1. Asset diversification
Insurance working for your clients
Do you have clients who wish to:
Build a strong foundation of financial security for themselves and their families?
Make their dollar go further?
Leave a legacy for their loved ones or a favourite charity?
All without having to make big changes to what they are doing today?
Participating life insurance can help them save money, provide financial security and allow them to leave a legacy by simply working with money they are already investing elsewhere.
January 2017
For wholesaler use only

2. Strategic diversification Keeping more wealth The tool
Agenda
The strategy
Client suitability
Strategic diversification
A unique asset class
Keeping more wealth
The tool
Agenda
The strategy
Looking at portfolios
Why participating life insurance?
Diversify to manage risk
Client suitability
Strategic diversification
A unique asset class
Keeping more wealth
The tool

3. The strategy Cash Cash Other Equities Other Equities Insurance
Instead of relying on investments alone, clients with excess money in their portfolio can reallocate a portion of their fixed-income investments into a participating life insurance policy.
By reallocating a portion of the money that a client would typically use in fixed-income investments into a participating life insurance policy, they don’t have to incur any additional out-of-pocket expenses. Rather, they are further diversifying their portfolio, which means they may be better equipped to manage risk and enjoy guaranteed growth.
Insurance
Fixed income
Fixed income

4. Why participating life insurance?
Life insurance payout is fully guaranteed, provided premiums are paid
Coverage begins at day one.
When the insured person dies, money from insurance goes to beneficiaries tax-free.
Build wealth
Accumulate tax-advantaged cash value
Opportunity for dividends
When policy cash value grows, the new total is guaranteed and protected
Can help reduce overall financial risk and tax obligations
Why participating life insurance?
Note – for more information, see the Participating life insurance guide.
Guaranteed income
The insurance policy is guaranteed to stay in force the client’s whole lifetime, if they make the required payments.
The insurance death benefit passed on to the beneficiaries upon the insured person’s death is tax-free.
Money from insurance only goes to the named beneficiary tax-free if the beneficiary is not the estate. Otherwise, it is subject to probate feeds, and the subsequent distribution to estate beneficiaries (if any) is not tax-free.
Build wealth
Guaranteed, steady growth, with the opportunity for dividends.
Cash value grows within the policy, tax-free (subject to legislative limits).
When the policy’s cash value grows, the new total is automatically guaranteed and is protected from declines, unless used for some other purpose.*
Insurance can help diversify a portfolio beyond investments and help reduce the overall financial risk and tax obligations.
*If a client borrows or withdraws money from their policy, it will reduce the policy’s cash value as well as the amount the person (or people) they have named as beneficiaries will receive (called a death benefit).

5. Diversify to manage risk

6. Growth. Access. Transfer
Clients with more cash than they possibly need in their lifetime may wish to consider redirecting a portion of their assets from investments into a participating life insurance policy. There’s also the opportunity to have access to cash if the need for it arises.
Think of participating life insurance as a parking spot for assets your clients won’t use in their lifetime.
After clients grow their net worth, they can use some of it for retirement income.
Clients can transfer the assets they don’t use to their next generation.
Consider this:
If a client’s assets are in taxable investments, their growth is reduced every year.
So you have to ask yourself, does it make sense for clients to pay tax every year on assets they will likely not use?

7. Recognizing client needs
Client suitability

8. Insurance needs
Clients will typically hit at least two of these points in their life.
The protection phase – when they look to replace lost income.
The accumulation phase -- when they look for tax-advantaged strategies that generate additional cash flow to supplement their retirement income, while also providing an estate benefit for the next generation.
People suitable for this strategy are closer to the transfer phase – they may have a focus on tax-advantaged accumulation in addition to their traditional insurance need. In other words, these are clients who have money they won’t likely need in their lifetime and would like to transfer to the next generation as tax-efficiently as possible, while still having access to the money if needed.

9. Have annual tax obligations from investments.
Client suitability
Need life insurance and are interested in the benefits participating life insurance offers.
Have annual tax obligations from investments.
Have a desire to reduce taxes on investment income.
Want to leave a legacy.
Want the option of having access to cash from their life insurance policy.
Clients who can benefit most from this strategy include those with:
Life insurance needs
Are eligible, and can pay, for life insurance
Annual tax obligations from investments
A desire to reduce taxes on investment income
A wish to leave a legacy
An interest in the option of having access to cash from their life insurance policy

10. Helping clients understand the versatility of insurance
A unique asset class
Helping clients understand the versatility of insurance
Once you’ve identified the appropriate clients, you can help them understand how insurance is a unique asset class and how participating life insurance can complement their financial security portfolio.

11. Strategic diversification
Note – For more information, see Balancing to reduce risk (form ). This piece helps clients understand the value of strategic diversification and how life insurance can help diversify their portfolios.
Some clients might understand the importance of strategic diversification but not how participating life insurance can complement their other assets.
To understand how, let’s look at the features of each asset class. This is an opportunity to review how each asset class works with other assets to provide clients with strategic diversification.
Different asset classes have different features , including its own growth and risk components. By considering the differences between asset classes, you can create a plan specific to your clients’ needs and strategically diversify their net worth to help manage risk.
  Fixed-income investments
Secure, accessible
Low risk, low return
Risk of returns being eroded by inflation
Taxed at highest marginal rate
May be subject to probate (estate administration tax) if any
 Equity investments
Potential for higher returns and higher risk
Returns fluctuate with market volatility, political instability
Subject to capital gains tax
Death can trigger tax, without immediate liquidity to pay tax
If forced to sell in a down market, can lead to loss of money
 Business, real estate, etc.
Value fluctuates with market developments
Investors usually rely on slow, steady growth
Limited access to capital, depending on how quickly and at what price goods can be sold
May be subject to capital gains tax
Death can trigger tax, without liquidity to pay tax
 Life insurance
Tax-free death benefit paid to named beneficiaries
Tax-advantaged growth within the policy, within prescribed limits, while living
Not subject to probate (estate administration tax) if any, if a beneficiary other than the estate is named
Death benefit and beneficiaries kept private
Exception – In Saskatchewan, executors must disclose all known life insurance policies owned by the deceased, including segregated fund policies. They must list the insurance company, policy number, designated beneficiaries and the value at the date of death.
Potential creditor protection
Creditor protection depends on court decisions and applicable legislation
Can be subject to change and can vary from each province – it can never be guaranteed
Clients should talk to their lawyers to find out more about the potential for creditor protection for their specific situations

12. Investment growth can be costly
Keeping more wealth
Investment growth can be costly
In this strategy, the clients we’re talking to already have investments and excess cash they likely won’t need in their lifetime. Investments may not be their best option because the growth on investments may be subject to a high tax rate.

13. Investment growth can be costly
Life insurance or investments? Investment growth can be costly.
Putting money into investments may be more expensive than clients think. In fact, it could end up costing them thousands every year.
Participating life insurance may be an effective strategy for clients looking for tax efficiencies and options. Life insurance can help clients accumulate more cash value during their lifetime and may allow them to leave larger estates to their beneficiaries than investments can.
Passive income held in taxable investments is taxed at the highest personal marginal tax rate, varying by province.
Taxes on the investment income reduce investment growth year after year. As the chart shows, taxes can dramatically reduce the overall cash the client receives.
This tax grind is the reverse of compound growth. It’s compound reduction. Every dollar paid to the Canada Revenue Agency now will cost more than one dollar over time because the ability to reinvest that dollar is lost forever.
RRSPs (registered retirement savings plan) and TFSAs (tax-free savings accounts) can help avoid or defer some taxes. However, both these options are quite limited in how much can be contributed every year. Once contributions are maximized, a client can find themselves in tax-exposed investments, as in this example.
The good news is: clients can avoid the tax-grind.
That’s why it’s important to know about other tax-advantaged options, like insurance.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

14. Customized solutions
The tool

15. Investment value today Cash invested or premium paid over time Growth
The tool
Compares current portfolio with a proposed portfolio that includes insurance, to show:
Investment value today
Cash invested or premium paid over time
Growth
Annual tax on growth
Net estate benefit
The tool compares a client’s current portfolio with a proposed portfolio that includes insurance.
The report allows you to show clients:
The current value of their investment
The amount of cash invested or premium paid over time
Growth
Annual tax on growth
Net estate benefit
Before we jump right into the Asset diversification tool, we need to determine what’s the best solution to meet our clients’ needs.

16. Case study – Meet Dorothy and Stanley
Age: 55 and 58 from Ontario
Non smokers, standard risk
Current portfolio balance: $1,500,000
Fixed-income portion (75%): $1,125,000
Marginal tax rate: 53.53%
Taxable dividends (25%): $375,000
Tax rate: 39.34%
Open to reallocating 25 – 50% of fixed income
25% of fixed income: $250,000
50% of fixed income: $500,000
Today we’re going to meet Dorothy and Stanley.
They currently have a portfolio balance of $1,500,000, with most of their investments in fixed-income assets.
They are interested in leaving the maximum amount possible to their children and grandchildren, without making any additional out-of-pocket payments.
They’re also OK with moving around some of their funds to maximize their estate value. However, being risk averse, they would like stable growth.
As it stands today, Dorothy and Stanley don’t expect to dip into their investments to fund their retirement or other expenses.
To determine the right product for the couple, we can run a plan comparison using the Plan comparison with accessing cash tool.
The report will allow us to evaluate cash value and death benefit.
Investment assumptions
Fixed income: growth rate three per cent
Taxable dividends: growth rate three per cent

17. Cash surrender value comparison year: 20
Initial premium
Number of years paid
Cumulative premium
Cash surrender value
Legacy Generator – guaranteed 20 pay Paid-up additions
$14,063 20
$281,259
$311,347
Wealth Generator – guaranteed 20 pay Paid-up additions
$281, 260
$307,225
Legacy Generator Paid-up additions
(Premium vacation beginning at year 21)
$281, 259
$315,059
Universal Life level
$281,260
$16,888
To begin our comparison, let’s look at using 25 per cent of their fixed income and put that into the premium. That works out to be $14,063 annually.
Since they aren’t interested in cash value, we won’t put too much emphasis on this slide. However, as we can see, much of the cash surrender values are similar across the board at year 20.
Coverage type: Joint last-to-die, premiums payable to last death

18. Death benefit comparison year: 35
Number of years paid
Cumulative premium
Initial death benefit
Death benefit at comparison year
Internal rate of return
Cost per dollar
Legacy Generator – guaranteed 20 pay Paid-up additions 20
$281,259
$451,931
$920,896
4.62%
31 cents
Wealth Generator – guaranteed 20 pay Paid-up additions
$281, 260
$362,106
$797,872
4.07%
35 cents
Legacy Generator Paid-up additions
(Premium vacation begins at year 21)
$489,461
$880,343
4.45%
32 cents
Universal Life level 35
$492,205
$1,150,000
$1,201,160
4.51%
41 cents
When we look at death benefit, we can see a greater disparity between the products. Since guaranteed payment period differs from premium vacation, we can eliminate the third option, as Dorothy and Stanley prefer a more stable solution.
And although universal life insurance has the potential to generate a greater death benefit, it does require more payments, something Dorothy and Stanley want to avoid.
When we look at the internal rate of return and cost per dollar, Legacy Generator – guaranteed 20 pay is the better choice, given our clients’ needs.

19. 25% of fixed income Case study
Now that we have a product that best suits Dorothy and Stanley, we can export that data into the Asset diversification tool.

20. Case study – using 25% fixed income
Legacy Generator – guaranteed 20 pay
Joint last-to-die, premiums payable to last death
Annual premium $14,063
Paid-up additions
Initial death benefit: $451,933

21. Current and proposed portfolio
As our clients are willing to reallocate a portion of their fixed income – in this example, 25 per cent, into insurance, we can compare their current portfolio of is investments exclusively to a proposed portfolio that includes insurance.
As you can see, for the same cost, including insurance in their portfolio could increase their net estate benefit by $406,745.

22. 50% of fixed income Case study
If Dorothy and Stanley decide to reallocate more of their fixed income into insurance, they may be able to further increase their net estate value.
In the previous example, they reallocated $14,063 into insurance in annual premium. Using 50 per cent of their fixed income would allow them to buy an insurance policy worth $28,125 annually.

23. Cash surrender value comparison year: 20
Initial premium
Number of years paid
Cumulative premium
Cash surrender value
Legacy Generator – guaranteed 20 pay Paid-up additions
$28,125 20
$562,500
$623,451
Wealth Generator – guaranteed 20 pay Paid-up additions
$615,196
Legacy Generator Paid-up additions
(Premium vacation beginning at year 21)
$630,883
Universal Life level
$33,739

24. Death benefit comparison year: 35
Number of years paid
Cumulative premium
Initial death benefit
Death benefit at comparison year
Internal rate of return
Cost per dollar
Legacy Generator – guaranteed 20 pay Paid-up additions 20
$562,500
$904,961
$1,844,031
4.63%
31 cents
Wealth Generator – guaranteed 20 pay Paid-up additions
$725,090
$1,597,678
4.07%
35 cents
Legacy Generator Paid-up additions
(Premium vacation begins at year 21)
$980,111
$1,763,799
4.46%
32 cents
Universal Life level 35
$984,375
$2,300,000
$2,402,205
4.51%
41 cents

25. Case study – using 50% fixed income
Legacy Generator – guaranteed 20 pay
Joint last-to-die, premiums payable to last death
Annual premium $28,125
Paid-up additions
Initial death benefit: $904,961

26. Current and proposed portfolio

27. Important considerations
Examples provided are not complete without the London Life illustration, including the cover page, reduced example and product features pages all having the same date. Read each page carefully as they contain important information about the policy.
If the accumulation stays within prescribed limits, the cash value is only subject to income tax if it’s withdrawn. Borrowing or withdrawing money from the policy will reduce the policy’s cash value and the death benefit.
Examples are for illustrative purposes only. Situations will vary according to specific circumstances.
This material is for information purposes only and shouldn’t be construed as legal or tax advice. Every effort has been made to ensure its accuracy, but errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation for Canadian residents, which is subject to change. For individual circumstances, consult with legal or tax advisors.