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Estate-friendly investing - think life company products


xBy Allan Morse


Any prudent financial plan should include provisions which serve both to maximize the overall rate of return on assets, as well as to secure capital by minimizing value-eroding taxes and probate fees payable by the estate on the death of the individual.

As one component of your overall financial plan, RRSPs can provide for these issues by: allowing the inclusion of a wide range of qualifying products for adequate diversification; deferring tax on generated returns; and providing for the designation of a named beneficiary which may avoid probate fees. Clearly, RRSPs are an important component in financial planning and may be beneficial in estate planning as well. But what about those non-RRSP assets which constitute the remainder of your financial portfolio?

While a non-registered investment portfolio of traditional products such as stocks, bonds, GICs or mutual funds will allow for adequate diversification and the potential for capital appreciation, these usually do not permit a named beneficiary designation. These assets will be considered part of your estate at death and may therefore be subject to probate fees.

The result may be a depletion of the value of your estate’s capital, effectively leaving less in the hands of your heirs. A solution to this dilemma exists in many of the Life Company products currently available to individuals.

Life Company products are increasing in popularity due to built in features which may offer tax advantages within the product, as well as provisions for assigning named beneficiaries which may avoid probate fees. Some of these products include Guaranteed Investment Annuities (GIAs), Insured Annuities, Segregated Funds, and Universal Life Insurance.

There is a significant emphasis in each of these products on “Estate Friendly Investing”. The advantages that a GIA can offer over a traditional GIC include: more flexibility regarding the maturity term; the ability to designate a beneficiary; the ability to potentially protect the GIA from creditors; and the qualification of interest for the pension income tax credit (up to $1,000 per year if you are over age 65). For individuals who require a non-registered income, these features of a GIA may hold more attraction than the more limited features of a GIC.

Insured Annuities offer assurance that you will not outlive your capital. Essentially, an Insured Annuity involves the combined purchase of a “Life Annuity” and a “Term to 100” life insurance policy. Lifetime income is guaranteed, as is the value of the capital ultimately transferred to your named beneficiary. Insured Annuities may be attractive alternatives for investors between the ages of 60 and 80 who seek guaranteed, regular lifetime income, and who want to preserve their capital and avoid probate process and costs.

Segregated Funds are insurance contracts based on the life of the annuitant named in the contract and offer minimum guaranteed benefits upon death or maturity, as well as other cash value benefits which are not guaranteed but fluctuate with the market value of the investment fund assets. While similar in many respects to a mutual fund, they offer several advantages from an estate preservation standpoint, in that the underlying capital may be guaranteed and a beneficiary can be designated.

Another way to achieve capital growth, as well as enhanced estate values, is through Universal Life insurance. In its simplest form, Universal Life is “Term Insurance” which is funded through a tax-sheltered investment account or “side fund”. A beneficiary is designated to receive the insurance proceeds plus the entire value of the side fund.

In conclusion, for some financial assets in your investment portfolio, consideration should be given to an investment in Life Company products as they may provide both tax-sheltered growth, as well as estate preservation. The range of options available to an individual through these products is quite diverse and suitability depends upon your specific circumstances.

Allan Morse is a Senior Investment Advisor with CIBC Wood Gundy in Charlottetown, Prince Edward Island. Over his career he has focused on the importance of financial planning which he feels helps clients set clear, attainable goals. If you have any questions regarding this article or any issue regarding financial or investment planning, please Email Allan here.