RRSP Transformation
Our RRSP Transformation strategy enables a client to exchange fully taxable income from his or her RRIF and instead, convert the capital amount of the account into a tax-free, probate-free bequest for any named beneficiary. Normally, owners of registered accounts pass any remaining assets to family members when they die. If a legal spouse receives these assets they are not taxable upon transfer to him or her, any income subsequently withdrawn is fully taxable, just as with any registered account. Most people have arranged their affairs so that registered assets eventually pass to their children. At that point, those assets are fully taxable to the estate and a large portion of the money, often half, disappears in tax. We can resolve this estate planning problem with the RRSP Transformation strategy.
Whether before or after age 72, and whether RRIF income has started or not, the owner of a registered account can guarantee that his or her beneficiaries receive the full value of his or her RRIF as a bequest, tax-free, upon his or her death. This bequest also bypasses probate, avoiding probate fees and facilitating privacy for the testator and beneficiary.
Who is it for?
This strategy is designed for individuals who:
- wish to ensure a guaranteed estate value for a named beneficiary without any tax deductions
- are ages 60yrs and older, in reasonable health, and are insurable
- who do not need the anticipated income from their RRSP/RRIF/LIRA/LIF because they have adequate income from other sources via pensions and/or other assets
- wish to bypass probate, and thereby obtain a cost, time and privacy advantage
How does it work?
Registered capital is used to fund a guaranteed life annuity. Then, the after-tax guaranteed payments from the guaranteed annuity is used to fund a fixed premium permanent life insurance policy. Upon death, the life insurance policy pays out its guaranteed face value to the named beneficiary (usually spouse or children, but any person or any organization can be named). In many cases, when running the numbers for an individual client, the bequest ends up to be even larger than the entire starting RRIF value. Once put in place, the outcome is known and guaranteed by the respective issuers.
If, for any reason, the client wants to unwind the arrangement in the future, such as in the case where he/she decides he/she requires his/her RRIF income, he/she can do so. Simply drop the life insurance policy and direct the guaranteed lifetime annuity income to the client to spend.
What’s an example?
A 71 year old client has a $1.4mm RRSP. The client also has more than adequate income from other sources, and placed her very close to the top income tax bracket. She was in standard health, which meant we could obtain a life insurance policy for her at standard rates. After converting her RRSP balance to a guaranteed life annuity, remitting the taxable portion of her annuity at her tax rate, we had sufficient remaining cash flow to secure a permanent life insurance policy for $1,825,910. All products used have fixed lifetime cash flows, so there are zero additional funding requirements to ensure this outcome.
The end result is that this client transformed a $1,400,000 RRIF, which would have been taxable to her estate, to a $1,825,910 tax-free immediate estate benefit for her children. The estate value is 30% higher than her RRSP capital and as much as 165% higher than if she had not implemented this solution, since the after-tax value of her RRSP would be $687,000 in year 1. We can easily demonstrate that this client is financially far better off with this strategy every year - from her present age to beyond age 100.
Let me see!
Ask for a complementary evaluation of the RRSP Transformation using your numbers by calling us at 416.849.6552 or via email at craig@csiccorp.com
Critical Illness Coverage
Make Critical Illness insurance work for you – get all your money back if you stay healthy
Many people haven’t heard of “critical illness coverage”. This is a unique type of insurance first proposed by a medical doctor. This doctor conducted the world’s first successful heart transplant, and noted that the financial burdens arising from major illnesses were crippling to his patients.
Getting seriously sick is expensive for families: careers often suffer or are cut short, costs for medical attention and assistance suddenly appear, and resources intended for retirement or bequests are reluctantly tapped. The risks are higher than we would like to think; the average 40-year-old non-smoker healthy male has a 26% probability (1 in 4) of being diagnosed with a critical illness before age 65. Thanks to the initiative of the heart surgeon, there is now a specific way to protect yourself against financial risk in the case of a critical illness.
In brief, critical illness insurance coverage will pay you a tax-free lump sum if you are diagnosed with any one of 24 serious conditions, including all the big ones like, heart attack, stroke, and cancer. This money can be used in any way you please. It is often used by people to access specialized medical attention, such as flying to the Mayo clinic. Some people use it to replace income so they can take a few months off work to recover. It can be used however you wish; there are no receipts, reporting, or other requirements. Most appealingly, if you are not hit by one of these 24 conditions, as we all hope, you can elect to get a tax-free refund of all your premiums paid at year 15 or anytime thereafter. If we disregard inflation, the effective cost for this protection is zero if you elect your refund of premiums.
Who is it for?
This strategy works best for people who:
- are between the ages of 25 to 60, in reasonable health, and are insurable
- wish to ensure they have adequate financial resources available, in the event they are diagnosed with a critical illness
- are happy with a “forced savings program” in the likely event that they are never diagnosed with a critical illness
How does it work?
Insurance of any type is usually considered a necessary evil – one hopes they never have to make a claim, but if they don’t make a claim, money appears forfeited. This trade off changes to a “win-win” by utilizing a particular option on the critical illness policy. If you are diagnosed with any of the 24 critical illnesses and survive 30 days, the policy face amount you applied for is paid out to you. If you have no claims, then a full refund is paid to you once 15 years has elapsed, and you close the policy. Both payments are tax-free.
An example?
A 40-year-old accountant realizes that a 26% probability of having a critical illness before age 65 is too high to ignore. He purchases $250,000 of critical illness coverage and goes back to his happy life. He pays $426 per month for this policy. Fate smiles upon him and he stays healthy. When he is 55, he elects to take a refund of all his premiums, $76,680, in a tax free lump sum, and close the contract.
Income Protection
Make Disability Insurance work for you - get 50% of your premiums back for making no claims
Although nobody likes to think about it, the greatest financial risk that most working people face is the potential loss of their future income due to a medical disability. The statistics are sobering; a 40-year-old male has a 33% chance of experiencing a disability before the age of 65. High quality disability insurance mitigates this risk, yet the coverage provided through group plans is often insufficient. Many group plans only pay upon a severe disability, and limit benefits to a period of a few years. High-quality individual disability insurance has a far wider definition of disability, can move with you when you move jobs, and can pay higher benefits to age 65. Commensurate with its higher quality, individual disability insurance is more expensive than group coverage in absolute terms. However, when looking at the potential benefit per dollar of cost, a good individual disability policy represents far more value. This strategy shows how you can protect your income using the best disability policies - yet receive 50% of the premium back if you make minor or no claims.
Who is it for?
This strategy is designed for individuals who:
- are a key breadwinner for their household
- want to ensure that their income to age 65 is not jeopardized by their health
- want to earn a guaranteed return of approximately 26% before-tax to offset the cost of protecting their income
How does it work?
Insurance is usually considered a necessary evil – one hopes they never have to make a claim, but feels that the money they have paid is forfeited. This trade off changes to a “win-win” by utilizing a particular option on the policy. If you become disabled, the policy will replace your lost income. If you have had minimal or no disability claims, this option guarantees that 50% of the total premiums paid are refunded to you. The non-taxable refunds occur every 8 years, and again upon reaching age 65. We can easily calculate the effective cost of owning income protection using the strategy in the example below.
What’s an example?
Realizing that his biggest asset is his future income, a 45-year-old pharmacist earning $100,000 each year wants to acquire good but cost-efficient disability coverage. With his advisor, he determines that a monthly tax-free benefit of $4,300 will cost him $142/month. Adding the premium refund option increases the monthly cost to $208/month but guarantees him a refund of 50% of his premiums in 8 years if he makes minor or no claims. In this case, the first refund will be for $9,257. We can calculate the effective rate of return on the additional cost for this option. In the pharmacists’ tax bracket, the effective rate of return is over 25.3% before-tax or 13.58% after-tax – and is guaranteed.