Concept #1 – Funding RRSP/RRIF Insurance Premiums
- Canadians today are concerned that the Old Age Security Pension and Canada Pension Plan may not be sufficient to fund their retirement needs. As a result the amount of money flowing into Registered Retirement Savings Plans (RRSPs) is increasing.
- The problem with registered plans such as RRSPs and Registered Retirement Income Funds (RRIFs) is that upon death, there is, for income tax purposes, a deemed disposition of the plan. This results in all assets being included in income in the year of death, resulting in taxes (often at the highest marginal tax rate of approximately 50%). If there is a surviving spouse, assets may be rolled tax-free to the spouse’s account(s), however, when the spouse dies the same tax problem recurs.
Having the government take up to half of the remaining RRSP balances is not very appealing!
- “RRSP/RRIF Insurance” is often used to conserve the full value of the estate. This insurance may be in the form of “Term to 100” life insurance, in an amount equal to 50% of the maximum future value of the RRSP or RRIF. The insurance is on the annuitant’s life, or, if both spouses are alive and the RRSP or RRIF is to be paid to the surviving spouse, on a “joint and last to die” basis. Other insurance options also exist.
- To wholly fund the premiums for this insurance, consider converting up to $5,000 per year of the assets within each spouse’s plan to SaskWorks Venture Fund shares. Each spouse will be eligible for up to $1,625 ($3,250 in total) in tax credits, which may be used to pay the insurance premiums (there will be little or no “out of pocket cash” required!).
- For example, for a 40-year-old non-smoking male, $1,625 can purchase approximately $600,000 of level premium, term to 100 life insurance. For a couple, 40 years old and non-smoking, $3,250 of combined tax savings can purchase approximately $1,250,000 of level premium, term to 100, life insurance on a “joint and last to die” basis.
The tax credits will often fund the entire amount of insurance required to replace the hard-earned retirement savings that the government would otherwise claim at the time of death. [There are specific rules governing when and how an RRSP, RRIF, Locked-in Retirement Account (LIRA), or Life Income Fund (LIF), may acquire shares of SaskWorks Venture Fund.]
Investment in an LSIF is subject to certain restrictions on resale and redemption. An investment in an LSIF is speculative and may not be suitable for all investors. Income tax savings are only one aspect of an investment in an LSIF. The merits of the investment as a whole should be considered. LSIF shares are offered by prospectus only. Consult the applicable LSIF prospectus for full details of the offering.
Rewritten with permission, based on a series of original articles written by Allan Jacks, Vice-President, Sales, Crocus Investment Fund. Previously published in CAIFA Winnipeg IMPACT Magazine.