Do retirees need life insurance?
A Certified Financial Planner looks at the different strategies to ask your own advisor: Is life insurance the answer?
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A Certified Financial Planner looks at the different strategies to ask your own advisor: Is life insurance the answer?
My wife and I are both retired office workers from a large manufacturing firm. She retired at 60 and I did at 61. We are both 67 now. We have good retirement income between our pensions, LIF, OAS and max CCP, as well as about $12,000 per year in dividend income. The issue is our RRSPs. We have around $900,000 combined, despite drawing down anywhere from $30,000 to $50,000 each year combined. Market returns have been good so it keeps growing despite the withdrawals. We don’t need the income but have drawn down some to take our income to just below OAS clawback level.
We recognize this is a good problem to have, but trying to determine if there is a software program to determine best withdrawals to make each year especially before we turn 71 and convert to RIF.
Trying to balance the issue of pulling even more money out now and paying more tax and OAS clawback versus our kids losing 50% of our RIF to tax when we pass.
—Mike
Hi Mike, I will work backward to make some assumptions about your current investments and pension and then give you some things to think about, including life insurance.
Your income description is suggesting you have about $300,000 of non-registered investments yielding 4%, a small $20,000 life income fund (LIF), and indexed pensions of about $40,000 each. You’re drawing about $20,000 each from your registered retirement savings plans (RRSPs) to bring your income to about $90,000, just below the entry point to the Old Age Security (OAS) clawback zone. This puts your total after-tax annual income at about $135,000.
Here are eight things to consider and/or discuss with your financial planner:
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I mention life insurance because you expressed a concern about your kids losing 50% of your RRIF to taxes when you pass. Life insurance is a “family first” investment you can use if you want to add some guarantees to your estate plan.
I modelled a permanent life insurance policy (universal, $500,000, minimum funded, annual renewal to age 90), with premiums starting at $4,067 a year increasing to $30,089. It stops at age 90. These were the results with the insurance if you pass at these ages:
The longer you live, the smaller the insurance benefit will be. Age 91 is about the crossover point in value, if your investments are earning a 5% annual return. The higher return, the less effective the insurance over time. And the lower the return, the more effective the insurance. I don’t know of any free software that will help you determine the best withdrawal strategy, and I’m not convinced there’s one best strategy over a 24 year period to age 91. Things change over time. Look at several different withdrawal strategies so you get a sense of the differences and then keep testing year to year. To do this, I use a program called Visionworks from Vision Systems Corp.
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Can you actually have your TFSA or RRSP fees deducted from your LIF? Talking points number 5.
as per Revenue Canada regulations, it would be a violation if a registered account management fees get charged to another registered account (i.e. An RSP or TFSA account cannot be charged to a LIF account) – however, the management fee of a registered account can be charged to your non-registered account.
I’m being told that you cannot pay management fees from one of my registered accounts incurred by another registered account. For example, if you have several RRSP accounts, you can’t combine all the fees and pay them from one account without incurring a withdrawal from the account to pay the fees of another registered account.
If I have a life insurance policy to help reduce the impact of income tax on a collapsed RRSP upon my death (my children will be the beneficiaries), is it better to name each child as a beneficiary, or my estate?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Is a whole life participating policy a good option?