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Advisor SunLife

Building and protecting wealth with insurance

Many clients don't understand the value of insurance in retirement planning. But the right products can offer tax benefits, portfolio diversification and income protection


Date: July 17, 2017

When it comes to building and protecting wealth with insurance products, there is a "financial literacy gap" for many Canadians, says Mark Arruda, assistant vice-president, strategic business development and marketing actuary at Sun Life Financial.

People hear the word "insurance" and don't automatically think of retirement - but they should, says Mr. Arruda.

"Many people don't understand the value and benefits insurance products can offer them in retirement planning," he says. "Insurance products can provide tax benefits, especially for those in a higher income bracket. They can provide diversification of one's portfolio and they can help protect income in case of disability or illness."

Mr. Arruda says it's important to have the right type of insurance and the appropriate amount of coverage to achieve an individual's specific financial objective.

For example, life insurance can play a vital role in estate planning. In addition to providing a death benefit, whole and universal life insurance can help protect a client's wealth by offering significant tax benefits, he says.

"A permanent life insurance policy is a great way to protect financial capital because all of the money paid out through the death benefit is paid to the named beneficiary tax-free," says Mr. Arruda. This can be particularly useful in the case of larger estates where a sizable tax bill could significantly reduce the value of the decedent's assets.

Insurance-based wealth products

Other insurance products work more like investment vehicles and can help the owners both protect and build their savings. These products can inject valuable diversification into a client's portfolio and some also provide guaranteed lifetime income.

"A segregated fund contract is an investment vehicle. Like mutual funds, they provide access to market based investment opportunities, but they also offer some insurance guarantees," explains Mr. Arruda. Depending on the product, insurance benefits could include protecting between 75 and 100 per cent of the initial deposit amount. Some segregated funds contracts offer features called "resets" that lock in growth to date on the premiums invested.

"So if you invest $1,000 into a segregated fund contract, that initial deposit is protected," he says. "But if it grows to $1,100 at the end of a year, the annual automatic reset feature offered in some contracts would now guarantee that new amount of $1,100." Because segregated fund contracts are an insurance contract, other benefits include the option to name beneficiaries and avoid probate fees.

Payout annuities are also an important product category to consider in retirement planning as part of a diversified portfolio, says Mr. Arruda. While life insurance is designed to pay a benefit at death, payout annuities are designed to provide guaranteed income to clients until death, helping them fund their retirement needs. Payout annuities provide guaranteed income for life, often at a higher rate of income than other income generating products, which can help many clients feel confident that their basic needs will be covered regardless of how long they live.

"Annuities, in my opinion, are a way to create a pension plan for yourself," says Sandra Foster, author of the estate-planning book You Can't Take It With You and president of Headspring Consulting Inc.

Where does health insurance fit in wealth planning?

Health insurance, often referred to as living benefits, includes disability, critical illness and long-term care insurance. These types of insurance protect wealth by mitigating risks that could impact clients' ability to save or even cause them to dip into retirement savings if they are unable to continue to earn income.

For example, disability insurance covers policyholders if a health event leaves them unable to work and replaces lost income while they recover. Long-term care insurance is particularly helpful later in life when people may become physically or mentally dependent on others for care. Policyholders can use the regular benefit payments to pay for home care or a care facility of their choice. Critical illness insurance can cover a range of illnesses, such as cancer, heart attack or Parkinson's disease. Policyholders can receive a lump-sum benefit, which can give them more financial flexibility so they can focus on recovery.

It starts with a conversation

Mr. Arruda says the first step in setting up a retirement plan that includes insurance products is for clients to talk with their financial advisor about their retirement goals. And these conversations should happen as early as possible.

"Qualifying for life insurance products requires a certain health status and it can be time-sensitive," he notes. "As clients age, health conditions may emerge that could affect whether a client qualifies for some of these insurance products."

Ms. Foster agrees that earlier is better when it comes to life insurance. But she adds that it's never too late.

"Just because you're not a 35-year-old individual doesn't mean you shouldn't look at life insurance if you have a need," she says. "Just like you [should still] save for retirement if you're already over 50."

Advisors can help educate clients about insurance and close that financial literacy gap by kicking off the conversation, says Mr. Arruda. Insurance products can be an important part of a well-diversified retirement plan to build and protect wealth - something all investors are looking for.

"The wealth protection insurance solutions we provide can help clients feel confident in their financial situation, today and tomorrow," he says.

Advisor SunLife


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