Secured returns that AREN’T “too good to be true”

Managing Your Money

Today’s economic environment presents investors with challenges that they have never faced before, and some are reluctantly giving up hope of seeing the “good” returns, that became the norm over the past decades. Could things get even worse for investors? The interest rate environment is LOW, markets are arguably HIGH, and questions about the next unforeseen economic crisis are not about IF but WHEN. The stress is especially high for those in mid-life, who are starting to look towards the vision of a relaxed and comfortable retirement. While those investors are generally shifting gears naturally to focus more on preservation of capital than growth, the instability has reduced their confidence levels and appetite for risk even further – so what to do?

As those investors become more risk adverse and start shifting their assets to traditionally “safe” fixed income investments they are also exposing themselves to higher rates of income tax and lower rates of return – not a good mix!  What if those investors could substitute some of the more traditional investments and:

●  Shift surplus assets out of the line of income tax, creating a permanent tax shelter

●  Have performance that is relatively stable and significantly higher than more traditional conservative investments

●  Have a secured outcome

●  Increase the after-tax value of the estate which will be passed on to their heirs

●  Access the funds if needed

If this sounds too good to be true, it’s not.  Though like anything else, there are pros and cons, so let’s discuss. We typically think of traditional asset classes as cash, bonds, and stocks. The concept of using life insurance as an asset class is another way affluent Canadians diversify into “safe” assets. The special tax-exempt nature of life insurance allows you to shelter an additional part of your personal or corporate investment portfolio from taxes. From a corporate perspective it can be even more effective and provides a unique way to transfer wealth accumulated within a personal corporation to the surviving shareholders tax-free. Unlike off-shore or sketchy tax-investment schemes this one has been approved by the government for over a century. This type of planning is generally geared towards those between 50-75 years old who enjoy excess income or have excess assets. It uses non-registered assets, so it’s not suitable for RRSP or TFSA savings. You need to be in relatively good health to qualify for life insurance. Liquidity is available, but not as simple as with a straightforward investment.

To illustrate how this would work, let’s consider a 60-year-old couple, John and Mary, who are in good health and are non-smokers. They have RRSP and TFSA savings, a company pension plan, and a comfortable amount of non-registered savings which they are not dependent on for their retirement income. The idea is that we use a life insurance policy as a way to shift their non-registered saving into a tax-sheltered plan that will also pay out tax-free to their heirs. This provides an unmatched certainty to preserve and build wealth as life insurance benefits are secured. Assuming normal life expectancy, they can expect to easily double or triple the value of those assets transferred to the insurance, compared to if they had invested them in a GIC type investment. That value would pass on to their beneficiaries, in most cases, tax free. By not using the life insurance strategy, and leaving the non-registered assets in traditional investments, they would require an equivaled pre-tax return, on a GIC type (ie “safe”) investment of approximately 10%, which we haven’t seen in decades.

Taxes are one of the most important advantages of this type of strategy, but there are other benefits as well. Some parents fear spending all of their children’s inheritance, leaving nothing to pass on. This strategy ensures there will be something left, and in a strategic way, leaving more for the children and less for the government.  Sometimes the death of a parent forces the untimely sale of assets by the children to pay capital gains taxes.  This can prevent a forced sale of investments, cottage, or other real estate asset.

Life insurance is and has been one of the most important strategies used by affluent Canadian families. I often see this aspect of portfolio management overlooked, especially when working through an approach of comprehensive financial planning. I would argue that traditional investment advisors tend to focus only on the investments per se, and many are not licensed in both investments and insurance. If this type of strategy interests you, seek out the advice of a professional who is non-biased and proficient in multi-dimensional planning, and not only investments or insurance. Because of the many unique features of life insurance, it is an asset class unlike any other.

We will be hosting an event in September, bringing together some of the top professionals in the field of Retirement Living. They will discuss topics ranging from downsizing and the stress of getting rid of stuff, to getting in-home assistance, and choosing the right residence to fit your lifestyle. To receive an invitation to this special event: Trends in Downsizing, Senior Living, and Home Care, contact Tania at [email protected] or 514-981-5795.  Please note space is limited.

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with over 24 years of experience working with retirees and pre-retirees. For a second opinion, private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or [email protected] Or visit our website at www.EphtimiosMacNeil.com

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.