Insured Inheritance | Income Shelter | Insured Annuity

Insured Inheritance

Your client has a "lump sum" set aside for a specific bequest under his/her will. The illustration shows how life insurance can "tax shelter" the investment and create superior inheritance values. It may be illustrated using either a Single Premium Deposit Account or a Term Certain Annuity.

How to create the optimum illustration

To have the most concise illustration, it is probably best to use a term certain annuity to translate the lump sum that is available into an after-tax cash flow over a 10-year period. The concept illustrates well because of the tax-sheltered growth in the side fund. To make sure that there is enough money in the side fund, you need a 10-pay approach on a maximum funded basis. For a more favourable comparison between taxable growth in the alternative investment and tax-sheltered growth in the insurance policy, make sure that your prospect is at least in a 30% tax bracket. Predictably, the higher the tax bracket the better the illustration looks.

This is how you calculate the premium for 10 years that the illustration will be based on. Request or run a 10-year term certain annuity quote for the lump sum amount that your prospect is able to invest. You want annual payments with the first payment to start 30 days after you run the quote. Remember that you need that first payment for the first premium. Make sure that the quote is on a prescribed basis and that you get the annual taxable amount. Apply the prospect's personal tax rate to the taxable amount and calculate what amount in personal income tax will have to be paid each year. Subtract that amount from the gross annuity payment and you end up with your annual premium for 10 years. If you use universal life, make sure that you use the smallest possible face amount for that premium because you want as much as possible from that premium to go into the side fund. Most prospects do not buy the 10-year term certain annuity because they find that they can come up with the same after-tax amount as the prescribed annuity from their regular investments. Because of the guaranteed nature of the prescribed term certain annuity it is still recommended that you use it to illustrate the concept. If the prospect, or the financial advisor of the prospect, feels that the annuity is not required, you should encourage their approach to be used.
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Income Shelter

Those with incomes in excess of what is needed to support life style needs should consider sheltering that income from taxes for increased growth while living and creating larger inheritance values at death.

How to create the optimum illustration

The Income Shelter is truly the workhorse of ADDCALC. Whenever you are illustrating a universal life or whole life policy, make sure to include an Income Shelter illustration. The beauty of it is that, whether you have a minimum pay, quick pay or maximum pay product, the Income Shelter will always make your product illustration look better. The best illustration is one with maximum funding for 10 years. However, even a quick pay on a minimum funded for life approach still looks favourable. You may have to run the illustrations to age 90 only, for example, if the cash value runs out in later years. The Income Shelter works well in combination with other illustrations. The Capital Gains Protector, for example, should always be accompanied by an Income Shelter to put the investment in the insurance policy to cover the taxes in proper perspective. Neither age nor tax bracket of your prospect should discourage you from running an illustration.
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Insured Annuity

Preserves a lump sum investment for estate purposes in a Non-registered Life-0 prescribed annuity while generating a larger guaranteed income for life. A comparison is made between the insured annuity and an alternate investment for income generating purposes.

How to create the optimum illustration

Generally speaking, a tax bracket of 40% and a prospect's age of 65 or older are needed to make the figures work. To get a good rate for the annuity and the Term to 100 insurance, only amounts over $100,000 should be considered. In sub-standard cases the extra income of an impaired annuity generally does not offset the extra premium for the insurance coverage.
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Insured Inheritance | Income Shelter | Insured Annuity