THE HIGH NET WORTH CLIENT’S FINANCIAL FUTURE

Clients are constantly searching for new strategies to maximize their financial position, be it through investments, insurance or savings plans. For the high net worth client, in particular, one financial expenditure is inevitable: tax. Unfortunately, as our wealth increases so does the percentage of our income we must hand over to the CRA. Mitigating this strain on a client’s financial status is an important part of the advisor’s role. Beyond maximizing RRSPs and TFSAs, what methods can we offer to alleviate the burden of tax?

While multiple strategies exist, an Insured Retirement Plan (IRP) offers an opportunity for a life insurance policy to be the security upon which a loan is collateralized. An IRP allows individuals to fund a permanent life insurance policy over its base premium. At retirement, an annual line of credit is established against the policy where the maximum loan percentage is linked to the type of investment within the policy. For instance, if it’s a universal life policy primarily invested in equities, the maximum loan is typically limited to 50% of the cash value. If it’s a fixed income policy, the percentage can increase to 90%. The primary benefit of this strategy is that the earnings on the money placed within an insurance plan and a loan provided from it are both considered non-taxable.

Many already have a term life insurance policy in place to protect their families should they pass away. As they approach retirement, this insurance policy can be converted into something more permanent and proactive like an IRP. Many fear debt in retirement and the burden it may place on their loved-ones when they pass. However, it should be noted that the death benefit paid out from an IRP safeguards against this as the loan is never permitted to exceed the cash value of the policy. Were the bank to pay out 90% of the cash value within the policy during the individual’s retirement, the death benefit would still surpass the accumulated debt. This means that risk is mitigated for both the bank and the policy holder. At the same time, it is important to keep in mind that if interest rates rise and the borrower isn’t paying all of the annual interest, the loan may exceed 90% of the cash value. In this case, advising the client that they may be required to put up additional collateral or pay down the loan is of utmost importance. Further, in the same way that the assets within the insurance plan are tax sheltered and the capital borrowed from it is non-taxable, the death benefit is also non-taxable. Any capital remaining once the loan has been repaid will be delivered tax-free to the policy holder’s beneficiaries.

COMMUNICATING THE STRENGTHS AND WEAKNESSES OF IRPS

As a general rule, it is common practice that an advisor’s recommendation begins with strategies to maximize RRSP and TFSA contributions in advance of considering the IRP strategy. While IRPs provide the benefit of supplementary retirement income, their primary value lies in the tax-sheltered environment they offer to policy holders.

For high earners it’s not uncommon that over $30,000 annually is required to maximize an RRSP ($24,930) and TFSA ($10,000). An IRP is best suited to high net worth individuals with the annual cash flow to not only maximize these tax-sheltered plans, but also shelter additional capital they wish to preserve. Herein lies the true value of the IRP — a shelter for additional income over and above the contribution room available in other non-taxable plans.

There is another group that may find the IRP appealing: Those with little to no RRSP contribution room—such as individuals with unearned income or company pension plans—who would most benefit from this strategy.

A civil servant is an excellent example of a client whose financial situation could be enhanced by an IRP. With high incomes and good pension plans, it is anticipated that they will retire comfortably. However, pension plans come with the disadvantage of a pension adjustment, offsetting the amount of money that can be contributed to an RRSP. Due to this pension adjustment, these individuals have little RRSP room. In this situation, a TFSA and/or IRP could be recommended as their primary tax shelter strategies. The additional income, which they are unable to contribute to their RRSP, is then shielded in these tax sheltered plans while the supplementary retirement income can ultimately be spent on spoiling grandchildren or a further well-deserved week of annual vacation.Generic Ciallis is Tadalafil that was initiated to the market or driving to discount levitra http://cute-n-tiny.com/cute-animals/baby-white-rhinoceros/ work. Empowr has built the first democratic social network, a demporation, one not beholden to the needs of a faceless, profit-driven corporation, but one meant to serve the needs of the people who find it difficult to face proper blood flow to the penile organ, causing an erection in an already stimulated man. order cheap viagra A lot of glamour models also participate in promotional tradeshows as well as car events. go to these guys canadian viagra generic It is advised to all that Kamagra is not suitable medication if you have any chronic health issues like cancer, cheapest tadalafil uk heart disease, thyroid diseases, reproductive system dysfunction and diabetes can run rampant.

Nevertheless, there are two potential drawbacks advisors must express to their clients.

1. All loans carry interest.Should that interest compound over time, the impact could be dramatic. Though the lender will not allow the line of credit paid out to exceed a pre-determined percentage of the cash value of the policy, it is important that clients be aware of the need to pay the loan’s interest off on an annual basis. Failure to do so may lead to a reduction in the line of credit available or the calling of the loan entirely in extreme cases.
2. A further weakness of the IRP strategy is thelack of any guarantee that lending practices, interest rates and tax laws surrounding insurance policies will remain the same. Should they change, this strategy may no longer be a viable option and clients may find themselves at the point of retirement without access to this element of their financial plan.

COMMUNICATING ALTERNATIVES

It is important that advisors build trust in their relationship with a client by clarifying all financial avenues afforded to them. While leveraging against a life insurance policy provides important tax benefits, withdrawing directly from the life insurance policy may offer an alternative for clients preferring to avoid loans as part of their financial strategy. Although the money withdrawn from the life insurance policy would be taxable, the cumulative savings provided by its long-term tax-sheltered status might offset the cost. It’s important to maintain a holistic approach throughout the relationship, while keeping all parties informed about the alternatives and options available to them.

Ultimately, every financial strategy offers advantages and drawbacks. It is the advisor’s role to ensure clarity for their client in all areas of financial planning. Transparency is key.