Standard Life recently made the decision to focus primarily on investment products and their new Segregated Funds product presents some interesting opportunities for people looking to get more stability in their investment portfolios.
100% Maturity and Death Benefit Guarantee
At a time when most companies are reducing their guarantees to 75%, Standard Life still offers 100% guarantees for both maturity value and death benefit. This means that at the maturity date, the value of the investment will be the greater of the market value or 100% of your deposit less any withdrawals taken. In other words, at maturity (minimum 15 years), your worst case scenario is receiving full value for your investment.
Similarly, the 100% death benefit guarantee provides that at death your beneficiary will receive the greater of the market value of your segregated fund or the sum of all your deposits less any withdrawals taken.
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The one thing baby boomers never seem to tire of is talking about when we plan to retire. However, in all these discussions, we always seem to focus on what we are retiring from, with little thought or real plan on what we are retiring to.
What can we expect in retirement, and how can we best prepare ourselves to maximize our opportunities and enjoyment of this important and hopefully, long stage of our life?
What events will trigger our retirement readiness? Reaching financial freedom or attaining a significant age? Perhaps a health setback or the death of someone close? Or might it be an unexpected career setback?
What will life look like after work? If we’re in a relationship, will our partner retire at the same time? Will we volunteer, or work part time, or perhaps start a new business? Do we want to travel more or spend more time with our grandchildren? What hobbies or activities do we want to have more time to enjoy? Have we started them, so that we know what to expect?
We need to have a purpose to make life worth living. What will yours be?
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Overview:
In today’s volatile markets, clients are looking for some additional security, or otherwise looking to reduce the risk in their investment portfolios. One way of doing this is to put in place a “mortality hedge”.
Scenario:
Jim, age 67 and Jane, age 65 are retired business owners with an investment portfolio of $2M invested 50% in equities and 50% in fixed income. While they would like to continue to have a 50% exposure to equities, they are nervous about the political and economic headlines, and the effect they are having on global stock markets. They would like to reduce the risk in their portfolio, without limiting the upside, or growth potential.
Solution: “The Mortality Hedge”
Let’s assume that Jim and Jane wish to put a 50% hedge on the equity portion of their investment portfolio. In other words, if we have another “2008”, they want to be sure that the value of their assets will eventually be preserved for the benefit of their 3 children and other estate liquidity needs. By purchasing a joint last to die life insurance policy in the amount of the hedge ($1M equity exposure x 50% hedge = $500,000 life insurance), they can rest assured that at the equity portion of their investment portfolio is protected for up to $500,000 of investment losses at the time of the last to die.
The past few years have not been very kind to investors, especially to those recently or soon to be retired. Just as investors dragged themselves out of the rubble of 2008, along came 2011. For those of us nearing retirement, there just isn’t enough time to be able to make up any losses so caution is the key word. For those who are already retired and are receiving our income in the form of RRIF payments a downturn in market could be disastrous. If you are looking for shelter from the roller coaster ride of volatility inherent in the market and maybe trying to find a “sure thing”, you may want to consider PensionBuilder from Manulife Financial.
An individual who invests in PensionBuilder will receive a guaranteed income for the rest of his or her life at a fixed rate of return (income benefit payout percentage). The payout percentage is set at the time of the income selection, from 3.75% at age 50 to 6.75% at age 80. If the income option is deferred for one or more years after deposit, the investor will receive a 5% bonus for each year deferred. This bonus is notional and increases the value against which the payout percentage is applied. For example, let’s assume that an individual makes a $100,000 deposit into PensionBuilder at age 65 but defers taking his or her income until age 71. With bonuses, at age 71, the total retirement fund for income purposes has grown to $125,000. At age 71, the income benefit payout percentage is 5.85% resulting in a guaranteed income for life of $7,312. If income had been taken at age 65 the income benefit payout percentage would have been 5.25%. The effect of waiting five years to take income has increased the payout percentage from 5.25% to 7.312% guaranteed for life.
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In the last bull market many investors started to develop unhealthy expectations as to the long term yields their investments would provide. Many had come to accept returns as high as 15% to 20% per annum as the base return their fund and portfolio managers would earn for them. Of course, these expectations came crashing back to earth in 2008 as the bull was chased away by a very large bear. Today, many fund managers are of the opinion that double digit returns are going to be very difficult to achieve with any consistency over the long term. Perhaps it is time for us to lower our expectations. Read more
Insurance needs can be broadly categorized into family needs and business and investment needs. Part I will focus on family or individual needs and on the next blog post, part II will focus on investment or business needs.
Part I – Family or Individual Needs
There are a number of factors that need to be examined when determining life insurance needs for family or an individual. The need for life insurance for families can be split into two categories – income needs and capital needs.
Income Needs refer to the ongoing income required to keep the surviving spouse and family in the same standard of living that they enjoyed prior to the death of the breadwinner. Once the amount of income is estimated, then the amount of capital to provide such an income is calculated using an acceptable interest rate return on the invested capital. For example, if the income for the survivors is estimated to be $50,000 per year for life before tax, then assuming a 4% rate of return, $1,250,000 of capital would be required. This simple method would assume no encroachments on capital which would pass on to the next generation upon the death of the surviving spouse. If capital was to reduce while providing this income, then less capital would be required at death.
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It is common business practice for a company to use corporate owned life insurance in several situations. This article will identify those situations and discuss appropriate amounts of coverage for each of them.
- SHAREHOLDERS’ AGREEMENTS – It is customary for a company with more than one shareholder to have in place an agreement between the shareholders which predetermines a course of action for specific situations. This agreement should include a Buy/Sell provision which deals with how a share interest will be purchased or redeemed in the event that a shareholder relinquishes or wishes to relinquish his or her shares in the company, including the death. The corporation will then insure each of the shareholders to the extent that the provision in the agreement dealing with death is all or partially funded. The same is true for those businesses operating as a partnership, as there should be a partnership agreement with provisions similar to the corporate agreement.
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Segregated Funds: Investing With A Safety Net – April 2012
Retirement Realities – March 2012
Insurance Strategies: “The Mortality Hedge” – February 2012
Time for A Sure Thing – January 2012
Are You On The Right Track? October 2011
How Much Life Insurance Do I REALLY Need? – November 2011
How Much Life Insurance Does A Business Need? – December 2011
