As a financial advisor I am often asked if a future death claim payout to a client’s beneficiary can be structured so that it is not paid out as a lump sum.
Parents, and sometimes grandparents, may be concerned that the inheritance if taken as a large lump sum may put the child at risk for several reasons:
The child has a substance abuse disorder or gambling addiction
Undue influence from the child’s partner, or friends, who may have their own best interests at heart, and not the beneficiary’s
The child has poor money management skills
Concerns the child’s relationship is unstable, and thus do not wish the
divorcing partner to have access to the funds
The dependent beneficiary has lifetime income needs due to physical or mental challenges
Traditionally the payments from a life insurance policy, RRSP, TFSA and Non-Registered Investment Account are paid as a lump sum to the beneficiaries and very little can be done by the parent in directing how the child spends the money.
While the funds can be placed in a formal Testamentary Trust, there are significant costs in legal and accounting fees to set one up. Not only is a Trustee needed to monitor the investments, an annual filing and the associated cost in doing so, is necessary.
What is the Empire Life Annuity Settlement Option?
Empire Life is one of the few Canadian life insurance companies to allow the
policyholder to customize how the death proceeds will be paid out to the
beneficiaries.
Policyholders can elect a full or partial annuity option, which then spreads the stream of income over as many years as they would like. A life annuity guarantees a predictable income stream for life.
This option is available for all life insurance and Critical Illness policies, plus investment contracts including RRSPs, TFSAs, GICs and Non-Registered contracts.
Why can’t I do this with my Bank or Credit Union assets?
Non-Registered assets – which include GICs, mutual funds, stocks and bonds with a bank, CU or brokerage firm must have the Estate as beneficiary. Only investments through a Canadian life insurance company allow a named beneficiary rather than the Estate.
Thus, the only option for Non-Registered assets, that are not with a Canadian life insurance company, is to have them paid to the Estate, this attracts Probate Fees and ultimately the need for a Trust.
All the cost and time associated with settling an Estate is avoided when the
policyholder selects the Annuity Settlement Option.
What if I have multiple beneficiaries, must they all get the Annuity Option?
No, and again why Empire Life’s Annuity Settlement Option is unique, in that multiple beneficiaries can each receive a different payout. One child may receive a lump sum, the second a life annuity and the third a combination of a lump sum and an annuity.
Can a minor child receive the annuity settlement?
Yes, but a life annuity is not an option, it must be a Term Certain Annuity which pays benefits for a set period of time.
A Trustee will still be appointed to receive the annuity payments on behalf of the child until they are of legal age.
Does my child need to know I did this while I am alive?
No, the beneficiaries will only know if you chose to share the information with them. As the advisor settling my client’s estate with any death claims, I would meet with the beneficiary to explain how the annuity works and to guide them through the necessary paperwork.
Is it expensive to set up?
Empire Life does not charge an up-front fee, or any ongoing costs, to the client to have this feature added. The beneficiary also does not pay a fee to have the annuity set up for themselves.
Can the ASO be amended or canceled once in place?
Yes, the policyholder can rescind or amend the ASO at any time prior to their death. There is no fee or penalty to rescind or amend the selection once set up.