Leveraged Supplementary Retirement Account - Standard Life

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2. Receive a series of loans Leveraged Supplementary Retirement Account The LSRA concept – Collateralization How much will the financial institution lend against the policy? Who should consider the LSRA strategy? A more effective method is to arrange a series of annual loans. The interest on the first loan will be capitalized (if the borrower wishes). The second loan will be added to the first, including capitalized interest and so on. The total loan at any time will be the sum of the annual loan amounts to date plus all of the capitalized interest. The annual loan amount will be set such that at the life expectancy of the borrower, the sum of all of the annual loans plus capitalized interest will not exceed the financial institution’s lending ratio based on projected cash value and the type of investment account. The attraction of the second approach is that no income tax will be payable, since all monies are received in the form of loans which are not subject to income tax. How much will the financial institution lend against the policy? The loan is secured by the policy cash value. If the funds within the policy are invested in guaranteed fixed income accounts, the financial institution will generally allow loans plus capitalized interest (if this has been elected) to accumulate to 85% to 90% of the cash value in the policy. If the funds are invested in variable accounts, such as managed accounts, the financial institution may only lend up to 50% to 60% of their value. Who should consider the LSRA strategy? This strategy is most suited to the following individuals: 1. An individual who has maximized contributions to (or pension benefits receivable from) employer-sponsored pension plans and RRSPs and has excess cash to invest for retirement. 2. An individual who will need higher income in retirement than can be provided through a combination of government and private tax-assisted pension and RRSP plans. 3. An individual who has a minimum of 10 years to accumulate additional funds before he/she will need to access the funds. 4. An individual who is comfortable with borrowing strategies and understands the risks associated with them. 5. Younger people who take a long-term planning perspective and can make deposits over and above the RRSP or Pension (RPP) maximums can take advantage of: • Owning a permanent, exempt policy rather than a temporary policy. • Accumulating assets in excess of the RRSP/RPP limits in an exempt policy rather than in a non-registered vehicle. Standard Life 7
Leveraged Supplementary Retirement Account Benefits of the LSRA option Factors and risks to consider Benefits of the LSRA option 1. Since the funds inside the policy grow on a tax-sheltered basis, it is possible to outperform traditional non-registered savings vehicles that are subject to annual taxation and therefore provide a larger after-tax source of cash flow (with the policy structured for investment purposes it is possible to minimize the face amount of the insurance thereby minimizing and ultimately eliminating its cost). 2. The loan proceeds are tax-free under current legislation. Since the loan proceeds are not deemed to be income, no clawback of government benefits would be triggered by the transaction. 3. The portion of the life insurance proceeds remaining after the loan balance is repaid is available for beneficiaries. 4. The individual can control how much to borrow against the policy based on his/her needs. Neither the registered nor the nonregistered plans can take advantage of the loan approach. In the case of registered plans, ITA and pension rules dictate the manner and timing of withdrawals from the plan. Once withdrawn, the income is taxable. Factors and risks to consider Beneficiary designations In the Common Law provinces, if the policy owner has designated a preferred beneficiary (spouse, child, grandchild, parent of the insured) or an irrevocable beneficiary, the policy is generally creditor protected. In Quebec, the rule is different. The policy is generally creditor protected if the policy owner has designated a preferred beneficiary (his spouse, his 8 Standard Life descendants, his ascendants) or an irrevocable beneficiary. However, we should note that when a beneficiary has been designated to be irrevocable*, the owner’s freedom is limited with regards to the policy. Any change that could materially affect the benefit must have the consent of an irrevocable beneficiary. Thus, any pledge of the policy as security for a loan will need the signature of that beneficiary. In situations where the insured and beneficiary are estranged, an agreement may not be forthcoming. Reduction of death benefit The LSRA arrangement reduces the death benefit available to heirs. Taking a loan against the policy may deprive a beneficiary of needed cash after the death of the insured because part of the death benefit must be used to pay off the loan. Even if additional funds are required during the insured’s lifetime, the impact of a reduced death benefit should be factored into the decision to proceed with leveraging. In situations where a single life, zero guarantee annuity has been recommended as another component of retirement income planning, the life insurance death benefit is expected to be there to provide an income for the surviving spouse. If part of the death benefit is needed to pay off a loan, only a portion will remain, which may not be sufficient. *In the Common Law provinces, (all provinces except Quebec), a spouse, child, grandchild, mother or father designated as a beneficiary before July 1, 1962 will also have to give consent if the contract is to be leveraged.
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Leveraged Supplementary Retirement Account - Standard Life

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