Income Generator | Insured Retirement | Corporate Insured Retirement | Secular Trust | Retirement Compensation Arrangement | Split Dollar RCA | Tax Sheltered Income Stream

Income Generator

A "Withdrawal Plan" illustration comparing results from a universal life with generating similar withdrawals through saving the money through an alternate investment. A genuine "buy term & invest the difference" concept.

How to create the optimum illustration

Universal life was not designed to be a retirement income vehicle. Just the same, because of its tax sheltering properties and its potential for attractive investment returns, it can be effective to produce additional retirement income if you choose the right prospect.

The "side fund" of the universal life policy generates the retirement income. To do so, it needs time to build up the tax-sheltered earnings before withdrawals start. If the retirement income is to start at age 65 the prospect should be 45 or younger. To compare favourably with an alternative investment that is subject to normal taxation, the prospect should be in a 45% tax bracket or higher.

Funding must be on a maximum basis with payments continuing for a minimum of 10 years. If you select YRT mortality charges, you must make sure that withdrawals use up all the cash value of the policy by age 69. If you don't, the investment in the universal life policy will not compare favourably with the alternative investment because the mortality charges will reduce the fund values too quickly after age 69. If you use level mortality charges, continue the income for as many years after age 65 as possible. The longer the income period, the more favourable the tax-sheltered growth within the universal life will compare with the growth in the taxable alternative investment.
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Insured Retirement

Shows how to use the fund value of a universal life policy as source of tax free "loans" repayable at death to create additional tax-free income while living.

How to create the optimum illustration

When creating the illustration, put yourself in the shoes of the banker who will be looking at the policy for its collateral value to cover the loan that may not be repaid until the insured dies at what may be a very old age. Cash value in the policy in excess of the built up loan value throughout the lifetime of that loan is the only thing the banker will be looking for. Maximum funding for at least 10 years is an obvious given. Level mortality charges will keep the cash value in tact, especially at the insured's very old age. The banker has to assume that the insured may live a long time and therefore cash value in excess of loan values at the very old ages is essential. Think carefully about what loan rate to enter. The loan will be fully secured so a rate close to prime rate is justified. A loan spread of 2% between what you use for the growth in the side fund and the loan rate is usually recommended.
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Corporate Insured Retirement

How to use the fund value of a corporately owned universal life policy as source for tax free "loans" repayable only at death to create additional taxable income while living.

How to create the optimum illustration

The same hints that apply to the Insured Retirement illustration also apply to the Corporate one.
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Secular Trust

Used by small businesses to provide an employee with additional retirement income, it illustrates and explains how a life insurance policy can be used to create a retirement planning alternative to an RCA.

How to create the optimum illustration

The same hints that apply to the Income Generator apply to this one.
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Retirement Compensation Arrangement (RCA)

Revenue Canada created this plan enabling an employer to make contributions to a trust for the benefit of an employee upon retirement. The illustration shows how funding the trust through "exempt" life insurance can generate additional income and other benefits.

How to create the optimum illustration

Revenue Canada introduced RCA's in 1986 primarily to tax the benefits accruing to employees of certain non-profit organizations or loss corporations. Revenue Canada has stated that the size of the benefit provided under a retiring allowance must be reasonable in relation to the remuneration received by the employee prior to retirement. What is reasonable is not clearly defined but it would appear that a maximum contribution of 18% of salary per year of service is acceptable.

The effectiveness of life insurance compared to an alternative investment depends entirely on the fund value that is available to the RCA trust to pay a retirement income. It means that maximum funding for a minimum of 10 years is a must. Retirement income should not start prior to the 15th year from the issue date of the policy and if the income illustrated extends beyond age 70 of the insured, level mortality charges must be used throughout.

Revenue Canada never intended RCA's to be a retirement income bonanza. An illustration needs to be put together with great care and prospects for the concept have to be carefully selected.
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Split Dollar RCA

The split dollar approach to funding an RCA trust has added to the attractiveness of life insurance as a funding vehicle for this growing source of new business.

How to create the optimum illustration

The helpful hints for the RCA apply equally to this concept. It is a variation on a theme for the primary purpose of building the side fund more effectively. It is recommended that the "split" policy is jointly owned from its inception and that the RCA trust is set up first. The split can be based on NCPI, Fund Value or Surrender value. The reasons for the choice should be documented in order to support the reasonableness of the decision.
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Tax Sheltered Income Stream

This is an income withdrawal illustration from a universal life policy similar to the INCOME GENERATOR illustration except that ADDCALC calculates the highest possible withdrawal amount over a given number of years.

How to create the optimum illustration

Many people only use the earnings on investments for retirement income and make every effort to leave the principal intact for emergencies or for the estate. This is exactly what the Tax Sheltered Income Stream illustrates; it shows that if preservation of principal is an objective, life insurance performs in a superior manner. Do try different "from" / "to" scenarios for receiving the income to determine which suits your client best and which creates the optimum illustration. Due to the dependence on the fund value, maximum funding for a minimum of 10 years is a must for all illustrations. It can be illustrated on a joint last-to-die basis for better retirement income results.
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Income Generator | Insured Retirement | Corporate Insured Retirement | Secular Trust | Retirement Compensation Arrangement | Split Dollar RCA | Tax Sheltered Income Stream