Dec 2017
What Do Actuaries Do & How They Can Help Your Business
Personal income taxes were supposed to be a temporary measure when they were implemented in Canada under the Income War Tax Act of 1917. Here we are, 100 years later. We know better.
We must, of course, pay our taxes, and should be more than willing to do so to cover the costs of our roads, schools, health care, etc. – true necessities we all enjoy. Like most TaxLetter® readers, you don’t want to pay any more than what’s legally required and prefer to leave more of your hard-earned money to loved ones and the causes you care about.
Governments at every level - federal, provincial and municipal - are under pressure to maximize their “tax revenues”, a euphemism for taking more money from you. With federal tax laws changing, especially for business owners and professionals, people need reliable advice from the tax and estate planning community – now more than ever.
It takes a team
A team that includes lawyers, accountants, insurance specialists and actuaries can help you determine the best strategies and financial products to ensure you pay only your fair share of taxes.
Most people have a vague idea as to the amount of taxes that are due upon their death. In most cases, there are no taxes due when a first spouse dies and leaves their estate to a surviving spouse. Upon the death of the second spouse, the government assumes you have “sold” everything at market value.
If you live in Ontario, for example, this could mean that as much as 54 percent of your assets will be consumed by taxes. If you have invested your money, capital gains are taxed at 25 per cent, Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) will shrink by as much as 54 per cent, and the funds in your corporation will be taxed at a rate of 45 per cent.
In 26 years of professional practice, I have yet to meet someone who wants things to go that way. With so many worthy places to leave your wealth, you probably don’t want the Canada Revenue Agency (CRA) as your principal beneficiary.
Canada’s Income Tax Act treats life insurance in a unique way. In contrast to other financial instruments, like stocks, bonds, GICs, etc., life insurance benefits are tax-free. There are very few ways to preserve your money for the next generation: your family home, a Tax-Free Savings Account (TFSA), and life insurance. The proceeds of tax-free life insurance can be used to pay taxes and other costs, avoiding the need to borrow money (with non-deductible interest) or sell assets to pay off taxes. If you own a corporation, the insurance premiums can be paid by the company, so your family will have the funds to pay the tax bill.
Lottery winnings fall into the same tax-free category, but few of us can arrange such windfalls.
Life Insurance Pays Off
Life insurance as a wealth-preservation solution continues to gain traction. It will become even more popular as governments continue to increase taxes and people become aware of the benefits of life insurance.
How popular is it? In 2003, 30 percent of all life insurance sold in the Greater Toronto Area had annual premiums of $25,000 or more. By 2016, it skyrocketed to 80 per cent.
By the end of 2015, Canadians owned $4.3 trillion of life insurance protection, as reported by The Canadian Life and Health Insurance Association (“CLHIA”), an organization representing Canada’s life insurance and health insurance providers.
No two client situations are identical, and no two policies are the same. The products usually vary by insurer as they all want their own, individual stamp. While some policies appear to share the same attributes, a deeper dive is necessary to truly match your unique needs (personally, corporately, or both) with the appropriate insurance product.
What are Actuaries?
That’s why we have an actuary on our team. An actuary is a business professional who deals with the measurement and management of risk and uncertainty. (The name of the corresponding profession is actuarial science). These risks can affect both sides of the balance sheet, and require asset management, liability management, and valuation skill.
In our practice, an actuarial review of the fine print confirms the insurance policy selected best fits your financial objectives with respect to your business, family and risk tolerance. Consulting actuaries is a key method of understanding financial risk, assets, and the management of the same.
Allow me to introduce Catherine MacRae, an actuarial consultant and member of our team. In the insurance industry for 25 years, Catherine was formerly a member of the Tax and Estate Planning team of Canada's largest insurance company, supporting the planning as it relates to individual life insurance product selection. Having performed product analysis for high net-worth clients since 2000, her skills add immense value to our practice, and her independence ensures the best policy choices for our clients.
Catherine’s professional designations - FCIA, CFP, CLU - reflect her professionalism and experience. Not everyone passes the grade to become a Fellow Canadian Institute of Actuaries (FCIA). Her knowledge of the investment and life insurance industry is also represented by the Certified Financial Planner (CFP) designation, and the Chartered Life Underwriter (CLU) expands her depth of knowledge further.
Professionals with those designations are a breed apart with a great level of knowledge, experience and specialized skills to best serve complex wealth and estate-transfer challenges. These professionals are in a unique position to help our clients grow and preserve wealth.
Before we recommend any insurance product, our process always includes a thorough review and understanding of your objectives, risk tolerance and intent.
What do Actuaries do?
Catherine works behind the scenes, reviewing your profile and technical material to ensure you receive the best advice, strategies and policy suggestions from her understanding of your personal and taxation needs, whether the policy is held corporately or personally.
"I will test a product's sensitivity to an assumed variance in potential investment performance to ensure that we're presenting a policy that will satisfy the client’s needs and risk tolerance,” says Catherine.
“If someone wants to take the largest investment risk, that's fine. But then there are other clients who say they take enough risk in their business, and thus want to be sure that their asset liquidity is there when they need it, provided through their insurance policy.”
Catherine is engaged in the entire process, tapping the resources of other professionals or people at insurance companies’ head offices, who are extremely helpful in resolving issues (product, reinsurance, tax or underwriting) that could be a barrier to placing a policy.
She researches the best products or carriers to suit your specific needs, runs the numbers through comparative spreadsheets, and conducts investment testing sensitivity to expose any potential product deterioration.
Catherine is also available to talk to your key advisors – your accountant and lawyer. She recalls a specific case when she was part of a technical team meeting with a client’s lawyer and accountant. She determined that by changing the policy ownership from personal to corporate, greater tax efficiencies could be achieved. Accordingly, a different product structure was implemented to maximize the Capital Dividend Account.
While she is usually involved before the purchase of a policy, she is very helpful to clients with existing policies. In one recent case, the client had paid $100,000 a year in premiums for three years into his insurance policy. Then he lost his job and felt he could no longer afford such a high level of premium commitment. If he was to cancel the policy, the underlying cash value was only $50,000.
Catherine was able to preserve his investment, through understanding the contract’s surrender charge penalties. She suggested that he immediately discontinue his optional payments, but continue to pay the regular premiums of $60,000 for two years. At the end of the fifth year, he was no longer subject to the punitive surrender penalty, and the cash surrender value would rise to $450,000.
She has valuable experience in cases dealing with charitable giving, an important (and favourite) area of our practice. One case involved a client who purchased an enhanced, universal life policy through a single lump-sum charitable donation. Over time the additional, enhanced coverage (above the planned base coverage) is eliminated unless the insurance carrier is instructed otherwise. Catherine was brought into the picture at the 10-year mark. She tested the policy, and based on the investment performance to date, recommended a go-forward investment strategy that would stabilize the future investment returns, and that the policy cash value would be sufficient to maintain the enhanced coverage and provide an even greater charitable gift than originally planned.
We provide strategies and solutions
All of this comes back to my often-stated principle that, “What we do isn’t about products or transactions.” We provide strategies and solutions as part of the comprehensive tax and estate planning process. Specialists like Catherine add value to that process.
We have entered an age of hyperspecialization. Specialists must be collaborators as well. With so many moving parts, no one can do everything perfectly on their own, especially now with so much information in a world that seems to change every few months.
That’s why people need a team of experienced professionals to achieve their estate planning objectives. The team should include experienced accountants, lawyers, estate planning and insurance specialists who are tops in their fields, and aware of the latest nuances of their respective professions. And that’s why we work with Catherine.
You can rest assured that any kind of life insurance you acquire for your protection portfolio will have been subject to the highest degree of professional due diligence available.
Don’t do it alone. Contact us for a consultation. We’d love to help.
Frequently Asked Questions
What are Actuaries?
Actuaries are professionals who focus on risk assessment. In this context, they focus on asset management, liability management, and valuation skills.
Are there different types of Actuaries?
There are different types of actuaries who focus on different types of industry, with insurance being the main focus. Within the insurance industry, there are actuaries who focus on life insurance, pensions, property, finance and pricing, and everything in between.