May 2009 - Larry Balback Insurance Strategies for Estate Planning - 3 Case Studies

A business continuation/executive benefit strategy

Welcome

Disclaimer

• This presentation is intended for information purposes only.

• Neither Sun Life Assurance Company of Canada nor the presenter has been engaged for the purpose of providing legal, accounting, taxation, or other professional advice.

• No one should act on the examples or information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific case are considered.

Agenda

• Sharing defined

• Strategy summary

• Why do this?

• Spotting opportunities

• How does it work?

• Planning considerations

• Case study

• Steps to implement

• Sales & marketing support

The ideaSharing defined

• Two parties share ownership, costs and benefits

of a single asset

• Neither party wants it all

• Non-financial examples:

• Time share vacation property

• Private airplanes

• Financial examples:

• Strip bonds

The conceptSales strategy in a nutshell

1. Company owns basic coverage

• payable on diagnosis of a covered critical illness; and

• surviving the specified period

2. Insured owns return of premiums (ROP)

• payable if there is no claim during specified period

• 15 years or

• policy anniversary after age 65

• Employer – risk management• Protect company against loss of key

employee(s)• Fund key person replacement and/or

buy-sell arrangements• Employee

• Potential tax-free return of total premiums

• Advisor• Reinforce your value to existing

clients• Foot-in-the door with

business owners

Win-win-win solutionAdvantages to employer, employee and you

Spotting opportunitiesWhere to focus your efforts

• Owner/managers of small to medium-sized

businesses

• Incorporated professionals who are employees

• Any business with one or more key employees

• May include shareholder employee

• Existing group clients

• Transition to individual sales

Who to targetTypical client profile

• Ages 30 – 60

• Need for corporate-owned CI insurance

• Key person protection

• Fund buy-sell agreement

• Any business that hasn’t updated their buy-sell

agreement

Steps

1. Needs analysis & recommendation

2. Apply for a critical illness insurance policy

as joint owners

• Include ROPC/E benefit

3. On approval:

• Lawyer draws up a shared ownership

agreement

• Company & insured sign agreement

• Copy of agreement to Sun Life Financial

1. Consult with tax advisors• Greatest certainty in QC,

least in BC• Each party must pay true cost

of their respective benefits• ROP benefits must be

priced separately, not bundled

2. Only one benefit• CI benefit OR ROPC/E

Tax considerations

See reference paper at www.sunlife.ca/advisor

Our apologies…More tax stuff

• No Capital Dividend Account

• CII basic benefit tax-free to corporation but

taxable if paid out

• Both parties must agree to cancel policy

• Possible adverse tax consequences if only ROP

owner cancels

• Less risk if insured is employee and not

a shareholder

• High risk to sharing with H&W Trust

Legal points to ponder

• Two contracts – policy & shared

ownership agreement

• Both parties need independent legal

advice

• Consider all contingencies

• Eos has an agreement checklist

• Sample agreement on SLF advisor siteSee sample agreement at www.sunlife.ca/advisor

Case in point

• Maury Blaas• M45 n/s• Key person

• Sun CII – Term 10• $250,000• ROPC/E – 15 yrs

Maury’s story [cont’d…]

• Company pays:

• $1,972.50 first 10 yrs

• $4,247.50 next 10

• Maury pays:

• $1,700 first 10 yrs

• $5,262.50 next 10

• If policy cancelled after 15 years:

• $84,275 year 15

• Internal Rate of Return (IRR) 10.16%

The results

Note: Only one of these benefits will be payable.

IRR is after-tax rate of return premiums would have to earn to pay these benefits.

Age 60 CII BenefitROPC/E Benefit

Payment $250,000 $84,275

IRR 23.1% 10.16%

Sales support

• Marketing materials

• Customer fact sheet

• Advisor case study

• Reference paper

• Critical illness advisor guide

• www.sunlife.ca/advisor

Corporate Owned Life Insurance

OPCO

Life

Insurance

beneficiary

beneficiary

Life

Insurance

owner owner

Shareholder A Shareholder B

50%50%

Corporate Owned Life Insurance- Advantages

• Often lower tax rate than individual• Easy administration• Potential partial premium deductibility

(collateral ins.)• Death benefit tax free to corporation• Mortality gain flows through capital

dividend account (proceeds less adjusted cost basis)

Corporate Owned Life Insurance- Disadvantages

• Creditor exposure• Issues if no shareholder agreement• Tax issues when transferred to life

insured. (retirement, sale, etc.)

Transfer of OwnershipCorporate Owned Life Insurance

Factors considered in determining value: (IC 89.3 paragraph 40)

• Cash surrender value• Policy loan value• Face value of policy• State of health of insured and life expectancy• Conversion privileges• Other policy terms (riders, A.D.B.,)• Replacement value.

Shared Benefit Life Insurance

OPCO

Life

Insurance

Benefi

ciary

(irre

voca

ble)Beneficiary

(irrevocable)

Life

Insurance

Shareholder A Shareholder B

50% 50%

Owner Owner

Insurance

Agreement

Insurance

Agreement

Shared Benefit- Advantages

• Corporation pays premium (or part)• Death benefit tax free to corp. (ACB?)• Creditor protection during lifetime• Different plans for each shareholder• Easy transition at retirement, sale etc.

Shared Benefit- Disadvantages

• Need for insurance agreement – lawyer• More administration issues• No premium deductibility? (collateral ins.)

Shared Benefit Life Insurance

OPCO

Life

Insurance

Benefi

ciary

(irre

voca

ble)

Beneficiary (irrevocable)

Life

Insurance

Holdco BHoldco A

Shareholder A Shareholder B

Owner Owner

Insurance

Agreement

Insurance

Agreement

50%50%