seek advice based on your specific circumstance.

What if critical illness strikes?

(photo from flickr)

We all wonder and fear what would happen if we were diagnosed with one of many critical illnesses or suffered a heart attack or stroke.

You work hard to achieve personal and financial goals during your lifetime. Your plan is working and you have accumulated savings and investments, using tax-efficient investment strategies such as your registered retirement savings plan (RRSP). If you have to sell investments prematurely or stop investing in order to manage recovery costs, your future plans may never recover. So what should you do?

The survival rate of these critical illnesses has risen over the years and we are now most likely going to survive “the big one.” In Canada, these are the statistics: 63% likelihood of surviving at least five years after a cancer diagnosis, 90% will survive a heart attack, and there is an 80% survival rate after a stroke and hospitalization.

Here’s the problem

The issue is that there are significant costs associated with the treatment and recovery from such an illness. There can be large medical bills that are not covered by our various healthcare plans. In Canada, many will want to pursue treatments offered by private clinics at home or abroad, which can be extremely costly.

In addition to these costs, we often neglect to consider the other realities that people face, such as not being able to work. The most obvious is the loss of income suffered when one cannot work or run the family business or professional practice for an extended period of time. This might also affect the income of the spouse and other family members, those who are needed to provide home care.

What are the options?

To deal with the unexpected costs and loss of family income there are really two choices:

One may choose to self-insure, meaning that one accepts the risks and has put money aside to cover the eventuality, or
One may purchase critical illness insurance, which provides a lump sum after one is diagnosed with one of the critical illnesses covered in the policy.

The options in more detail

Removing the costs and lost income from one’s financial plan is a considerable setback to the financial plan. The projected retirement income is suddenly reduced and, for most people, it will never be made up. The impact is even greater if one is forced to withdraw from RRSP accounts, as these amounts are fully taxable as income.

As an example, if one needed to cover $100,000 of costs and had to withdraw it from a RRSP account, at a marginal tax rate of 50%, the person would have to withdraw $200,000 of savings intended for retirement.

The eventual impact on one’s projected retirement must be considered carefully, taking into account the income tax issues based on the source of funds, plus the loss of compounding that will no longer be enjoyed on the growth of those funds from the time of the critical illness until the time one planned to retire.

Suffice it to say, the decision to self-insure needs to be taken very seriously. Unfortunately, there are statistics that reaffirm the risks of falling ill with a critical illness are significant.

Critical illness insurance is sometimes referred to as “new insurance,” as it is a newer solution than traditional life insurance. In the past, before the many medical advancements we have enjoyed, life insurance was the solution because it was more rare to survive the illnesses.

Critical illness policies are designed to pay out a lump sum, say $100,000, typically 30 days after the diagnosis. The illnesses are defined and one can purchase a basic plan that covers heart, stroke and cancer, or the more comprehensive plans that have up to 25 covered conditions and include long-term-care insurance as well.

As of the end of 2019, one major life insurance company reported the following statistics:

It has paid out $520 million on 5,360 claims. In 2019, 67% were for cancer, 13% for heart attack, four percent for strokes and the remainder for coronary bypass, multiple sclerosis and other illnesses. The average age of claimants was 53 for women and 55 for men.

The lump sums paid out are used to cover medical costs, replace lost income, retire debt such as loans and mortgages, cover salaries within a business and often pay for time off and bucket list-type vacations.

There are programs available where, if one has been fortunate enough to not have made a claim, in other words, not have fallen ill with a critical illness, the policy can be canceled and all the premiums refunded. The only cost, in that case, is the time value of money on the premiums, as 100% is refunded.

It is even possible to model such a plan where one uses funds earmarked for a RRSP contribution to cover the premiums. This is more effective than one might first think, as the refund of premiums is tax-free.

The first step is to identify and understand the risks to one’s retirement plan. The second step is to consult a qualified professional to consider what protection works best for you.

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Sources: Manulife Insurance – Critical Illness: Asset Protection: Keep Your Retirement Savings for the Future, and Critical Illness: Retirement Protection Handbook.

Disclaimer: This information is designed to educate and inform you of strategies and products currently available. The views (including any recommendations) expressed in this commentary are those of the author alone and are not necessarily those of ZLC Financial. This information is not to be construed as investment advice. It is for educational or information purposes only. It is not intended to provide legal, taxation or account advice; as each situation is different, please seek advice based on your specific circumstance. This commentary is not in any respect to be construed as an offer to sell or the solicitation of an offer to buy any securities.

Transferring our assets

(photo from Alpha Stock Images, photographer Nick Youngson)

After a lifetime of work, most of us would like to know that our assets and legacy are transferred to the next generations, children and grandchildren, in the amounts and percentages we chose while alive. Our hope is that this would happen as painlessly, securely and quickly as possible.

It is a subject I am quite passionate about. I have seen loving families, with the best intentions, fail to adequately plan this transfer of assets and they are faced with disappointing financial and emotional consequences. There is the very real risk that your assets will not land in the hands of the people you intended. In addition, even when your wishes are met, without the proper planning and communication, feelings can be hurt, with long-lasting negative, albeit unintended, consequences.

What is probate

Probate is a legal procedure that validates a deceased’s will and confirms the executor’s authority to carry out the testator’s wishes.

There is no requirement that every will must be probated. Proper planning can eliminate the need for probate, and the type of asset involved will generally dictate whether or not probate is required.

The cost of probate varies by province. British Columbia has fees of $14 per thousand on estates over $50,000, plus a filing fee. Property owned in another province may attract fees based on that province’s fee schedule.

Advantages/disadvantages

When letters of probate are obtained, financial institutions, transfer agents, land registry offices and other third parties can safely transfer the assets to the intended recipients. The time frame for any court challenges to the will or estate is usually measured from when the probate is granted. This limits the period when legal action may be taken.

However, the process can be very expensive, time-consuming and complex, and is open to public scrutiny. This loss of privacy can be very important to the ongoing harmony of the family when assets aren’t divided equally among the beneficiaries.

Avoiding or reducing probate

Make sure you have a will. Probate fees will be applied automatically if you die intestate (without a will).
Gifting prior to death can reduce the value of the estate subject to probate but must be done with care. There are important legal and income tax considerations and possibly property transfer taxes.
Use named beneficiaries whenever possible. Moving assets to vehicles such as life insurance, annuities and segregated funds is a great way to avoid probate. What’s important is that proceeds are paid quickly, typically in a few weeks, and directly to the beneficiary. This avoids lawsuits from family members who may feel they didn’t receive what they felt they deserved from the estate.
Holding assets in joint tenancy with a spouse, child or other family member will avoid probate, as the asset passes automatically upon death to the other individual. Using joint tenancy to avoid probate fees should involve careful consideration: there will be a loss of control once it is jointly held and the asset will be exposed to the joint tenant’s creditors. There are also certain complicated tax issues and other risks associated with this strategy.
Transferring assets to a trust will remove the asset from the estate. Be careful of appreciable assets that may attract a taxable disposition upon transfer. The use of an alter-ego or joint spousal trust can be very effective for this purpose. There are many cases where trusts are necessary to achieve more complicated wishes but they can be expensive to set up and require annual maintenance.
Transfer assets to a corporation. Except for outstanding mortgages on real estate, which are deductible, probate fees are generally charged against the gross value of an estate asset. If an estate asset was purchased with borrowed money, it may be beneficial to transfer that asset to a company. This will reduce the value of the estate and the company share value will be the asset, less the debt used to acquire it.
Have multiple wills. Not all assets are subject to probate. It is becoming popular to have two wills – one for assets that are probatable and one for those that are not. This strategy is not available in all provinces and the use of multiple wills may create problems with the new graduated-rate estate tax with respect to testamentary trusts. It is important to seek professional advice when considering these strategies.
Keep it simple. There are often cases where we can plan to quite easily avoid probate entirely. All assets can be invested within segregated funds (GICs, stocks and bonds are available) with named beneficiaries and others gifted. This can be done where income is still guaranteed for the rest of one’s life, but ownership has been transferred while alive, or will pass straight to beneficiaries later, thus avoiding probate.

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Finally, I like to stress the gifting of assets while one is alive, be it to your family or a charity. There are many advantages, whether it’s the personal satisfaction of supporting your favourite charity, or the love shared with your children and grandchildren. After all, isn’t estate planning really intergenerational legacy planning?

*** Disclaimer: The views (including any recommendations) expressed in this commentary are those of the author alone, and are not necessarily those of ZLC Financial. This information is not to be construed as investment advice. It is for educational or information purposes only. It is not intended to provide legal, taxation or account advice; as each situation is different, please seek advice based on your specific circumstance. This commentary is not in any respect to be construed as an offer to sell or the solicitation of an offer to buy any securities. ***

Financial future of next generation

(image by ZLC Financial)

One of the few things in life that we can absolutely count on is change. Therefore, no matter what age or stage in life, just about everyone has a need for insurance. It is especially important to have a review-revise-repeat approach when it comes to planning for you, your family and your ever-changing lifestyle and situation.

Do you have assets that you don’t plan on spending in your lifetime? Do you want to leave an inheritance but are worried about leaving your family with a large tax burden? A cascading life insurance strategy is a simple way to preserve your wealth for the generations to come.

Cascading life insurance is an intergenerational transfer of wealth, allowing grandparents to provide a significant legacy to their grandchildren without giving up control during their lifetime. It is an efficient tax-advantaged way to preserve your wealth for those you love by taking advantage of the tax-sheltered features of permanent life insurance.

The best way to be prepared is with a well-thought-out plan. Let’s take a closer look at how to use cascading life insurance. Here’s how it works.

Purchase a permanent life insurance policy with your grandchild as the life insured. If your grandchild is not the age of majority, their parent (your son or daughter) can be the contingent owner. When a contingent owner is named, the policy ownership will automatically transfer to the contingent owner without tax.

You or your son or daughter can be named as the beneficiary. Similar to the ownership structure noted above, you can be the beneficiary and your son or daughter can be the successor beneficiary.

Some of your non-registered assets will be used to fund the policy, thus reducing your future annual tax burden. The funds invested in a life insurance policy will allow for accumulation of cash value inside the policy, and you don’t have to pay income tax on its growth. Upon your death, the ownership of the policy is transferred to your adult child as contingent owner (or your grandchild, if the age of majority) without your estate paying any tax on the cash value growth. The transfer is free of probate, executor and legal fees.

The cash value in the policy remains completely accessible and in your control while you’re alive in the event that you do require additional income.

Meet Brian and his family

Brian is 66. He has $300,000 invested that he doesn’t need to meet his own costs of living. Brian wants to minimize the amount of tax he pays on his non-registered portfolio. In addition, he wants to shelter those assets from tax and probate fees when the assets are transferred to his grandson James, Janet’s son, who is a minor today.

Brian purchases a permanent life insurance policy and deposits the $300,000 into the policy over a 10-year period. Brian is the owner of the policy, and he names Janet as the contingent owner. The insurance is placed on his grandson James’s life and his daughter Janet is the beneficiary of the policy.

When Brian dies, Janet will become the owner of the policy, since she was named as the contingent owner. Janet can continue to own the policy indefinitely or transfer the policy to James when she thinks he is fit to be the owner.

The cash value will continue to accumulate in the policy and will be eventually owned by James.

Now, here’s the important part: the policy, when transferred from Brian to Janet and eventually from Janet to James, will pass along with its cash value, free of tax and probate fees.

James will have a few options:

Access cash value from the policy (a taxable event),
Borrow money using the investments in the policy as collateral, providing him with tax-free cash flow, or
Change the beneficiary to his children, ultimately creating a lasting legacy passed down through four generations.

Insurance is a valuable and creative tool that can help provide peace of mind for you, your family and their financial future. The cascading life insurance policy provides several benefits:

Permanent life insurance protection and control of capital in a tax-exempt life insurance policy.
The ability to accumulate tax-exempt cash within the life insurance policy.
The ability to transfer the policy’s cash value growth tax-free to your grandchild, who is the only life insured on the policy.
Death benefit proceeds are paid out tax-free to named beneficiaries at the death of the life insured.
Probate fees are not applicable on the life insurance proceeds upon the death of the life insured with a named beneficiary other than the estate.

The cascading life insurance strategy is designed for individuals who have annual tax obligations from non-registered investments, who would like to reduce the tax burden upon their death and are interested in legacy planning (family and charity).