What you need to know about your Group Long Term Disability
Having a source to replace your earned income in the event of an illness or accident is vital considering that on average, 1 in 3 Canadians will become disabled for a period of more than 90 days at least once before the age of 65. For those that are disabled for more than 90 days the average length of that disability is 2.9 years.
If you are one of the approximately 10 million Canadians covered under a group Long Term Disability plan (LTD) it’s important to understand what your coverage provides. Don’t wait until after you’re disabled to read the employee handbook, because you could have a few surprises!
How much coverage do I really have?
- Generally, employee benefit LTD plans are designed to replace up to 85% of your pre-disability after tax income.
- The amount of your benefit is determined by formula. These formulas vary so it’s a good idea to know what yours is.
When do I start getting benefits?
- Usually, you are eligible for benefits to commence after being disabled for a period of 90 or 120 days.
Is this benefit taxable to me?
- If the LTD premium is paid by you personally then the benefit will be received tax free.
- In groups where the employer pays the LTD premium, then the benefit when received will be taxable.
- Should this be the case, make sure you discuss with your employer or insurer what your options are for having tax withheld if disabled so there will be no nasty surprises come tax time.
What else do I need to know when I enroll in an LTD plan?
- Pay attention to the Non-Evidence Maximum (NEM). This is the maximum amount of disability benefit you would be entitled to without providing medical evidence. You may be eligible to receive higher coverage if you take a medical examination.
- You should also be aware that LTD benefits are usually offset (reduced), by any disability benefits you might receive from CPP/QPP or Workmen’s Compensation.
- Any benefits paid as a result of an accident from an automobile insurance plan may also reduce your LTD benefits.
- Most group plans have a waiting period, usually three to six months before a new employee is eligible to join the plan.
- If you were formerly a member of a plan at another employer, request that your new employer waives the waiting period.
- If you’re an employee who was actively recruited or is considered a valuable addition, you should also make this request.
Are there other options?
- All of the above could certainly result in you receiving less disability income than you thought you were entitled to. If this is the case, consider purchasing an individual disability policy to “top up” your coverage.
- The good news here is that most Group LTD plans do not offset against personal disability income policies.
Please call me if you would like to discuss your personal situation or feel free to use the social sharing buttons below to share this article with a friend or family member you think might find this information of value.
The Single Premium Insured Annuity
Available until January 1, 2017
A New Approach
A new method of structuring an insured annuity has restored its favourable results. The new approach involves combining the prescribed annuity with a Universal Life policy.
- The UL policy is funded with a single deposit to provide lifetime coverage.
- The remaining capital is then used to purchase the prescribed life annuity.
- On the death of the insured/annuitant, the annuity income ceases
- The Universal Life policy now returns the full amount of the capital to the intended beneficiaries.
How does this strategy compare with investing in a fixed term GIC?
Martha is a healthy, 75 year old widow, who wishes to leave a significant bequest to her grandchildren. The majority of her capital is invested in fixed income investments as she is very much risk adverse at this stage of her life. She has $500,000 to invest.
As an alternative to a GIC deposit she considers the Insured Annuity Strategy whereby she purchases a $500,000 Universal Life policy and pays for it in a single payment of $ 258,949. The balance of $241,051 she uses to purchase a Prescribed Life Annuity with no guarantee which pays her an annual income of $ 18,641. Due to the prescribed income treatment she would receive this income tax free.
|GIC Investment (2.5%)||Insured Annuity|
|Insurance Deposit||$ 258,949|
|Annuity Purchase||$ 241,051|
|Gross annual income||$ 12,500||$ 18,641|
|Tax Payable at 40%||$ 5,000||$ 0|
|Net annual income||$ 7,500||$ 18,641|
|Pre-tax equivalent ret.||2.50%||6.21%|
|Equivalent after tax yield||1.50%||3.73%|
What this comparison shows is that there would have to be an after tax yield of 3.73% to equal the annual income from the insured annuity.
Why won’t this be available for long?
Two things will change on January 1, 2017:
- The new tax treatment of prescribed annuity income will take effect, greatly reducing its tax efficiency.
- The changes to the way that Universal Life policies are taxed will no longer allow single premium deposits.
In the meantime, however, insured annuities can be structured in this way and if done prior to January 1, 2017 they will be grandfathered and therefore not affected by the new tax treatment.
Please give me a call if you think that this strategy would work for you. Or feel free to use the sharing buttons below to forward this to someone you think would benefit from this information.
Ease Your Retirement Worries with Immediate Annuities
The majority of Canadians work hard to accumulate a retirement fund and many are averse to exposing savings to unnecessary market risk after they retire.
In today’s prolonged low interest rate environment, immediate annuities are often dismissed or overlooked as a viable vehicle for providing retirement income. Perhaps they shouldn’t be.
An annuity is an investment that provides a guaranteed income stream for a set period of time or for the lifetime of the annuitant. While annuities may not be for everyone, for those trying to find a way to guarantee income in retirement Immediate Annuities may be the answer.
3 Retirement Risks to Avoid
Outliving Your Savings
No one wants to outlive their retirement fund or leave their surviving spouse without resources. An immediate life annuity either on a single life or a joint life basis could be the answer for those looking to ensure that their monthly living expenses are taken care of for the rest of their lives.
If you are a member of a company or government pension plan, you will have the option of structuring a regular pension income for this purpose and to select survivor options for your spouse.
If your retirement savings are in the form of a Registered Retirement Savings Plan, you have the option of converting your RRSP into a RRIF (Registered Retirement Income Fund) or purchasing an immediate life annuity. This must be done no later than age 71.
Market Risk and Volatility
While you are drawing income from your RRIF you remain invested for the undrawn balance. Seeking higher yields involves a measure of risk. A downturn in the market, such as what happened in 2008, could prove disastrous to a retirement plan. An immediate annuity is not subject to this market risk.
High Rates of Income Tax
The income you receive from a registered source (i.e. RRIF’s, pension, or registered immediate annuities) is all taxable.
You can use your non-registered savings (such as TFSA’s) to purchase a prescribed immediate annuity which will be taxed at a much lower rate than traditional income producing investments (such as GIC’s, bonds etc.).
There are a number of conditions to be met for an annuity to be prescribed, the main ones being:
- The owner of the annuity must be the annuitant;
- The owner is an individual, testamentary trust or spouse, alter ego or joint partner trust;
- The purchase of the annuity is made with non-registered funds.
Annuity income from a prescribed annuity is a blending of interest and return of capital. This results in less tax payable.
Changes are coming
Unfortunately, the advantage of prescribed annuities will be greatly reduced after January 1, 2017 as the government is changing the factors in determining the taxable portion of prescribed annuity income. Existing arrangements will be grandfathered meaning only new annuity purchases will be affected after this date.
Also, as of January 1, 2016, the only Testamentary Trusts that will be allowed to purchase a prescribed annuity are testamentary spouse or common-law partner trusts, or a Qualified Disability Trust.
Retirement Scenario A
Protecting Against Market Risk – Certainty of Income
Consider the circumstances of John and Mary who are aged 73 and 72 respectively. They have done well for themselves in accumulating wealth for retirement but, after living through a number of bear markets, they realize that they must stay conservative in their investment approach in order to protect their future income.
They have determined that they require a guaranteed monthly income of $1,800 pretax in order to meet their day to day living expenses. To give them peace of mind, they purchase an immediate joint life annuity that will pay them $1,800 per month for as long as they live.
John and Mary transfer $341,638* from their RRIF to pay for a registered immediate annuity providing $1,800 monthly income. This will provide them with a predictable and sustainable income for the rest of their lives. The guarantee income period is 10 years which means if they should both die within this time the balance of the 120 guaranteed payments would go to their beneficiaries.
Retirement Scenario B
Reducing Taxable Income with Prescribed Annuities
Roger is a 74 year old widower who has non-registered funds invested to produce income. He has GIC’s and bonds totaling $250,000 which provide him with an average return of 3%. This results in $7,500 per year annual income which after tax gives him $ 4,875 spendable income (assuming a tax rate of 35%).
If he were to use the $250,000 to purchase a prescribed immediate life annuity he would receive an annual income of $19,758.* Of this, only $1,102 per year would be taxable. Assuming a 35% tax rate this means his after tax spendable income would be $ 19,372 per year. The income from the annuity would be paid for the rest of his life but should he die within 10 years his beneficiary would receive the balance of 120 guaranteed payments.
By providing lower reportable income, prescribed annuities can also be effective in reducing the chances of a clawback of OAS and Guaranteed Supplement Income payments from the federal government.
8 Key Facts to Know About Immediate Annuities
- An annuity can be an important component of a balanced financial plan;
- It can provide predictable and sustainable income for the life of the annuitant(s), regardless of market conditions or interest rate fluctuations;
- The rate of income provided by an annuity is generally higher than other guaranteed income vehicles;
- Annuitants can chose the frequency of their payments and also include indexing to help keep pace with inflation;
- Annuities are backed with assets to match the duration of the payments. This means that when interest rates are low, it is possible to lock in higher long-term interest rates with an annuity;
- Choosing a guarantee payment for the annuity income means that if the annuitant dies prior to the balance of the guarantee period, the beneficiaries will receive the balance. Otherwise the annuitant receives the income for life;
- For those over the age of 65, taxable income from an annuity will generally qualify for the pension income credit;
- For prescribed annuities, after January 1, 2017 the government changes in how the non-taxable portion is calculated come into effect and after that date will not provide the significant advantage that they do now.
If you or someone you know shares the concerns of protecting income throughout the retirement years, an immediate annuity might provide a solution to some of those concerns. Please feel free to share this information with your friends and family.
*Annuity rates shown are those of Sun Life current as of June 7, 2016;
When putting together your financial plan, there is no question about the benefits of consolidation. The importance of having a financial plan is the ability to coordinate, consolidate and be able to implement your plan to achieve your goals.
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Bikramjit S. Sandhar
Unit #219 - 7928 128 Street
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Life One Financial s a full service one stop financial planning organization that prides itself on a very holistic approach to tax planning – to help you maximize your tax savings today so there is more for you and your family for all your tomorrows.