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The practicality of portfolio insurance

Providing a safety net for your client’s retirement plans.

The dream of a comfortable retirement is a fixture in the back of many minds. Of course, everyone’s idea of a dream retirement is unique and requires a different plan to achieve. There are two elements, however, that are common in most retirement plans: accumulating savings and reducing risk. Although the first element looks different for every client, “saving for retirement” is a goal shared by most working-age Canadians.

When it comes to the second element, reducing risk, we tend to think of market factors. But risk reduction involves several moving parts. Take, for example, the need to stay on track. Many retirement plans rely on contributing a certain amount per year to compound inside the account. But what if your client were to become ill and couldn’t sustain their planned contributions?

Health risks can be financial risks

It’s unsettling to know that 50 per cent[1] of Canadians will be diagnosed with cancer at some time in their lives, and that stroke is the leading cause of disability in Canada. Illness may result in lengthy periods when no income is being earned. Meanwhile, medical bills that are not covered by provincial health care plans may pile up. Critical illnesses are almost always unexpected. Heart attack, stroke or cancer can derail even the best-laid plans. Ask yourself, where would my clients access the capital to pay for unexpected medical bills? Quite often, the answer is retirement savings. 

So, how can you ensure that your clients will be able to stay on track toward their retirement goals despite a critical illness? It helps if you consider a critical illness policy as “portfolio insurance.” By using some contributions to fund a critical illness policy, you can protect a client’s portfolio in the event of a diagnosis, allowing the client to focus on recovery. If, after 15 years, they aren’t diagnosed with a critical illness, the premiums paid into the policy are paid out tax-free and can be used as retirement income.

A case study

Let’s consider the following example: Your client, John, has been making RRSP contributions for some time now. His portfolio is worth about $150,000. He plans on making $18,000 in annual deposits to his RRSP. 

John could take a portion of his annual contribution and use it to purchase Lifecheque® critical illness insurance. Since he is a forty-year-old non-smoker, the first-year premium would be $5,917.32. This coverage could provide his portfolio with some protection if he faces the expenses of a critical illness. 

Table outlining example of current investment balance of $150,000 in registered savings, with a planned annual deposit of $18,000. The first year Lifecheque premium is $5,917.32. Marginal tax rate of 40%. The before tax rate of return of 5% in registered savings and 6% in non-registered savings. The age 60 is when the critical illness will occur at a cost of $150,000. Planned retirement age of 65, Retirement income needed to age 85 and assumed life expectancy of age 84.

 Let’s look at the impact if John develops a critical illness at age 60, before retiring at age 65.

Bar chart: Annual net retirement income. This graph shows the impact on the annual net retirement income from four different scenarios. It illustrates the impact of having coverage and becoming ill and not having coverage and becoming ill. It also shows not having coverage and becoming ill and not having coverage and not becoming ill.

 For illustration purposes only.

Note: These projections are based on a 5 per cent rate of return, a 40 per cent marginal tax rate and 20 years of retirement income.

We already see that the biggest risk for John’s portfolio is not having coverage and his becoming ill. Taking capital from the retirement portfolio to cover the costs of a critical illness so close to retirement reduces John’s income dramatically throughout his retirement.

LIne graph: Balance in retirement savings account. This is a graphical representation of the balance in the retirement savings account. It illustrates four different scenarios for the retirement account.

For illustration purposes only.

No one wants to think about it, but contracting a critical illness is a possibility. And if it happens, the financial impact could be devastating. By protecting your clients with critical illness insurance, you are essentially protecting their income and savings so they can focus on healing without worrying about derailing their retirement plans. 

Lifecheque® critical illness insurance: helping clients focus on what really matters – getting better. 

With four plans to choose from, Lifecheque is one of the most comprehensive critical illness insurance plans available today. 

 With Lifecheque coverage, people can: 

  • Receive a lump-sum benefit if diagnosed with one of 24 covered conditions and you satisfy the waiting period
  • Receive a benefit for the early stages of some illnesses with the Early Intervention Benefit
  • Get quick access to money with the Recovery Benefit
  • Have additional long-term care protection that’s built right into the policy
  • Connect to the one-of-a-kind Health Service Navigator®, providing a medical second opinion service and integrated health information and support

Contact your Manulife Insurance wholesaler to review how Lifecheque® critical illness insurance can help you protect your client’s retirement plan[1][2]. 

Lifecheque is a registered trademark of Manulife. Health Service Navigator is offered through and is a registered trademark of Manulife. Health Service Navigator is powered by WorldCare Inc. WorldCare and The WorldCare Consortium are trademarks of WorldCare Limited, used under license. 

[1] https://action.cancer.ca/en/research/cancer-statistics/cancer-statistics-at-a-glance

[1] Waiting periods vary by conditions. Please refer to the sample contract on the Advisor Portal for specific details.

[2] Health Service Navigator is not contractual, and Manulife cannot guarantee its availability. 

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