2009 General Meeting ● Assemblée générale 2009Ottawa, Ontario ● Ottawa (Ontario)

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

Session/séance : PD 35 How Insurance is SoldSpeaker(s)/conférencier(s) :Richard Elsmore, Estate Planning Specialist, Vice President CIBC Wood Gundy Inc.

How Insurance is Sold

• Insurance “Need!”• DAPA

• Define• Accept• Present• Accept

2009

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How Insurance is Sold

• Insurance “Need!”

• Define• Accept• Present• Accept

2009

Gen

eral

Mee

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2009

How Insurance is Sold

• Insurance “Need?”

2009

Gen

eral

Mee

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ée g

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2009

How Insurance is Sold

• Insurance “Want!”

2009

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Estate PlanningFinancial Planning

Retirement PlanningBusiness Planning

Investment Planning

Estate Planning

Estate Assets

Estate Liabilities

Liability Identified

The Estate Planning Process

InvestigationInvestigation

The Estate Planning Process

Time of Death

The Wall FuneralFuneral

CGTCGT

RIF TaxRIF Tax

ProbateProbate

AdminAdmin

GrossGrossAssetsAssets Assets

Reduced

Estate Assets Estate Assets

EstateLiabilities

Reduced Estate Liability

Liability Identified Liability Minimized

The Estate Planning Process

InvestigationInvestigation InformationInformation

The Estate Planning Process (involves organizational

strategies)

Time of Death

The Wall FuneralFuneral

CGTCGT

RIF TaxRIF Tax

ProbateProbate

AdminAdmin

Valid Will’sValid Will’sPower of AttorneyPower of Attorney

Family TrustsFamily TrustsTestamentary TrustsTestamentary Trusts

Joint OwnershipJoint OwnershipGifts while aliveGifts while alive

BequestsBequestsSegregated FundsSegregated Funds

Estate FreezesEstate FreezesItemization of effectsItemization of effectsCharitable bequestsCharitable bequests

GrossGrossAssetsAssets

Assetsreduced BUT

Only By minimized

costs

Estate Assets Estate Assets

EstateLiabilities

Reduced Estate Liability

Estate Assets

Reduced Estate Liability

Liability Identified Liability Minimized Liability Neutralized

Transferring a small portion of assets BEFORE they are used to pay tax into a tax sheltered estate results in even the reduced tax being eliminated.

The Estate Planning Process

InvestigationInvestigation InformationInformation ImplementationImplementation

The Estate Planning ProcessRobert and Sheila are enjoying their retirementRobert and Sheila are enjoying their retirement Sheila is 62 and Robert is 64Sheila is 62 and Robert is 64 They are comfortable with They are comfortable with their retirement income.their retirement income. They jointly own a (mortgage They jointly own a (mortgage free), house in Ottawa worth free), house in Ottawa worth $450,000.$450,000. Their combined Their combinedRSP’s are valued at RSP’s are valued at $385,000.$385,000. They own a They own a cottage north of Kingston which they purchased cottage north of Kingston which they purchased for for $75,000$75,000 and invested a further and invested a further $50,000$50,000 in inImprovements. It is currently worth Improvements. It is currently worth $350,000$350,000Their personal effects have an approximate Their personal effects have an approximate value of value of $75,000.$75,000. They intend to leave They intend to leave everything to each other and on second death to everything to each other and on second death to their two children John (30) and Sarah (28).their two children John (30) and Sarah (28).

ITEM ITEM ACBACB FMVFMVHouse House N/A N/A $ 450,000.$ 450,000. RSP’s RSP’s N/A N/A $ 385,000.$ 385,000. Cottage Cottage $125,000$125,000 $ 350,000.$ 350,000.Personal effects Personal effects N/AN/A $ 75,000.$ 75,000. $125,000$125,000 $1,260,000.$1,260,000.

Deemed disposition at deathDeemed disposition at deathCurrent estate liability on 2Current estate liability on 2ndnd death deathProbate Probate $ 18,400$ 18,400 Legal/Exec Fees Legal/Exec Fees $ 63,000$ 63,000Tax on RSP’s Tax on RSP’s $ 178,640$ 178,640Capital Gains Tax Capital Gains Tax $ 52,200$ 52,200Total Total $ 312,240 $ 312,240 (24.78% of estate!) (24.78% of estate!)

The Estate Planning Process

ITEM ITEM ACBACB FMVFMVHouse House N/A $ 450,000.N/A $ 450,000. RSP’s RSP’s N/A $ 385,000.N/A $ 385,000. Cottage Cottage $125,000 $ 350,000.$125,000 $ 350,000.Personal effects Personal effects N/A $ 75,000.N/A $ 75,000. $125,000 $1,260,000.$125,000 $1,260,000.

Deemed disposition at deathDeemed disposition at death

Current estate Current estate Liability onLiability on

22ndnd death deathProbate Probate $ 18,400$ 18,400 Legal/Exec Fees Legal/Exec Fees $ 63,000$ 63,000Tax on RSP’s Tax on RSP’s $ 178,640$ 178,640Capital Gains Tax Capital Gains Tax $ 52,200$ 52,200Total Total $ 312,240$ 312,240 (25% of estate approx!) (25% of estate approx!)

$ 13,371$ 13,371$ 8,750$ 8,750$ 178,640$ 178,640$ 52,200$ 52,200$ 252,961$ 252,961(20.00% of estate approx!)(20.00% of estate approx!)

To achieveTo achievethis and potentially this and potentially

greater savings, greater savings, informationinformation

only is required!only is required!

The Estate Planning Process

Liability Liability Approx % Approx % of Estateof Estate A) Initial estate liability = A) Initial estate liability = $312,240$312,240 (25%)(25%) B) Revised estate liability = B) Revised estate liability = $252,961$252,961 (20%)(20%) C) Saving for 10 years = C) Saving for 10 years = $21, 566$21, 566 total, total, $215,660$215,660 (17%)(17%) D) Saving for 10 years = D) Saving for 10 years = $ 7,000$ 7,000 total, total, $70,000$70,000 (5.5%)(5.5%)

NoteNote::B) Approximately B) Approximately 5%5% savings achieved by basic planning. savings achieved by basic planning.C) Requires deposits for ten years at 5% ROR and 30% tax rate, C) Requires deposits for ten years at 5% ROR and 30% tax rate, (the (the liability is not funded by this approach for first ten years).liability is not funded by this approach for first ten years).D) Requires insurance and underwriting but provides D) Requires insurance and underwriting but provides instant instant liability liability coverage.coverage.

The Estate Planning Process

Time of Death

The Wall FuneralFuneral

CGTCGT

RIF TaxRIF Tax

ProbateProbate

AdminAdmin

GrossGrossAssetsAssets

NetNetAssetsAssets

Insurance Insurance Tax ShelterTax Shelter

SurplusSurplus tax- freetax- free to beneficiariesto beneficiaries or charitiesor charities

Instant, tax efficientInstant, tax efficient funding of estate liabilityfunding of estate liability

The Estate Planning Process

Investment Planning

Investment Planning

Non- Registered Registered

Mortality? Mortality?

INCOME REQUIRED

Investment Planning

Non- Registered RegisteredNon-RegisteredTax Sheltered

INCOME REQUIRED

Investment Planning

Non- Registered RegisteredNon-RegisteredTax Sheltered

Mortality? Mortality? Mortality?

INCOME REQUIRED

Investment PlanningJul-07 GIC's Equities Mr. & Mrs. Client  

Joint Life Alternative Non-Insurance Alternative Non-Insurance    

  Investment Investment Universal Life Whole Life

Ten Deposits 25,000 25,000 25,000 25,000

  N/A N/A    

  N/A N/A Rate of Return PAR Current Dividend Scale

  N/A N/A   (Totally different structure)

ESTATE VAL 5% 5% 5% Not "apples to apples"

Y 1 Age 41 24,001 24,254 1,158,911 952,982

Y10 Age 50 264,847 280,420 1,476,880 2,329,037

Y20 Age 60 345,028 420,298 1,650,401 2,791,571

Y30 Age 70 449,482 648,146 2,036,091 3,902,897

Y40 Age 80 585,560 1,019,285 2,745,076 5,642,932

ACCOUNT VAL 5%= 2.68% After Income Tax** 5% Before CGT** Tax Sheltered Investment Tax Sheltered Investment

Y 1 Age 41 25,670 26,250 22,825 13,547

Y10 Age 50 283,259 316,386 304,621 279,066

Y20 Age 60 369,014 515,360 514,315 632,188

Y30 Age 70 480,730 839,468 900,005 1,374,668

Y40 Age 80 626,267 1,367,404 1,608,990 2,845,446

  Low High Medium/High Very Low

Business Planning

• During life• High up-front tax on retained earnings in fixed income

• On death• Frequently high tax on deemed disposition of shares• Possible double tax when dividends paid to heirs• Shareholder liquidity issue –

– very expensive to pay estate costs with a corporate dividend

Tax Challenges

Tax treatment of a Holdco

Redundant Assets

AliveAlive *Retained Earnings *Retained EarningsPay Income Tax on earningsPay Income Tax on earnings

AliveAlive Pay DividendPay Dividend

TaxTax

AliveAlive Pay IncomePay Income

TaxTaxTax TrapTax Trap

*Retained Earnings- defined as “redundant assets not being used to fund lifestyle.”

On DeathOn Death-- Pay Capital Gains Tax on Pay Capital Gains Tax on Share ValuesShare Values

GOAL = 1) Reduce Taxes 2) Improve IRR on Asset 3) Preserve Estate Values

Tax treatment of a Holdco

Redundant Assets

RetainedRetained Earnings Tax Earnings Tax

Pay DividendPay DividendTaxTax

Pay IncomePay IncomeTaxTaxInsurance

ContractTax Shelter

GOAL = 1) Reduce Taxes 2) Improve IRR on Asset 3) Preserve Estate Values

Tax treatment of a Holdco

Pay Dividend Pay Dividend

TaxTaxPay IncomePay IncomeTaxTax

Insurance Contract

Insurance Co

PaysTax-Free

Balance to shareholder beneficiariesBalance to shareholder beneficiaries

Capital Dividend

A/C Retained Earnings

A/C

Up to ACB

Up to ACB

Over ACB

Over ACB

Tax-freedividend

Taxable dividend

Pay Capital Gains TaxPay Capital Gains Tax on Share Values on Share Values

GOAL = 1) Reduce Taxes 2) Improve IRR on Asset 3) Preserve Estate Values

Summary• How I sell Insurance has changed

– From “need” to “want” Concepts deal with -• Preservation of wealth, • Creation of wealth, • Tax sheltering of wealth, • Tax efficient funding of estate liability, • Long term investment for income and growth• Corporate tax planning

• These concepts drive larger premiums and larger sums of Insurance

• The focus has shifted from the death benefit to the whole package and more often with the focus on the tax sheltered account

• Amounts of insurance applied for are more often determined by the amount of deposit planned, securing whatever amount of insurance is required to maintain the policies exempt status

• The language has changed from insurance terminology to investment terminology

• Products are packaged within concepts and concepts are packaged within planning reports

• This process is actively being expanded within the high net worth community.