Often we see older investors shift gears near retirement and beyond. Many become risk averse and move their assets into fixed income type investments. Unfortunately, this often results in the assets being exposed to higher rates of income tax and lower rates of return – never a good combination.
Or maybe the older investor cannot fully enjoy their retirement years for fear of spending their children’s inheritance.
The Estate Bond financial planning strategy presents a solution to both of these problems.
In essence, we are substituting one investment (the life insurance policy) for another (fixed income assets).
In other words, there is an increase in the funds available to heirs and beneficiaries after death and a decrease in the taxes payable before death.
Robert, aged 60, and his wife Sarah, aged 58 are satisfied that they will have sufficient income during their retirement years. They used the Estate Bond concept as a means to guarantee their legacy to their children and grandchildren.
Investment: $30,000 for 20 years into a Joint Second-to-Die Participating Whole Life policy which is guaranteed to be paid up in 20 years
Immediate Death Benefit: $892,078
Death Benefit in 30 years: $2,160,257 (at current dividend scale)
Cash Surrender Value in 30 years: $1,582,934 (at current dividend scale)*
* If surrendered, the cash surrender value would be subject to income tax but there are strategies that could be employed to avoid this tax. Assumes using Participating Whole Life illustrated at current dividend scale. Values shown in 30th year at approximate life expectancy.
Investment: $30,000 for 20 years in a fixed income investment earning 2.5% AFTER tax
Immediate Death Benefit: $30,000
Estate Benefit in 30 years: $1,005,504
It should be noted that obtaining this rate of return in today’s fixed income environment would be challenging.
The Estate Bond strategy is designed for affluent individuals who are 45 years of age or older and who are in reasonably good health. For those who meet these criteria and have surplus funds to invest, this concept can provide significant benefits and results.
Please call me if you have any questions about the Estate Bond strategy or would like to determine if it is right for you. As always, please feel free to share this article using the sharing buttons.
Jack is a graduate of the Family Enterprise Advisor Program given by the Sauder School of Business at UBC. He has lectured extensively to professional groups including the B.C. Institute of Chartered Accountants, as well as individual accounting and legal firms. He is co-author of, and has been instructor for, both the introductory and advanced life insurance courses for the Canadian Institute of Chartered Accountants. He often is called upon to provide expert opinion or testimony in legal disputes involving life insurance or advisor conduct.