The hidden cost of tax and how to save more Individual tax grind+ The hidden cost of tax and how to save more This document is for wholesaler use only. January 2018

Agenda Individual tax grind+ A case study The tool Client suitability When to use it A case study Hidden cost of tax Saving clients money and getting them more Agenda: Individual tax grind+ The tool Client suitability When to use it A case study Hidden cost of tax Saving clients money and getting them more

A tax-advantaged way to enhance your clients’ estates Individual tax grind+

The tool Major update to existing calculator Now features two options: Ability to show investments only Asset mix Investment growth as well as the amount of money lost to tax Ability to import permanent life insurance policy Comparing investments to insurance Cumulative amount paid and net estate value The individual tax grind now goes beyond your basic calculator. It’s more advisor and client-friendly – both in terms of input and report. The new tool can do everything the old calculator can do plus more. Now you have the opportunity to speak to clients about their asset mix and the substantial cost of tax on growth. Plus, there’s the opportunity to import a permanent life insurance policy. By bringing insurance into the conversation, you’re able to show clients how insurance can provide an opportunity for reduced taxes on growth, which can drive higher returns.

Who is this tool for? Needs life insurance and is interested in the opportunity permanent life insurance offers Has annual tax obligations from investments Has a desire to reduce taxes on investment income Wants to leave a legacy Clients who can benefit most from this strategy include people with: Life insurance needs Able to qualify and pay for life insurance Annual tax obligations from investments A desire to reduce taxes on investment income A wish to leave a legacy

Putting the tool into action Case study

Meet Arlene

How you know Arlene Arlene is a client who was transferred to you when you bought a book of business a few years ago She has some minor investment holdings with you You meet annually to discuss her investments You see an opportunity for estate planning You as an advisor have some minor investments holdings with Arlene that were transferred to you when you bought a book of business from a retiring advisor. You know Arlene has significant investments elsewhere and you can see an estate planning opportunity. Arlene views insurance as a cost and doesn’t see how it will benefit her and her family any more than her investments would in the long term. Since you meet with Arlene annually to review her investments, you figure now might be the opportunity to reposition insurance to highlight how it can help her save tax and leave more to her children.

A snapshot of Arlene’s scenario 55-year-old female Lives in Ontario A site supervisor with an annual income of $220,000 Looking to retire in five years Has two adult children Savvy with investments Maximized her TFSA and RRSP Reluctant to buy individual permanent life insurance Views insurance as another cost Doesn’t understand how insurance can fit in her plan Is under the impression investments can do everything insurance can do and more Arlene is a 55-year-old site supervisor. Her annual income before tax is $210,000. Since her children are now grown, she’s looking to retire in five years. Arlene has maximized both her TFSA and RRSP and she’s reluctant to buy an individual permanent life insurance policy. Her reluctance to buy a policy stems from her understanding that insurance is a cost, while investments are simply money set aside that she continues to own. Province of residence: Ontario.

Arlene’s goals Limit investment risk exposure Provide a legacy Minimize tax Maintain a reasonable return After getting to know Arlene a little more, we’re able to break down her top goals: Limit investment risk exposure Provide a legacy Minimize tax Maintain a reasonable return

Arlene’s place in the planning cycle To better understand where Arlene fits in terms of her goals, insurance needs and net worth, we can place her near the centre *click* of the Changing needs diagram. Knowing where she generally falls on this moving scale can help you as you determine the type of conversation you’re going to have and what type of strategy you might want to consider using. But before we go down the path too far, let’s look at Arlene’s current investments.

Arlene’s investment portfolio Asset class Investment mix Growth rate Tax rate Fixed income 75% 4% 53.53% Dividends (equities) 25% 5% 45.30% A look at Arlene’s investments tells us that the majority of her investments are fixed income. This is because as she prepares for retirement, she wants to limit her exposure to market ups and downs. So she’s begun to transition most of her non-registered investments into mainly fixed income and some equities.

Strategic diversification Arlene knows the importance of strategic diversification but she doesn’t understand how permanent life insurance can complement her other assets. Let’s look at the features of each asset class. This is an opportunity to review how each asset class works with other assets to provide strategic diversification. Each asset class has its own growth and risk characteristics. By considering the differences between asset classes, you can create a plan specific to the needs of a client like Arlene and strategically diversify their net worth to help reduce risk while maximizing returns. It’s important to remember that we’re simply showing Arlene how she can distribute her existing or future investments in a new way that will help reduce volatility risk/taxes while providing an enhanced return.   For Arlene, we’re specifically going to look at fixed-income investments, equity investments *click* and life insurance *click*. 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 May be subject to probate (i.e., estate administration tax) if any 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 Can result in loss of money if forced to sell in a down market May be subject to probate (estate administration tax) if any Life insurance: Tax-free death benefit is paid to named beneficiaries If the accumulation stays within prescribed limits, the cash value is only subject to income tax when it’s withdrawn Not subject to probate (estate administration tax) if any, if a beneficiary other than the estate is named Death benefit and beneficiaries can be kept private 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 For clients interested or owning business and real estate some of the characteristics of these assets are: 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 If forced to sell in a down market, can lose money

The hidden cost of tax Amount invested: $500,000 Amount of time: 30 years Amount of growth lost due to tax: $824,064 As mentioned earlier, Arlene views insurance as a cost and investments as money set aside. What we want to show Arlene is that investments also presents itself with cost – hidden as tax and lost growth.

Taxable investments at age 85 $1,756,517 $824,064 $932,453 If Arlene were to invest a total of $500,000 over a period of 30 years, $824,064 in growth is lost due to tax. Investment assumptions: $500,000 lump-sum investment deposit at age 55, comparison age 85 Investment mix: 75% fixed income, 4% growth rate and 53.53% tax rate 25% dividends (equities), 5% growth rate and 45.30% tax rate Investment assumptions: $500,000 lump-sum deposit at age 55. 75% fixed income, 4% growth rate and 53.53% tax rate, and 25% dividends (equities), 5% growth rate and 45.30% tax rate. The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

Loss of future growth due to tax Year Cash invested Investment value Growth Annual tax Net estate value Growth lost due to tax 1 $500,000 - $21,250 $10,861 $510,389 … 5 $542,915 $23,109 $11,797 $554,227 $61,553 30 $913,085 $39,257 $19,889 $932,453 $824,064 In taking a closer look at Arlene’s investments, we see that although her investments are growing, they are also taxed quite heavily. By holding onto investments, she’s losing a significant amount to taxes. Now that Arlene sees that even by her retirement *click* she would lose $61,553 to tax, and potentially at year 30, she may lose $824,064 she’s open to other options. After all, she wants to maximize her estate for her two daughters. The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

How to save more Investments compared to insurance Now that you’ve shown Arlene the hidden cost of tax and how investing may be like taking two steps forward and one step back, we want to assure her how she may be able to save more and get further ahead. How to save more

Investments compared to insurance Year Cash invested/premium paid Investments – Net estate value Insurance – Net estate value 1 $54,761 $510,389 $1,468,906 2 ... 3 4 5 $273,805 $554,227 $1,472,911 10 15 20 30 $547,610 $932,453 $1,680,414 Insurance assumptions: 55-year old female, non-smoker, standard risk. Enhanced legacy – guaranteed 20 Pay paid-up additions with additional deposit option. Total annual premium $54,761 with ADO ($16,428) and an offset starting on year 11. Initial death benefit $969,053. Insurance assumptions: 55-year old female, non-smoker, standard risk. Enhanced legacy – guaranteed 20 Pay paid-up additions with additional deposit option. Total annual premium $54,761 with ADO ($16,428), offset begins at year 11. Initial death benefit $969,053. The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

Investments compared to insurance What you paid What you get

Which one would Arlene rather have? At age 85: Investments Insurance Difference Cash invested/premium paid $500,000 $ % Net estate value $932,453 $1,680,414 $747,961 80% To get the same net estate value with investments as Arlene does with insurance would require a yearly after-tax rate of return of 3.93% After running a report for Arlene using the revamped Tax grind tool, we can see there’s a significant increase to her estate value. For example, if Arlene were to die at age 85, her net estate value would be $1,680,414 using life insurance compared to $932,453 with using investments. To get the same net estate value with investments as Arlene would using insurance would require a yearly after-tax rate of return of 3.93%.

Insured solution – summary If the accumulation stays within prescribed limits, the cash value is only subject to income tax when it’s withdrawn. Access to the accumulated cash value (if available) in the future. The death benefit is payable tax-free to named beneficiaries. Flexibility in payments allows for changing cash flows and an accelerated death benefit. If borrowing against or withdrawing money from the policy, it may reduce the policy’s cash value and death benefit and may be subject to tax. Besides increasing Arlene’s net estate value, we want to show her that permanent life insurance and its various options can provide her with flexibility, something she wasn’t sure life insurance could do. The product we chose for Arlene was based on how much she was able to spend, her desire to leave behind money for her daughters and her plans to retire in the near future. We chose Enhanced legacy – guaranteed 20 Pay paid-up additions with additional deposit option. By choosing a participating life insurance product, she’s able to see her product grow – something she’s used to with investments, and also have access to her cash value. Although she doesn’t foresee the need to tap into her investments or insurance, she wanted the assurance of that option, in case her financial situation changed. The additional deposit option was selected because it allows flexibility in Arlene’s payments, something that’s important to her as she approaches retirement. What can ADO do? Attractive to clients with changing cash flows or to clients with a desire to contribute more than the basic premium when possible Accelerate tax-advantaged growth of cash values Enhanced death benefit Support Premium offset should a client’s situation change over time Flexible limits can start and stop can be added after issue with underwriting Can enhance IRRs on cash value and death benefit – varies by product Provide more flexibility to the client should the client’s situation change over time support Premium offset Shortens the crossover point

What’s next? Continue the conversation with a strategy Asset transfer+ Asset diversification Now that Arlene has learned about the benefits life insurance can offer, she’s open to hearing more. That’s where the Asset transfer+ or Asset diversification strategies come into play. They can provide her with customized reports that go into greater detail about having access to cash or only using a portion of her investments to increase her net estate value. Wherever the conversation goes, there’s a strategy that can help support the conversation.