Insurance in Retirement
The Financialist • Issue 106 • July 2010
BY JACQUELINE SIAH BSC CIM CFP CLU
In our working years, life insurance products are usually considered tools to protect us until retirement. In retirement, however, insurance can play an equally important role, from ensuring quality care in the event that you are no longer able to take care of yourself, to maximizing the value of your estate for your heirs. This article takes a brief look at some “post-retirement” insurance products and strategies.
Long Term Care
It is a situation no one wants to imagine themselves in: reaching a time in life when we are no longer able to take care of ourselves. Where provincial health care plans lack adequate coverage to fund services such as nursing care, personal care, and homemaking services, Long Term Care insurance can help fill the gap.
Long Term Care insurance pays a benefit when you are unable to perform two or more “activities of daily living” (ADL), or if you have a cognitive impairment. While the definition of ADL varies among carriers, it generally includes eating, bathing, dressing, toileting, transferring (the ability to move in and out of a chair or bed), and continence.
The cost of Long Term Care insurance, and the benefits, can vary greatly amongst carriers and among different types of plans. Some of the more important elements to consider include the waiting period before payments begin, premium payment period, medical requirements, and whether premiums are waived once payments begin.
Estate Preservation/ Maximization
In retirement, life insurance is the foundation of effective estate planning.
If you have a spouse or common-law partner, on the first death of either of you, all assets may be transferred (or rolled over) on a tax-deferred basis to the surviving spouse or common-law partner. At the second death, however, your entire estate – with the exception of the principal residence – is treated as though you disposed of all assets as of the date of death. In non-registered plans, any capital gains on your assets are triggered. In a registered plan (RRSP, RRIF, etc), the entire plan value is treated as though you withdrew it as income at your date of death and may be taxed at the highest marginal tax rate (43.7% in BC).
Permanent life insurance can be an extremely cost-effective way to preserve and enhance your estate by providing a guaranteed tax-free lump sum for a known capital need (eg. income tax) at death. Furthermore, if a beneficiary is named directly in the policy, the proceeds bypass the estate and, as such, are not subject to probate fees. For example, the premium for a $250,000 joint-life second-to-die Term-100 insurance policy for a couple, both aged 70 (in reasonably good health) costs approximately $406/month. If you set aside this same $406/month and earned a 5% net (i.e. after-tax) rate of return, it would take approximately 26 years for you to save $250,000.
Insured Annuities
Retirees who are in relatively good health, have accumulated a significant portion in non-registered assets, and would like to generate a steady flow of income for the remainder of their lives while preserving the value of those assets for the estate, may consider an Insured Annuity (or Lifetime GIC).
The Insured Annuity consists of two parts: a prescribed life annuity which is purchased with non-registered funds, and a term life insurance policy. The annuity pays you an income, a portion of which you can apply to the premiums on a level premium life insurance policy. During your lifetime, the income you receive from the prescribed annuity is taxed preferentially, since a portion of each payment is considered to be a return of capital. Because of this tax treatment, the Insured Annuity only works effectively with non-registered funds. At your death, the life insurance policy ensures that your investment is fully returned to your estate via a tax-free lump sum, bypassing probate if beneficiaries were named directly in the policy.
Before purchasing any life insurance product, it is important not only to select the options that best suit your needs, but to ensure that you can and want to continue paying the premiums so that your policy stays in force. For a detailed life insurance needs analysis, please contact your Rogers Group Financial advisor.