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 The
Companion Advisor: Retirement
Planning
RRIFing with insurance: an Advisors point of
view
Written by Nathalie Fisette-Caza
Director, Advanced Marketing HubFinancial, Montreal
A Companion Advisor Article
Reedited to reflect only new age limit (now age 71,
changed in 2007 from 69))
As the year 2005 draws to an end, revisiting RRIFs is an excellent strategy
if your in the 71 plus group.
Many individuals in this age group find that the time to roll over their
RRSPs into RRIFs is very stressful, because it means that it is time for
them to start chipping away at the capital they have spent a life time
building. They often forget that the government may be entitled to as
much as 48% of the tax savings they enjoyed (depending on their marginal
tax rate and the province of residence). For most this is a concern, therefore
it is important to obtain information and options about capital preservation
strategies.
Pre-retirement planning is an excellent way to provide an analysis of
the current and future assets of a couple. Whatever their situation may
be, such an analysis will provide the basis for good planning strategies.
It is important to know though whether or not one of their priorities
is to leave an inheritance for their children. If such is not the case,
planning for this will be a low priority for such a couple.
However, if the couple are ensured of a comfortable income level for
their entire life, the important thing will be to determine the amount
of assets that will be left after their death as well as the level of
taxes on such assets. A life insurance policy is an excellent solution
to ensure that they can preserve the capital in their estate. The amount
of the insurance generally has to be higher than the initial tax total
that can threaten to reduce their capital.
For example, when converted to a RRIF a $500,000 RRSP with a 4% annual
return and minimal withdrawals over a 20 year period will render $204,753
at the end of the 20 years. If there is only $250,000 in life insurance
coverage for the deferred taxes in 2005 and if death only ensues in 20
years, the after tax value of the inheritance will be $348,690. In order
to preserve the entire $500,000, the amount of life insurance coverage
needed will be $400,000. The basic rule of thumb is to determine how much
the parents want to leave their children and then to use this figure to
determine the coverage. They can thus fully enjoy their RRIF without feeling
that they will be depriving their children of their inheritance.
Another strategy that is frequently proposed to the same category of
individuals is a charitable donation at death. In example, we often see
cases where life insurance is bequeathed to a charitable organization,
in the expectation that the charitable tax deduction will offset taxes
on the RRIF at death. The major risk with this type of strategy is that
the RRIF capital risks being reduced to the point where the amount of
taxes to be paid is insignificant compared to the offset value of the
charitable donation. It might be better to donate the balance of the RRIF
to the charitable organization, who will issue a tax receipt for the amount
bequeathed, and to give the life insurance directly to the inheritors.
Likewise, in cases where couples require more than the prescribed RRIF
minimum, it might be a good idea to have their children to take part in
the planning. For example the parents might want to provide their children
with a certain level of inheritance, but their available retirement income
will not be enough to pay the insurance premiums. If such is the case,
the children may decide to make up the difference in the premium payments.
This is an excellent way for children to be sure of receiving an inheritance
and for parents to enjoy the fruits of their inheritance with peace of
mind.
The time for RRSP conversion to RRIF can also be an opportune time to
free up income that can be used to pay the insurance premiums. In fact,
clients’ incomes often increase with the RRIF income, which means
that the surplus can be used to pay the premiums, without having any adverse
effect on their level of lifestyle.
Unfortunately, the idea of subscribing to life insurance for clients
aged 70 or older is very often neglected. It must be remembered that,
at this age, estate-planning, tax planning and capital planning often
have far greater importance, because the consequences on the next generation
are far more tangible; at this stage the children are financially independent,
grand children have grown up, etc. Furthermore, minimum RRIF requirements
often make it attractive to look at such strategies, without affecting
the level of lifestyle. Dealing with the issue of RRIF preservation right
from the beginning of retirement, which may start at the age of 60, and
thus well before RRIF conversion. The strategy will be the same, but premiums
will be much more affordable.
Nathalie Fisette-Caza, Director, Advanced
Marketing HubFinancial, Montreal
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