Perspecta Investment Loan Program with Standard Life (6152)

Perspecta Investment Loan Program
What you should know
Perspecta Investment Loan Program –
Loan information
The columns in this report provide information
about the loan. Below, we describe the
calculations used to create the column values.
• Cash Value (not including Transit Account values)
This column illustrates the un-loaned portion
of the cash surrender value of the contract,
excluding any transit account values. In
illustrations using single deposits it is required
that, with the minimum single deposit, there
be a transit account balance for the first two
policy years. Amounts in the transit account are
not available for policy loans.
• Annual Policy Loan
This is the amount of the policy loan selected
in a policy year. It is limited to a maximum of
90% of the cash surrender of the contract. A
smaller amount can be selected. The selected
amount can either be a specified percentage or
a specified amount. Loan capital repayments
are also included in this column.
• Taxable Portion of Loan
This is the amount of the loan granted in a
policy year that exceeds the Adjusted Cost Basis
(ACB) of the contract. We recommend that
policy loans only be taken up to the ACB of
the contract.
• Cumulative Loan to Cumulative Premium Ratio
This ratio indicates the “recovery rate” of the
total premiums paid to the exempt accounts in
the policy, to the amount of the policy loan. If we
were able to loan up to 100% of the premiums
paid we would have a ratio of 100.
In reality, this is unlikely to happen because
there are additional costs aside from the cost
of insurance, such as premium tax, and the
limitation of policy loans to the ACB.
A recovery rate in the range of 90% – 94% at the
end of the 7 th policy year would be the norm.
• Outstanding Loan Balance
The outstanding loan balance is the
accumulation of annual loans from the “Annual
Policy Loan” column, and includes one year’s
interest. From an illustration perspective, this
is a timing issue and is based on the following
illustration workings:
– Deposits are always deemed to be paid at the
beginning of the year.
– Policy loans are also calculated at the
beginning of the policy year.
This results in policy loan interest for the
year being calculated at the beginning of the
following year along with any new deposit. We
therefore do not see a credit for the policy loan
interest in the first policy year.
There is a field in the Loan Interest Repayment
section of the software that enables you to
illustrate for the client what would happen if
the loan interest were capitalized. This is for
illustration purposes only and is designed to
show that policy loans are not sustainable if the
interest is charged against the policy.
• Annual Loan Interest Payment
This is the loan interest that is to be paid
annually by cheque by the policy owner. The
interest rate for ILP loans is 10%.
• Interest credited to Policy IA
This is the amount of interest transferred to the
“un-loaned” policy accounts when the loan
interest is paid. It equals the interest rate of
8% times the value of the loan. When the loan
interest is paid, the amount of interest accrued
in the loan account will be transferred to the
“non-loaned” accounts so that the loan and
loan account are of the same value.
If the loan interest is not paid, we will transfer
money from the “un-loaned” accounts to the
loan account to capitalize interest in the policy.
• Potential Tax Savings
This column calculates the potential tax savings
should the client be eligible to deduct the
interest charges from income. These tax savings
are calculated using the Marginal Tax Rate
entered in the Policy & Participant screen of the
illustration software. You may wish to edit this
rate as the default rate is 40%.
In order to determine if the client is eligible
for an interest deduction we refer you to our
Taxing Issues publication entitled Interest
Deductibility (PC 6141).
Standard Life 10