Concept Definition
There are many different concept types in the insurance industry. The definition of concepts we apply at LDA is for the following;
- Personal/Corporate Estate Transfer (CET/CEB)
- Immediate Finance Arrangement (IFA)
- Insured Retirement Plan (IRP/CIRP)*
This guide will show you how to create cases using the Corporate Estate Transfer and IFA concepts.
*The IRP concept is in development. Stay tuned for the release. To learn more about showing policy loans in LDA, click here.
Before Working on The Concepts
For both concepts, you'll need to load a permanent plan to your case. Please click here to learn more about adding a permanent plan to your case.
Need to Know
You can present multiple options in the same presentation. The layout will show the insurance plan vs the investment. If you add in more than one insurance plan, you'll see two of the data pages to represent each plan.
Corporate Estate Transfer
Page Selection
To begin, go to the report concept option under the case-control subsection of the design case page. Here, you'll find the corporate or personal estate transfer section in the drop-down menu. Select the option you wish to present, based on the ownership type.
Assumptions
Once the proper pages are selected, scroll to the Alternate Investment Assumptions section. We'll cover each section and what it means for the report.
Ownership Type: This automatically enters the provincial personal or corporate tax rates, depending on the selection made. Once selected, you don't have to enter any value into the tax sections and can move on.
Asset Mix Present: Here is where you can choose from one of 3 portfolio types for your alternate investment. By making a selection, it will fill in the investment sections shown in the above image with a value between 10-40%.
The investment vehicles are;
- Interest Investments
- Taxable Dividends
- Realized Capital Gains
- Unrealized Capital Gains
If no present is selected, you can enter in a custom about into each section. The most common example we see is 100% in the "Interest Investment Mix". This simulates having your money in bond/GICs as they have a similar risk profile to the insurance policy.
Target Age: The period you wish to highlight on the graphs and charts in the presentation. We typically see age 85 or 90 used.
Growth Rate: Here, you'll enter in a growth percentage for each investment vehicle. The growth rate you use here is before tax.
Presentation
Once finished with the steps above, generate the report.
The first page of the concept highlights the assumptions used, as well as a disclaimer for the client.
Next, we'll outline the concept in a visual format to explain how a non-registered investment is taxed, versus an insurance policy.
This brings you to the first page highlighting the calculations of the concept. On the left-hand side, you'll find the investment at age 85, which is the target age we used. The green bar shows the pre-tax value.
Below that you'll see what's lost due to tax and then the net value to the estate.
The right side covers the insurance policy, starting with the insurance benefit at the target age, using the current dividend scale of the carrier.
Below the insurance benefit is the net value to the estate.
TIP: You can toggle between the current and reduced dividend of the insurance policy with the legends options on the right side of the chart (see image above).
After presenting the net estate value comparison, LDA will offer a chart to show the potential rate of return required for the taxable investment vehicles, at our target age.
In this scenario, since 100% of the investment mix is in the interest vehicle, I'll compare the rate of return of the insurance policy (4.59%) to the interest option.
What this tells me is to equal the same rate of return as the insurance policy, I need an average return of 10.52% up to my target age (85) to equal the net estate value of the insurance policy.
The table below shows how the net estate value of the investment is created and compares it to the insurance. Remember to use the plus icon to the right of each year to expand the table.
One of the more popular pages with this concept is the alternate investment analysis chart. Here, we'll see the taxable investment's net value (Green), the net estate value of the insurance (blue), and the cash value of the insurance policy (navy blue).
The final page will present a summary of what we covered. The premium paid/investment amount, net estate of the investment and insurance, and IRR.
IFA
Page Selection
To begin, go to the report concept option under the case-control subsection of the design case page. Here, you'll find the IFA section in the drop-down menu. Select IFA. LDA will automatically select the best pages for this strategy.
Assumptions
Scroll to the Immediate Finance Agreement section of the design case page for your IFA controls.
Here's a breakdown of what some of the sections mean for the report.
Financing Rate: The interest rate of the loan borrowed to leverage the strategy.
Policy Cash Value and Additional Asset Collateral: Percentage of Cash Value and Additional Assets used as collateral to secure the loan.
Add Interest to Loan Balance: Certain lenders allow you to defer the interest payments into the loan balance, effectively meaning there is no out-of-pocket cost to the client. If you wish to present this to the client, toggle this option to yes.
IFA Include Reinvestment of Loan Proceeds: LDA will take the balance of the loan that pays the premium and show that reinvested. If you toggle this option to Yes, you'll need to create an investment in the alternate investment assumptions section.
Service Outstanding Loan from Reinvestment Proceeds: If you choose to show the loan proceeds being reinvested, you can choose to show the investment paying the loan balance.
IFA Loan Assumption: Choose from one of the following;
- Advanced Insurance Payments: Enter a percentage of the loan balance paying the premium.
- Fixed Annual Advance: Enter the dollar amount and duration of the loan paying the premium.
- Max Using Cash Value Collateral Only: Leveage the cash value once it reaches a point to service the strategy.
IFA Repayment Start and End Year: If you wish to present the loan balance being paid during the lifetime of the client, enter the starting and ending years of the loan repayment. Don't fill it in if you wish to show the balance paid at death.
Guaranteed Pay Duration: Since we accept the carrier data from a spreadsheet, with certain carriers, we have no way to tell if a policy is structured as a guaranteed 10-pay or a guaranteed pay to age 100 with ADO and premium offset at year 11.
Due to this, if you're working with a guaranteed limited pay option (5,8,10 or 20 pay), enter the guaranteed payment duration. That way, LDA can properly calculate the NCPI deductibility.
Presentation
Once finished with the steps above, generate the report.
The first IFA page is a graphic describing the benefits and purpose of the IFA strategy.
Next LDA will show the benefits during the lifetime and upon the death of the client.
If you show the loan balance being repaid while the clients are alive, the graphic will update to show this during the lifetime section.
The Plan Details and Assumptions Page will show the client what borrowing and tax assumptions are used for the plan or plans in your presentation.
This leads to the first page highlighting the insurance data and assumptions of the strategy. The left of the page shows insurance without an IFA, while the right shows it with the IFA.
The key point to mention on this page is the IRR benefit of insurance with an IFA vs without. The IRR columns are the last ones we'll see on the red and blue headers.
The first IFA chart covers the net to estate and out of pocket cost.
We recommend toggling either the estate or out-of-pocket options on or off to show one at a time. In the picture below, notice how I've removed the net estate options temporarily to compare the out-of-pocket values.
Cash flow is the next chart. Here is where you can see a visual of the premium payments made by the loan, the additional collateral required, illustrating how that goes down once the cash value reaches a certain amount and the net cash outlay for the interest payments of the loan.
TIP: Use the greyout legends below to expand the usage of this chart or to present the reduced values.
The remainder of the report is presented in a table format, starting with the cash flow summary. See the interest paid, tax saves cumulative cash outlay and more!
Tax Summary is next. Loan interest tax savings, NCPI deduction, and Total tax saving are found here.
LDA will add a sensitivity analysis to the presentation. This outlines how the strategy changes if the average loan rate increases by 1 and 2%. Here's an example of the 1% increase.
Finally, the last page breaks down the Exceed CDA calculations and what tax saving is provided due to the unused CDA excess.
Remember, you can add additional pages to present reinvesting the loan proceeds and using those dollars to service the loan balance.
Support
Need help with a concept case? Contact our customer success team through the Ask Us a Question tab, or schedule a meeting through the link below.
Click Here to Schedule a Meeting.