Continuing Education for Financial Service Professionals
The Building Blocks of Canadian Retirement Planning
The Building Blocks of Canadian Retirement Planning Copyright 2013 CLIFE Inc. All rights reserved. Any reproduction of parts or all of this book and its contents by any means electronic or mechanical is prohibited.
& The Building Blocks of Canadian Retirement Planning is a collection of terms common to the Canadian life insurance and financial services industry and relevant to all those who work in the financial services industry or in association with life insurers. The definitions of the terms are “pure,� that is, they do not reflect the practices or policies of any insurance company. Thus, there may be some minor discrepancies between these definitions and how an insurer uses this terminology or interprets and applies these terms. The information in this book is provided for educational purposes only; it should not be construed or interpreted as providing advice. Agents and advisors should always seek guidance from their principals and compliance experts in regards to informing themselves and others about details of the products they sell and other considerations of their business.
& We welcome all feedback and suggestions for additions to the book. Please send your comments to info@clifece.ca. CLIFE INC. 1595 Sixteenth Avenue Suite 301 Richmond Hill, ON L4B 3N9 www.clifece.ca The Building Blocks of Canadian Retirement Planning continuing education credits for life agents, CFP Professionals, and accident and sickness agents is provided upon satisfactory completion of an online test. Please see the website for details or email info@clifece.ca.
The Building Blocks of Canadian Retirement Planning
Overview
This continuing education course is an overview of terms and concepts that apply to retirement in Canada, presented in alphabetical order so that information can be found quickly and easily.
Each entry is explained to develop basic understanding for the reader, and when appropriate, an additional note is appended called “Relevance to Retirement.� In those sections, additional remarks have been added to help complete the picture of the significance of the term and any pitfalls of which you should be aware.
Reading this course will reinforce your knowledge of the basics, and show you the interactions that exist between accounts, activities, plans and policies. You will begin to see the big picture. To fully appreciate retirement planning you will appreciate that while the individual entries in the course are the equivalent of single building blocks, together those blocks stack up to form a tower of knowledge.
Accident and Sickness Insurance (A&S) Accident and sickness insurance is a broad category of insurance also known as health insurance.
A&S is available for both personal use and for groups. Some employee benefit packages include health insurance post-retirement for a specified period of time. If so, ensure that coverage will be adequate for planned travel or absences from Canada.
All Canadians enjoy basic health insurance from their provincial health plans. However, provincial plans are not equivalent across the board. If one resides in Alberta and retires to BC, he or she may find a difference in coverage.
A&S policies provide:
-
Extended health care. Pays for semi-private or private hospital rooms, prescription drugs, medical appliances (such as a knee brace), and other services.
-
Travel assistance. Pays the cost of health care needed outside Canada above the amount provincial plans cover. Will also cover costs such as those incurred by a traveling companion, and the return of a body to Canada.
-
Prescription drugs.
-
Dental services.
-
Accidental Death and Dismemberment.
-
Critical Illness Insurance. Pays a lump sum when the insured is diagnosed with a critical illness covered by the policy and remains alive 30 days after diagnosis.
-
Long-term Care Insurance (LTCI). Pays for care of those who are no longer able to care for themselves.
Relevance to Retirement: Health insurance is essential for travel outside Canada and a necessity for snowbirds. Many Canadians are also unaware that differences exist between provinces as to what is covered or not covered in various provincial plans. Canadians who reside for part of the year in another province may want health insurance to provide the same coverage they are accustomed to having at home.
LTCI is a product that saves a person’s wealth from their health: in other words, it protects the estate from the significant expense of long-term care. It has particular relevance to women because women have longer lifespans than men, and also because they outlive their male partners, they can find they have no one to provide care for them. Although the expense may be considerable, out-of-pocket costs for nursing home care can run into the hundreds of thousands of dollars.
Adjusted Cost Basis Adjusted cost basis (ACB) is a dollar amount that represents the net cost of the life insurance policy to the policy owner. It is made up of the gross cost of the policy (in other words, how much has been paid --mostly, premiums) plus or minus other contributions that add to, or are subtracted from, that value.
ACB increases by costs incurred by policy owner and decreases by benefits received by the policy owner. ACB is used to determine the taxable gain on a policy loan and the taxable portion of a withdrawal.
Costs that increase the ACB include:
-
Premiums.
-
A policy loan repayment.
The ACB is decreased by: -
Life insurance coverage, called the net cost of pure insurance (NCPI).
-
Dividends.
-
A policy loan.
-
A withdrawal.
The ACB calculation for a “plain vanilla” policy is: ACB = premiums – NCPI
The ACB calculation for a par whole life policy with a policy loan is: ACB = premiums – NCPI – dividends – policy loan
When a life insured dies, the policy beneficiary receives the death benefit of the policy. The death benefit is not affected by the ACB. Advisor Remarks: 1. As of Dec. 2, 1982, the method for calculating the ACB changed. Policies issued prior to this date are called grandfathered. These policies have preferential tax treatment compared to those issued after that date. 2. ACB is a difficult concept. It is best thought of as how much the person is “out of pocket” in terms of expense for the product. 3. For non-insurance purposes, the ACB is the adjusted cost base. Only in insurance is “basis” used.
Relevance to Retirement: A retiree who contemplates taking a policy loan, withdrawal, or cash surrender value of a life policy may face tax consequences depending on the ACB of the policy. This should be pointed out by the agent prior to completing the transaction. The insurer that has issued the policy should provide the ACB estimate and an accountant or tax specialist could be brought in to ensure tax efficiency.
The Allowance The Allowance is a federal government retirement pension that can be received by the spouse of a person who receives Old Age Security (OAS), or when the spouse is a survivor of a person who received OAS. The recipient must meet the requirement for residency stipulated by the government, which calls for a person to have lived in Canada for at least 10 years after age 18.
A very complicated formula is used to determine how much will be received. Tables of rates can be accessed here: http://www.servicecanada.gc.ca/eng/isp/oas/tabrates/tabmain.shtml
Relevance to Retirement: The Allowance is only available to low-income seniors. It is a contributor to income for those without other income sources.
Annuities An annuity is an investment contract, usually made with a life insurance company. A single lump-sum deposit or a series of deposits can fund an annuity, or it can be funded by a transfer of funds from an RRSP or by those with a defined contribution plan form of pension who need to transfer the value of the pension at retirement.
The capital which funds the contract grows due to the interest provided by the provider of the annuity, for instance at 3%. This means 3% interest is applied to the capital. The interest rate is fixed at the time the annuity contract is purchased.
Annuities are a guaranteed investment because the contract owner is guaranteed to receive a return of his or her capital plus interest. The exception to this is if the contract owner has chosen to deposit his capital into a variable annuity. Instead of receiving a guaranteed interest rate, he will receive annuity payments based on performance of the stock market. The amount of benefit from a variable annuity is not guaranteed.
Annuities pay a regular income, called the annuity benefit to the contract owner, who is called the annuitant. The contract owner can choose to receive the benefit monthly, quarterly, semi-annually, or annually.
If an annuity is funded with a single deposit, the annuitant can begin to receive a benefit on the first annuity period he has selected. This is called an immediate annuity.
Alternatively, if a series of deposits are made to the contract, the benefit will begin at a date in the future. An annuitant may also choose to make a single deposit but begin to receive benefits at a future date. This is called a deferred annuity.
Annuities are available for a specified term, such as 10 years or to age 80, or for life. Annuities that are lifelong can provide for beneficiaries after the death of the annuitant.
Annuities are also available on a personal basis and for the coverage of a couple, called a joint and last survivor annuity. Such an annuity makes a payment for the lifetimes of two spouses and then does not provide a beneficiary benefit.
Advisor Remarks: 1. The annuity benefit paid to the annuitant is determined by a number of factors. They include the rates offered by the insurer (there are differences between companies), the total amount of capital, how often the benefit is paid, and the age, gender and health of the annuitant. 2. All provinces define annuities as a form of life insurance. This gives them creditor protection. 3. Annuity benefits are paid monthly, every three months (quarterly), twice a year (semi-annually) or annually. The contract owner makes this decision on the application. 4. Withdrawals or surrender of the annuity contract is to be avoided since the annuitant will be financially penalized.
Relevance to Retirement: Annuities have in recent years fallen from investor favour due to their current low interest rates. However, that situation is changing because investors and retirees are beginning to realize the value of the guaranteed income annuities provide.
A wise strategy at RRSP maturity can be to split funds between an annuity and a RRIF. The retiree benefits from the dependability of the annuity with the income flexibility of the RRIF.
Finally, an insured annuity is a product with incredible advantages. It simply combines a permanent insurance policy (such as term-to-100) with a straight life annuity: the retiree enjoys income for life from the annuity that can be used as necessary for life insurance premium payments; the beneficiary receives the value of the life insurance on death of the annuitant. Thus, the value of an estate is both enjoyed during life and received after death by a beneficiary.
Average Age Average age enters the retirement planning picture in several ways:
1. Age at retirement 2. Age at death
Since 2009 the average retirement age has risen slowly but steadily. As of 2011 the average retirement age was 62.3 according to Statistics Canada. The average age at death is just over 80; however, once a person reaches age 65, they can expect to live another 21.3 years. So, on average, if a person retires at age 62.3, and lives to age 65, he or she will live in retirement a total of 24 years on average. Note that because these numbers are averages, that means half the population will retire and die before the average is attained, and the other half will retire and die after.
This is an incredible challenge to retirement planning: what is the right number of years to plan for? No one wants to outlive their money; this is a constant worry to people as they age. And, there is no definitive answer as to “how long� other than using averages. But, it is a perilous position to plan for a future event (whether retirement, the loss of independent living, or death), unable to know when that event might occur.
Relevance to Retirement: Should you use an average when you plan? Needless to say, it is preferable to plan for a longer time than shorter.
CLICK HERE TO ORDER