Case Study: Life Insurance in Retirement – Helping Adult Children Equitably
Jan 12, 2023
How can you help an adult child in need now and ensure any other children are treated equally?
An integral part of your financial plan while accumulating assets is life insurance. The most common use for life insurance is to protect your family from financial hardship in the event you die before retirement. As you accumulate sufficient wealth and pension entitlements, life insurance becomes a want and can be viewed as an unnecessary and costly luxury.
Why consider life insurance in retirement?
There are some situations where life insurance in retirement might make sense to cover the following:
1. Taxes at death – Large registered portfolios or a second property can have a substantial tax bill when the second spouse dies.
2. Debts – Many retire with debt these days (mortgage, line of credit).
3. Charitable giving – Potential to make a much larger gift to a charity.
4. Enhanced estate – If a certain portion of your non-registered investment portfolio (outside your RRIF, RRSP, or TFSA) has been allocated to pass to your estate at death and you have no intention of using these funds during your lifetime, then the use of life insurance may allow you to enhance your estate with a very low-risk strategy.
5. Income for dependants – Proceeds could help out an adult child or grand- child that may be a dependant due to disability or for other reasons.
6. Estate equalization – Cash from insurance proceeds can deal with estate liquidity issues. For example, if you have a cabin and you leave it to two children and one child wants to keep the cabin, the insurance proceeds can be used to pay an equal share to the other child.
Meet Jim and Jan. They retired two years ago at age 63 and recently sold their home in Vancouver and moved to the Sunshine Coast. They have two adult sons. Joe is living in New Zealand and is married with two kids. John is single and lives in the Fraser Valley.
Jim has a municipal pension and Jan has a Registered Retirement Income Fund (RRIF). They can cover all regular expenses with Jim’s pension plus their Canada Pension Plan and Old Age Security with $500 to $600 left over each month. At this time, they want to travel as much as possible. They will draw from Jan’s RRIF over the next 10 to 15 years to cover all of their travel. They will eventually use the value of their home for long-term care if required. They would prefer to help the boys now and not worry about leaving an estate in the future.
They have $300,000 “extra” from the sale of their Vancouver home and want to gift that to the boys now.
Joe and his wife own a home in New Zealand and he does not need any cash at this time. Their son John has saved up for a down payment on a home but would benefit from a larger down payment so he can qualify for a reduced mortgage rate and not have to pay the Canada Mortgage and Housing Corporation (CMHC) insurance.
They would like to help John with his down payment but want to make sure that Joe will receive the same amount in the future.
We looked at some different scenarios, and in the end, they decided on the following:
■ Gift John $250,000 now to go toward his home down payment.
■ Gift Joe’s kids $50,0000 now to be deposited in an investment account for their post- secondary education.
■ Purchase a joint and last to die $250,000 life insurance policy, naming Joe as the beneficiary, to ensure he gets an inheritance.
They are investing approximately $5,700 per year in a joint and last to die life insurance policy that will pay a $250,000 tax-free benefit to Joe upon their deaths. This benefit amount (face value) is guaranteed and is not based upon market factors.
Based upon a joint life expectancy of 27 years, this represents an after-tax compound return of 3.5%. This is equivalent to a GIC with a compound rate of return of 5.85% (assuming a marginal tax rate of 40%). This is a low-risk strategy, it is affordable for them, and takes away the worry of having to save the funds for Joe.
The benefits of life insurance:
■ Life insurance allows a beneficiary to be named directly on the policy; thus, the proceeds bypass probate, saving both time and money.
■ The proceeds (benefit payment) from a life insurance policy are tax-free.
■ Funds inside a life insurance policy accumulate tax-free, providing the possibility of reducing your taxes today.
■ The benefit amount is guaranteed and thus the exact amount upon death is known.
The disadvantages of life insurance:
■ For all intents and purposes, you have given up control of this capital (premium) for a guaranteed future estate value.
■ There is a requirement to complete medical testing, which can be inconvenient and take time. That being said, it is important to realize that you only need to be as healthy as the average person your age to qualify for the insurance.
Based on Jim and Jan’s risk tolerance, estate objectives, guaranteed lifetime income, and other factors, this strategy worked for them.
Speak to your RGF Integrated Wealth Management Advisor to see which strategy may work for you. ■
An integral part of your financial plan while accumulating assets is life insurance. The most common use for life insurance is to protect your family from financial hardship in the event you die before retirement. As you accumulate sufficient wealth and pension entitlements, life insurance becomes a want and can be viewed as an unnecessary and costly luxury.
Why consider life insurance in retirement?
There are some situations where life insurance in retirement might make sense to cover the following:
1. Taxes at death – Large registered portfolios or a second property can have a substantial tax bill when the second spouse dies.
2. Debts – Many retire with debt these days (mortgage, line of credit).
3. Charitable giving – Potential to make a much larger gift to a charity.
4. Enhanced estate – If a certain portion of your non-registered investment portfolio (outside your RRIF, RRSP, or TFSA) has been allocated to pass to your estate at death and you have no intention of using these funds during your lifetime, then the use of life insurance may allow you to enhance your estate with a very low-risk strategy.
5. Income for dependants – Proceeds could help out an adult child or grand- child that may be a dependant due to disability or for other reasons.
6. Estate equalization – Cash from insurance proceeds can deal with estate liquidity issues. For example, if you have a cabin and you leave it to two children and one child wants to keep the cabin, the insurance proceeds can be used to pay an equal share to the other child.
Meet Jim and Jan. They retired two years ago at age 63 and recently sold their home in Vancouver and moved to the Sunshine Coast. They have two adult sons. Joe is living in New Zealand and is married with two kids. John is single and lives in the Fraser Valley.
Jim has a municipal pension and Jan has a Registered Retirement Income Fund (RRIF). They can cover all regular expenses with Jim’s pension plus their Canada Pension Plan and Old Age Security with $500 to $600 left over each month. At this time, they want to travel as much as possible. They will draw from Jan’s RRIF over the next 10 to 15 years to cover all of their travel. They will eventually use the value of their home for long-term care if required. They would prefer to help the boys now and not worry about leaving an estate in the future.
They have $300,000 “extra” from the sale of their Vancouver home and want to gift that to the boys now.
Joe and his wife own a home in New Zealand and he does not need any cash at this time. Their son John has saved up for a down payment on a home but would benefit from a larger down payment so he can qualify for a reduced mortgage rate and not have to pay the Canada Mortgage and Housing Corporation (CMHC) insurance.
They would like to help John with his down payment but want to make sure that Joe will receive the same amount in the future.
We looked at some different scenarios, and in the end, they decided on the following:
■ Gift John $250,000 now to go toward his home down payment.
■ Gift Joe’s kids $50,0000 now to be deposited in an investment account for their post- secondary education.
■ Purchase a joint and last to die $250,000 life insurance policy, naming Joe as the beneficiary, to ensure he gets an inheritance.
They are investing approximately $5,700 per year in a joint and last to die life insurance policy that will pay a $250,000 tax-free benefit to Joe upon their deaths. This benefit amount (face value) is guaranteed and is not based upon market factors.
Based upon a joint life expectancy of 27 years, this represents an after-tax compound return of 3.5%. This is equivalent to a GIC with a compound rate of return of 5.85% (assuming a marginal tax rate of 40%). This is a low-risk strategy, it is affordable for them, and takes away the worry of having to save the funds for Joe.
The benefits of life insurance:
■ Life insurance allows a beneficiary to be named directly on the policy; thus, the proceeds bypass probate, saving both time and money.
■ The proceeds (benefit payment) from a life insurance policy are tax-free.
■ Funds inside a life insurance policy accumulate tax-free, providing the possibility of reducing your taxes today.
■ The benefit amount is guaranteed and thus the exact amount upon death is known.
The disadvantages of life insurance:
■ For all intents and purposes, you have given up control of this capital (premium) for a guaranteed future estate value.
■ There is a requirement to complete medical testing, which can be inconvenient and take time. That being said, it is important to realize that you only need to be as healthy as the average person your age to qualify for the insurance.
Based on Jim and Jan’s risk tolerance, estate objectives, guaranteed lifetime income, and other factors, this strategy worked for them.
Speak to your RGF Integrated Wealth Management Advisor to see which strategy may work for you. ■
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