Corporate asset diversification strategy Insurance working to reach corporate long-term business goals This presentation has been developed as a training resource to help advisors identify and prepare a solution to help their Canadian corporation clients protect their business from the unexpected and help them achieve their financial goals using participating life insurance as a unique asset class. The corporate asset diversification strategy uses principles of our balancing to reduce risk marketing material, customizing the conversation to show how including participating life insurance as an asset class can impact a financial security plan. January 2017. Not for use with clients

Strategic diversification – Life insurance as a unique financial asset Agenda Do you know this client? Strategic diversification – Life insurance as a unique financial asset Corporate tax pitfalls Corporate asset diversification New tool Case study Future options - accessing strategies and Values Agenda Do you know this client? Business life cycle Strategic diversification – Life insurance as a unique financial asset Corporate tax pitfalls An effective solution – Corporate asset diversification using participating life insurance New tool – telling the story - case study Participating life insurance can provide options in the future such as accessing strategies and Values

Do you know this client? Need life insurance and are interested in the benefits permanent life insurance offers Successful corporation, generating more cash than required for income or to run the business Surplus remaining in Corporation is invested and growth is taxed at the highest corporate tax rate Clients who can benefit most from this strategy include business owners with: Life insurance need Passive corporate investments not required in day-to-day operation of the business Paying the highest corporate tax rate on this investment income

Business life cycle We’ve already discussed which clients may be most suitable for this strategy, but in terms of the business life cycle and their needs, typically clients will be in the growth or established phase. However, I wouldn’t discount this conversation with your business owner client’s that fall in the Start-up / Growth stage of their business.... The one commonality among all business owners is that they want to try to reduce tax as much as possible with in their business. Term might be the right solution for these clients now but it’s always a good idea to plant a seed with your clients that term insurance may be a less expensive option initially, however, over time the cost will increase and that in the future they may be interested in some of the options that may be available with participating insurance. The purpose of this strategy is to speak to the value proposition that PAR presents to business owners. They have corporate money they don’t need to access in to run their business or take as income, but the money sitting within a fixed income account is experiencing tax erosion. On the next slide, we’ll review various assets that may be held by a corporation and characteristics of each category.

Strategic diversification As a corporation becomes successful, it will generate more cash than required to run the business. This surplus is often distributed to various assets with the intent of diversifying risk, maximizing growth and ultimately optimizing net worth and estate values. Generally, business owners understand the importance of strategic diversification but they might not understand how permanent life insurance can complement their other assets.   To understand how, let’s look at the features of each asset class. This is a opportunity to review how each asset class works with others to provide clients with strategic diversification. Different asset classes have different features. For example, each asset class has 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 Returns are generally lower as risk is lower Risk of returns being eroded by inflation Taxed at highest marginal rate 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 lose money Business, real estate, etc. Value fluctuates with market 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 Owner and named beneficiary – A private corporation resident in Canada When the insured person dies – The corporation receives the death benefit, which credits its capital dividend account by an amount equal to the death benefit less the adjusted cost basis of the insurance policy Tax-advantaged growth within the policy, within prescribed limits, while living Death benefit and beneficiaries are kept private (benefit would be paid to CDA) 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 Note – For more information, see Balancing to reduce risk (form 46-8374). This piece helps clients understand the value of strategic diversification and how life insurance can help diversify their portfolios. Optimized net value to shareholder’s estate

Passive assets are fully taxable at the highest corporate tax rate Money lost to taxes Generally, established business owners prefer to retain a certain level of liquidity in their business in the form of passive assets. There is a cost to retain those liquid assets, the cost is in the form of tax and it can be considerable. Passive assets are taxed at the highest corporate rate which will quickly erode growth. The next time you are speaking with your business owner clients or looking at corporate financials looking for planning opportunities it’s important to look for retained earnings (cash equivalents) and point out this potential “cost”. (All comments related to taxation are general in nature and are based on current Canadian tax legislation and interpretations for Canadian residents, which are subject to change. For individual circumstances, consult with your legal or tax professional.) Passive assets are fully taxable at the highest corporate tax rate

Tax impact is greater over time Year after year, taxes eat away at investment growth. Instead of compound growth, this tax erosion can be seen as compound reduction. Every dollar paid to Canada Revenue Agency (CRA) has the potential to cost more than one dollar over time – that’s because the ability to reinvest that dollar is lost forever. Growth on passive investments held within the corporation are taxed at the highest corporate tax rate.

Optimize long term asset growth Equities Fixed income assets Fixed Income investments Life insurance While passive corporate investments can grow quickly and be accessed easily, growth on these assets are taxed at the highest corporate tax rate By planning ahead participating insurance can help offset the tax grind on passive assets and help distribute corporate profits more efficiently in the future. The general idea of this strategy is to redirect a portion of the money in the corporation that would otherwise be going into a fixed income investment and use it to buy a participating life insurance policy. Participating life insurance is not a fixed-income investment, however, in many ways, it is like a fixed-income asset. Participating life insurance is a long-term capital asset that can have an immediate estate enhancement due to early death, guarantees, historically stable growth, tax advantages and risk management components. Participating life insurance can help you build wealth and lower taxes. By putting some of the money not required to run your daily business into a participating life insurance policy, you may be able to achieve a higher rate of growth, after taxes, and at the same time reduce your annual taxes. Other Cash

Why Participating Life Insurance? Stable Integrated guarantees Vested values* Liquidity if needed** *if no money is withdrawn ** cash withdrawal, policy loan or collateral assignment may impact cash value or death benefit Business owners prefer to limit their business risk to the business. They are drawn to financial instruments that don’t experience the highs/lows that can be associated with higher risk investments. Generally, the stable nature and tax efficiencies associated with PAR are highly desirable in the business owner market. Participating Life insurance creates the opportunity to transition taxable investments into a tax advantaged financial instrument that will provide: Tax-advantaged vested growth within the policy, within prescribed limits, while living so long as no money is withdrawn. Liquidity if needed in the future through the use of cash withdrawals, policy loans, collateral assignment. Note: a cash withdrawal, policy loan or collateral loan may impact the cash value or death benefit of the policy. Note: collateral loans involve risk. They should only be considered by sophisticated investors with high risk tolerance and access to professional advice from a lawyer or accountant. The terms of future availability of collateral loans cannot be guaranteed. tax-free benefit to named beneficiaries which could mean a potential tax-free payout to shareholders

Which portfolio would you rather have? When introducing client’s to the idea of integrating life insurance into their financial planning they will start thinking about cost. It’s important to emphasize that we are not looking to add additional cost we are simply looking to optimize their overall portfolio. This is achieved by moving a portion of their assets from a taxable position into one that is tax advantaged. The result is less tax on growth and more money for whoever they name as the beneficiaries, whether that’s their business/shareholders/loved ones. The conversation can be this simple! Estate Enhancement With the same total cash outlay, participating life insurance can reduce your annual and estate taxes and increase your portfolio

Corporate Asset Diversification Strategy Case study

Bob is a 50 year old business owner Successful private corporation Case study Bob is a 50 year old business owner Successful private corporation Current portfolio balance: $3,000,000 Fixed income portion: $1,500,000 Proposal: Reallocation of a portion of fixed income investments (over 15 yrs) $750,000 Bob is 50 years old and a successful owner of a private Canadian corporation. He currently has a portfolio of $3,000,000; $1,500,000 of it sitting in passive investments. Although an upside of keeping this money where it is would be liquidity, over the next 35 years he will pay tax annually on the interest income. So for 35 years, this money is earning interest, and the corporation is paying tax at the highest corporate tax rate on these earnings. Finally, when Bob wants to this money out of the corporation as a dividend, the dividend income is taxed. Basically, there is no tax incentive in earning interest income. Case study assumptions: Male, age 50, non-smoker, standard risk, Legacy Generator – guaranteed 20-pay, initial annual premium $50,000 paid for 15 years. Initial death benefit $1,413,837. Comparison age 85. Assumptions: Legacy Generator – guaranteed 20 Pay, Initial annual premium $50,000 paid for 15 years initial death benefit $1,413,837. Male, 50 NS, standard risk, comparison age 85, province of Manitoba

Which portfolio would you rather have? Let’s take a closer look at the Corporate asset diversification report. The top two bars represents the current portfolio – what Bob is doing today with his investment portfolio. $3,000,000 (at age 50). The second bar is the $3,000,000 projected net estate value of the portfolio at age 85. Annual taxation on the investment is reflected in the final growth value. 3. The bottom two bars -the proposed portfolio – shows a redirection of a portion of the fixed income portion of the client’s portfolio to pay the premium of a participating life insurance policy for 15 years. The investment value today less the cumulative insurance premium is equal to the investment value today shown in the top bar. In this example, we redirect just under $750,000 to pay premium over 15 years. 4. The growth within the participating life insurance policy is not taxed (within limits) and assumes no withdrawal of any cash value and the death benefit may be payable to named beneficiary(ies), which could be shareholders tax free. 5. Bottom line – with the same total cash outlay, participating life insurance can reduce annual tax on growth while providing a significant estate benefit to the shareholder. In this case, the net value benefit to shareholder’s estate is $6,779,803 a difference of $1,350,680 or 25%. Assumptions: Legacy Generator – Guaranteed 20-Pay Initial annual premium $50,000 paid for 15 years Initial death benefit $1,413,837. Male, 50 NS, standard risk, comparison age 85

Do you think Bob would be interested? Current portfolio Proposed portfolio Difference $ Difference % Cumulative cash invested or premiums paid $750,000 Net value benefit to shareholder’s estate $5429,123 $6,779,803 $1,350,680 25% With the same total cash outlay, participating life insurance can reduce your annual and estate taxes and increase your portfolio

Meeting business goals Investment and insurance Pay less tax Manage risk by diversifying corporate assets Plan for eventual withdrawal of assets in a tax efficient manner Grow total net worth Potential for liquidity (if needed) Effective asset transfer (tax advantaged) for succession planning or estate equalization For a business owner who wants to: Be proactive in the continued success of the business Plan for eventual withdrawal of profits in a tax efficient manner Future goal may include succession planning or estate equalization Permanent life insurance may be an effective solution for corporations looking for tax-efficiencies and options. Life insurance can help business owners accumulate more cash value during their lifetime and may allow them to leave larger estates to their shareholders than investments can.

Accessing strategies and values Corporate plan comparison with accessing cash Corporate asset transfer + Save it. Spend it. Leave it. Accessing brochure 46-4920 Today we’ve talked about how participating life insurance and it’s cash value can be an important contributor to net value to a shareholder’s estate. Additional planning for business owners could include the opportunity to access cash values in a life insurance policy. Here are some strategies to help you help your client reach their long-term business goals and increase corporate wealth.

This material is for information purposes only and should not be construed as providing legal or tax advice. Reasonable efforts have 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 and interpretations for Canadian residents, which is subject to change. For individual circumstances, consult with your legal or tax professional. This information is provided by The Great-West Life Assurance Company and is current as of December 2016.