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Wealth Update – Cost of Using RRSPs to Finance a Critical Illness Need

Here is a correction to last week’s email blast. In Q1, the strongest fund at Empire Life was the Multi-Strategy Global Growth with a return of 12.03%, and the weakest performer was Global Dividend Growth at 0.97%.

On to this week’s topic.

Let’s consider the unpleasant situation of a 45-year-old female client who will be diagnosed with a critical illness at age 54. At age 54, to cover the costs associated with dealing with the illness, this client will have to withdraw $200,000 from their RRSP.

What effect will this withdrawal have on this client’s financial future:

  • Had the withdrawal not been done, the value of the client’s RRSP at age 65 is projected to be $965,234.

  • With the withdrawal at age 54 of $200,000 from her RRSP, the projected value of the RRSP at age 65 has dropped to $508,808.

  • A staggering $456,425 loss.

  • Also remember, that this $200,000 withdrawal will be fully taxable and probably at the highest marginal tax rate, so only $100,000 approximately with be left to help with the critical illness costs.

Obviously, this entire risk can be eliminated with a Critical Illness policy. In this case, this client could purchase $200,000 of protection with Return-Of-Premium for about $2,000 per year.

While $2,000 less will be invested each year, the ROP can provide a risk-free lump sum payment in the future (assuming there has been no claim) to partially compensate for the lost investment opportunity.

In a previous email blast, we discussed using the money being allocated to fixed income in a portfolio to instead pay for a critical illness policy with ROP. And to think of the ROP as principal guarantee for the premiums.

We got all this data using Desjardins’ Critical Illness Impact Calculator. Here and here are two reference documents.

As always, we look forward to your comments.

Scott Edgington, CEA

Director, Advanced Planning, Wealth

Qualified Financial Services

Jim Lyons

Regional Vice President, Business Development - Wealth

Qualified Financial Services


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