The Empire Life Insurance Company recently announced the launch of its new Registered Disability Savings Plan (RDSP), which will combine the benefits of the federal government’s RDSP program with features of segregated funds.
This new RDSP is the first segregated fund RDSP available in the Canadian life and health insurance industry, says Geoff Gibson, Empire Life’s Toronto-based vice-president of investment product and marketing, during an interview with the Insurance Portal.
“We view this as an incredibly important and incredibly underutilized product by Canadians,” adds Gibson, who notes that only about one-third of eligible Canadians who already qualify for the disability tax credit (DTC) have an RDSP.
Statistics Canada reported that the RDSP take-up rate in Canada was 34.9 per cent in 2023.
“So, when we were looking at this opportunity, we realized there are a number of Canadians who are missing out on the opportunity to better enhance their financial security through the government grants and bonds, as well as the tax savings opportunities, that are available in the RDSP,” Gibson elaborates.
“The Empire Life RDSP segregated fund product option is an important innovation which will help people with medical disabilities obtain increased financial security,” says a spokesperson with the Canadian Life and Health Insurance Association (CLHIA).
“Segregated funds provide the opportunity for market growth and protection with guarantees,” the CLHIA spokesperson adds.
New opportunities for advisors, policyholders
Gibson notes that because of the limited distribution of the RDSP in Canada, many financial advisors might not make it a part of their business practice.
Furthermore, “you don’t walk into too many financial institutions and see a sign that says, ‘Ask us about our RDSPs.’ There are not a lot of people talking about this.”
“So, one of our goals in launching this product was to be able to get more financial advisors to open up their practice to selling RDSPs. They are a complex product, so part of our value proposition in coming to market was to build best-in-class education materials for advisors and clients, as well as a best-in-class digital e-application to make submitting the application easier,” says Gibson.
Introducing the RDSP as an insurance product also provides a new opportunity for financial advisors who do not have a mutual fund license. Under the current model, RDSP access is restricted to advisors with a mutual fund license who must work through a limited number of dealer companies that offer RDSPs, he explains.
Gibson says RDSPs are complex for many reasons. For example, government grants available to plan holders are based on matching contributions and income tested levels. Government bonds are also based on income tested levels. Withdrawing funds has tax implications. And from an administrative standpoint, the RDSP manufacturer must integrate its back-office systems with government systems to validate all transactions.
“I think some companies have looked at the complexity and made a decision to not make an RDSP product available, despite the valuable benefits it provides to eligible Canadians. But at Empire Life we’re a firm believer in helping all Canadians, especially those in the middle market and lower income sectors, achieve financial security and navigate life with confidence,” he elaborates.
The RDSP has a maximum individual lifetime contribution limit of $200,000. Depending on the client’s annual income, contributions can also matched up to $1,500 dollar amount, which allows to obtain a grant of $3,500. The maximum lifetime match for the grants is $70,000 and the lifetime bond amount is up to $20,000. For low income Canadians, the bond pays up to $1,000 annually, with no matching contribution required, says Gibson.
All of the proceeds in the plan grow on a tax deferred basis until age 59, he adds. “So, it’s an incredibly powerful combination of personal and government matching or non-matching contributions that accelerate the asset growth in an RDSP.”
The customer then needs to start taking mandatory withdrawals, called lifetime disability assistance payments (LDAPs), at 60 years old. In many cases the RDSP is the only instrument for future financial security when the client reaches age 60, Gibson adds.
Segregated funds give added boost
By putting the RDSP into a segregated fund, Empire Life is able to offer death benefit guarantee resets, along with a wide range of investment options, from very conservative to very high growth, high volatility investments to allow those who purchase it to grow their retirement savings, Gibson explains.
Combining the benefits of the government’s RDSP program with features of segregated funds, and opening up this product to insurance licensed financial advisors, “we’re going to give Canadians who work with those financial advisors the ability to achieve all of [their] grants, bonds and tax deferred growth, and then we build in the benefits of a segregated fund contract with the death benefit resets,” he adds.
If an individual were to purchase an RDSP from one of the few companies in Canada that offer such a mutual fund, they may be limited to proprietary funds. But “by investing with Empire Life, you get access to funds managed by Empire Life [and] access to funds managed by a number of other companies we deal with,” says Gibson.
Segregated funds also offer protection and peace of mind, he adds.
For example, in a regular mutual fund, there are no guarantees and no capital protection. So, if a client were to pass away when markets are down, the RDSP payout to the estate of the beneficiary would reflect that lower value, Gibson explains.
“With our segregated fund product, we’re offering a 75 per cent death benefit guarantee as well as resets every year up until age 80. That death benefit amount increases for every dollar that goes in, and then is going to get reset up when markets are performing well. If the client does pass away, the beneficiary of their estate is going to receive potentially more than what they would in a down market if they’d just purchased a mutual fund, or some other non-guaranteed investment in their RDSP,” he adds.
The real benefit of a segregated fund is the guarantee it is able to provide customers, says Mary Kelly, chair in insurance at Wilfrid Laurier University in Waterloo, Ontario.
By reaching an underserved market and giving them the support to set up the RDSP as a segregated insurance fund, this could potentially open up knowledge of the RDSP to push its usage above the current low threshold, says Kelly.
The RDSP is a very generous program – beneficiaries can receive tens of thousands of dollars in government matching grants and bonds. “You’d like to see more Canadians take advantage of it,” she stresses.