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APRIL 2014

KEY INSIGHTS:

LIFE INSURANCE 1. Insurance can help preserve
affluent lifestyles
for the WEALTHY 2. Permanent life insurance can
protect or enhance financial capital
The myth-busting benefits 3. Permanent insurance is an asset
class worth considering

There’s another old myth about life insurance too: “the wealthier
you are, the less you need insurance.” Like many other generally
accepted “truths”, this one appears logical on its surface. But dig
down a little deeper and you’ll find a different story.
Consider a typical scenario for an affluent, middle-aged
couple who own a successful business: their kids have grown,
they own a beautiful home, and their business has prospered,
providing them with a valuable asset and a steady annual

There are grains of truth to many income. Life insurance was essential protection for this couple
25 years ago when their debt was high and the kids were young.
myths, but others simply don’t But today, with no mortgage and millions in investment and
stand the test of time. For example, business assets, the need for life insurance would appear to
be greatly reduced.
years ago parents would tell their
kids to dress warmly so they But is it?
While the couple now has more than enough financial
wouldn’t catch a cold. But medical security to meet their basic living needs, the surprising
professionals busted that myth fact is this: the benefits they can derive from life
insurance are greater than ever.
when they discovered that cold
air doesn’t make you sick.

Wayne graduated from the University of Waterloo in 1986 with an Honours Bachelor of Mathematics degree. a business. majoring in actuarial LIFE INSURANCE IS WEALTH PROTECTION science. National Accounts & Strategic Business Development. the greater the percentage of for firms and advisors so they can recognize income replacement they’ll need to maintain their lifestyle. he invests his – with multiple properties to maintain. ACIA Regional Vice-President. insurance as an integral component of their business model. time developing best practice methodology The higher an individual’s pre-retirement income. Wayne was promoted to Regional Vice President in 1998 and has been integral in building out a tight-knit team to Financial Capital Benefits support strategic and valued partners to grow Growing and protecting assets that an individual already owns. THERE ARE TWO KEY BENEFITS LIFE INSURANCE He joined Sun Life Financial in 1990 in the individual product pricing area and quickly CAN PROVIDE FOR WEALTHY INDIVIDUALS: gained exposure to various areas of the business including Marketing and Distribution Human Capital Benefits through a number of positions of increasing Protecting the value of an individual’s income earning potential. his mission is to debunk some of the common myths and misunderstandings about insurance and ultimately. Miller Busted: Insurance can help preserve affluent lifestyles BMATH. he attained the Associate of the Society of Actuaries (ASA) TOTAL WEALTH = Human Capital + Financial Capital HUMAN CAPITAL is the value of one’s future income earning potential designation. A respected industry expert and advocate. HUMAN CAPITAL FINANCIAL CAPITAL Building for the future Getting ready for retirement At retirement 2 . make up their net worth (real estate holdings. Sun Life Financial Wayne Miller is a Regional The more Vice-President with Individual Insurance clients have. help advisors improve their practices. it increases advisors to share his insights. and that Sun Life’s insurance business. His industry involvement FINANCIAL CAPITAL is the value of one’s net worth includes membership in Advocis. high-end travel and more. He’s served as Chair and member of the Canadian DOLLARS ($) TOTAL WEALTH Life and Health Insurance Association Inc. GAMA International Canada and the Conference for Advanced Life Underwriting (CALU). That same year. luxury vehicles. ASA. LIFE INSURANCE for the WEALTHY BIOGRAPHY Myth: The wealthy don’t need life insurance Wayne G. Distribution for Sun Life Financial Canada. responsibility. When not presenting to large and small groups of The need for money and ongoing cash flow doesn’t decrease with wealth. the more they have to lose. investments). (CLHIA)’s various task forces.

2011. 1 Sun Life Canadian Health Index™. couple has built. critical illness insurance typically declines as individuals approach – which pays a lump sum amount the end of their income-earning years. 3 . and don’t plan to retire for another the investment nest egg that the desired lifestyle. The payout income will need to discuss insurance protection while from the policy can be used towards individuals are insurable. A term insurance policy – Aon Hewitt for the Retirement Income which provides insurance protection Affluent individuals also have a lifestyle Industry Association. 2013. APRIL 2014 What do wealthy individuals need to protect? HUMAN CAPITAL BENEFITS – income and lifestyle protection While the need to protect human capital And finally. It is important to can stem from an illness.1 could protect this income stream in the event one of the business owners becomes disabled and is no longer able to work. hiring staff income in retirement at home or at work. upon the diagnosis of a major illness It’s estimated that it may still have an important role to if the individual survives the required individuals with more play for wealthy individuals with some waiting period – can be instrumental earning years left and a lifestyle they in covering some of the high costs that than $150. whatever is required. Over one third of income stream if an early death occurs. Canadians who experienced a serious health event or accident said that it Likewise.000 in annual want to maintain. 10 years. like financing a replace 84% of their For example. imagine the successful leave from the business. a disability insurance policy triggered a significant lifestyle change. 2012 for a specific period of time and is the that they want to maintain – and they lowest cost form of insurance – could shouldn’t underestimate the impact of be put in place to help protect this a serious illness on it. For a couple AGE 71% chance of one of them experiencing a critical illness in their retirement years THERE IS A 65 82% probability that one of them will require long-term care. or managing business couple continue drawing ongoing credit costs – while preserving years to sustain their income from their business each year. Source: Munich Re.

real estate and cash investments. we usually think of stocks. Avoidance of estate settlement 3 costs such as probate fees Typically. business and lifestyle tax and maximize their estate’s value. and lifestyle planning For secure investment goals – insurance as an alternative asset class When we think of investment asset classes. But permanent life insurance policies – either whole life or universal life that stay in place for an individual’s lifetime – can produce superior rates of return than more traditional. Life insurance can play a valuable role policy can provide significant benefits: in many of these planning strategies – and that’s not only in protecting wealth but in growing it. the need for significantly greater for the life insurance than for the non- estate. business and lifestyle registered investment regardless of when death occurs. 4 . their retirement income needs and are looking to minimize As wealth grows. And given that death is a 100 per cent certainty. it’s the “financial (TFSAs)) there are limited options for tax deferral or tax capital” benefits that the affluent miss out on if they buy savings. Even if the individual needs to access his savings during his lifetime. While the need for these “human capital” protections Individual Pension Plans (IPPs) and Tax Free Savings Accounts should be assessed for all individuals. the need for estate. Once an individual maximizes their tax-sheltered saving opportunities (Registered Retirement Savings Plans (RRSPs). permanent life planning increases. bonds. life insurance offers comparable liquidity to a bond portfolio. 1 A tax-free death benefit Here’s an overview of some of the ways that insurance can be used to protect or enhance financial capital –  ax-sheltering of policy T while accomplishing clients’ estate and other financial 2 investment income planning objectives. conservative investments like Guaranteed Investment Certificates (GICs) or government bonds. insurance is worth considering as an asset class. with even less volatility. What do wealthy individuals need to protect? FINANCIAL CAPITAL BENEFITS – estate. business. a permanent insurance planning increases. For individuals who have enough savings to finance into the myth that life insurance isn’t for them. the benefit to the estate upon death is As wealth grows.

The 77 proceeds of the life insurance policy are paid to the children % or other beneficiaries to offset the cost of the charitable gift CONTROL and ensure they get the full inheritance intended. However. and lifestyle planning Providing additional tax-free retirement income While permanent life insurance can be an excellent way to build estate value. they transfer ownership of the policy to the charity of their Individuals can also access their insurance policy’s value choice. institution is the most common method of generating In addition. Under current tax laws. with the same charity also named as beneficiary. The individual makes a direct charitable bequest in their will. 2013. For The charity is guaranteed the amount of the death benefit this reason. the loan substantial charitable contribution beyond their annual proceeds are received tax free. a loan arrangement from a third-party financial provided the individual continues to make premium payments. 8 Another way to use insurance proceeds is to replace the cost % of of a charitable gift at death. they (or their estate) may not have the liquid cash to make it happen.Household Balance Sheet. APRIL 2014 What do wealthy individuals need to protect? FINANCIAL CAPITAL BENEFITS – estate. is payable on the loan until death. the individual applies for a excess going tax-free to the named beneficiaries. with the To donate using insurance. permanent insurance policy. for which the insurance While many affluent individuals would like to make a policy is the collateral. support for various causes. OF ALL financial wealth Source: Investor Economics . When the individual dies. and with no probate fees payable on the amount. and the charitable tax credit households is used to reduce income taxes payable by the estate. a withdrawal or policy loan could trigger tax consequences depending on the adjusted cost basis of the policy. 5 . When the policy is approved. The financial institution provides the Making the most of charitable giving individual with a series of loans. the payment of the death benefit is made outside additional income in retirement. through a withdrawal of the policy’s cash value or through a The individual pays the annual premium and gets a tax policy loan directly with the insurance company. it can also be used to provide an additional tax-efficient source of retirement income. business. receipt for that amount. The most common method of doing this is by using the cash surrender value of the policy as collateral for a loan from a financial institution. One affordable solution is The loan arrangement can be structured so that no interest the use of life insurance to make a charitable bequest. of the estate. so the charity receives the proceeds quickly. part of the death benefit goes to pay out the loan.

One of the most effective solutions is buying life. unless they rollover to a qualified beneficiary. cause financial hardship to either the company or to the partner being bought out. life insurance proceeds can be $ $ be structured so that some or all of the insurance proceeds $ $ $ used to provide an equal share of the estate $ $ are used to pay tax-free capital dividend payments from $ $ to other beneficiaries. if an individual owns a business and wants one child to assume ownership $ Tax-effective transfers: Insurance arrangements can also and control. or paying suppliers. accident or death. do not have to be sold to cover the unexpected illness. In addition. insurance can play a key role in a number of ways: When an individual dies. there could be significant out- these estate expenses. although probate fees are not applicable. the agreement needs to be funded in a way that won’t spouse or minor child. they are deemed to dispose of all their capital property – $ Funding a buy-sell agreement: If there are multiple and their estate must cover the tax on any $ $ business owners. disability There can be other expenses as well. and the funds can be used for any number of business purposes. policy. providing supplementary cash flow This liquidity can also be used as a means of to replace a decline in business income. For example. There are a number of sell the business or other assets. court verification fees apply for Providing key person insurance: Losing a key owner or non-notarial wills. In addition. disability. without the need to the company to one or more of its shareholders. non-taxable and can provide an estate with the (liquid. creditors could withdraw financing and be an ideal way to cover some or all of customers might go elsewhere. 6 . disability or critical illness could $ $ $ have a significant business impact. ready) cash needed to ensure Key person life. tax-sheltered assets $ $ conditions (such as death. Probate and critical illness insurance to insure each owner. The death benefit is of-pocket costs in terms of recruiting and training a suitable replacement. business. such as a To be effective. variations in how such arrangements can be structured. What do wealthy individuals need to protect? FINANCIAL CAPITAL BENEFITS – estate. depending on the situation and business purpose. such as recruiting or training a replacement. $ $ $ employee through death. The business loses the $ $ The proceeds of a life insurance policy can $ $ input of a valuable member. non-contribution due held in registered plans (such as RRSPs and to serious illness) under which one owner has the right to buy the RRIFs) lose their tax-sheltered status upon ownership share of other owners. such as a cottage or funds necessary to keep a business operating should a key person suffer an business. the company (or the surviving owners government to confirm the validity of a depending on how the insurance arrangement is structured) can use the will – can amount to thousands of dollars insurance proceeds to buy out the partner’s business interest. depending on the province of residence. and lifestyle planning Covering estate tax liabilities. a buy-sell agreement sets out the $ $ $ $ $ capital gains. When an owner fees – which the estate must pay to the dies or becomes disabled or ill. In Quebec. Business uses for insurance or equalizing the estate For businesses. disability and critical illness insurance can provide the that non-liquid assets. death and become fully taxable. equalizing an estate amongst beneficiaries. The business is the beneficiary of the estate’s liabilities.

NEED TERM INSURANCE WANT PERM INSURANCE (protecting human capital) (protecting financial capital) Replace income in the event of Low risk asset class premature death or disability of a bread-winner or key person Tax-effective transfer of assets from a corporation Meeting shareholder buy-sell obligations Inter-generational transfers Philanthropic gifting Funding tax liabilities Estate equalization tool Protecting the value of an investment portfolio in the event of an illness 7 . business protection. estate preservation. what was once a necessary protection expense becomes a very valuable financial opportunity. Insurance products can add value for insurable business owners and affluent individuals in so many ways: enhanced retirement income. APRIL 2014 The insurance opportunity It’s time to bust the myth that insurance has no place in the portfolio of wealthy individuals. It’s an investment worth exploring for the affluent. As age and wealth increase. THE WEALTHY DON’T NEED INSURANCE BUT THEY SURE WANT IT. and tax- efficient wealth transfers.

The higher an individual’s that’s not only in protecting wealth but registered investment. Sun Life Assurance Company of Canada does not provide legal.cifp. the greater the also in growing it. always have the client seek advice from a qualified professional including a thorough examination of the client’s specific legal/tax situation. permanent life amount of income replacement they’ll insurance is worth considering as an need to maintain their lifestyle. The Canadian Institute of Financial Planning (CIFP) views the ideas outlined in this bright paper as credible. well-researched insights for advisors and clients building retirement plans. 2014. taxation or other professional advice to advisors or their clients. death is significantly greater if clients put increases – with multiple properties to Life insurance can play a valuable role in some of their money into a permanent maintain. To learn more about the CIFP.LIFE INSURANCE for the WEALTHY The myth-busting benefits Insurance can help Permanent life insurance can Permanent insurance is an preserve affluent lifestyles protect or enhance financial capital asset class worth considering The need for money and ongoing cash As wealth grows. luxury vehicles. the benefit to the estate upon flow doesn’t decrease with wealth. Sun Life Assurance Company of Canada is a member of the Sun Life Financial group of companies. the need for estate. Typically. please visit www. The information presented here is for your information only. high-end travel many of these planning strategies – and life insurance policy instead of a non- and more. © Sun Life Assurance Company of Canada. 810-4134-04-14 . alternate asset class.ca. Since death is a pre-retirement income. it business and lifestyle planning increases. 100 per cent certainty. Before you act on any of this information on behalf of a client. accounting.