If you want to be retired at 50, read this!
Now that we have your attention, we really mean financially independent, not necessarily retired, because not everyone wants to retire early. Some people would like to retire at 40, others want to keep working forever.
If you are careful with your money and make good financial choices, you can have the financial independence to do whatever you want. Have you noticed that many people earn a lot of money and seem to be just "getting by"? Yet there are people who have low incomes and do very well. How much money you earn isn't the only thing that matters. What matters more is how you handle the money you have. The difference between getting by and being financially independent is actually very small.
People who are financially independent aren't necessarily making more money or smarter than others, but they are probably better at making financial decisions. They set their goals, make a plan, and stick to it. They look at tax implications, returns and risk, project all the figures into the future, and then decide on a course of action. This sounds complicated, but our calculators and our recommendations are here to help simplify your decisions. When you have all the information, making decisions becomes much easier.
Throughout this website we have resources, Tips
which will allow you to compare different scenarios. You will be able to see what a big difference a small change in your money management decisions can make. You may not think that this applies to you when you are young, but this is when it is most important, because you have the luxury of time (and compounding!) on your side.
Some people giving financial advice are in a conflict of interest, because they benefit if you follow their advice. We do not earn money from any of the recommendations that we make. Our income is from visitors to our website clicking ads. The advice on this website is not tailored to anyone's individual situation. It is wise to get a second opinion for any financial advice you receive, including ours. Before making a major financial decision, you should hire an independent professional advisor (paid by the hour) to review your plan.
Every person's situation is different, and one plan does not fit all. You need to sit down, define your goals, and figure out your own plan. Life is a series of choices, and every person is the master of their own fate. Forming and following the plan requires that you make choices, some of which can be difficult, and some of which will require a lot of dedication. Everyone's goals should include buying their own home, and getting out of non-tax-deductible debt as quickly as possible.
Tax Tip: Make your money work for you instead of you working for it.
Personal income taxes are calculated on Taxable Income. To calculate Taxable Income, first Total Income for Tax Purposes is calculated, then items are deducted to arrive at Net Income for Tax Purposes, then other items are deducted to arrive at Taxable Income. Total Income for Tax Purposes - Line 150To calculate Total Income for Tax Purposes (line 150 on the tax return), add:income from employment and commissionsother employment income, including income from wage loss replacement plansOld Age Security pension from T4A(OAS) slipsCanada Pension Plan or Quebec Pension Plan benefits from T4A(P) slipsother pensions or superannuationeligible pension income transferred from spouse (see pension splitting)Universal Child Care Benefit (UCCB) payments of $100 per month for each dependent child under 6 (claimed on the tax return of the lower income spouse)employment insurance and other benefits from T4E slipsgrossed-up Canadian dividends (see dividend tax credit in Glossary)interest and other investment incomenet income from partnerships (limited or non-active partners only)net rental incomecurrent year taxable capital gains in excess of current year allowable capital losses, including gains from the sale of personal use property or listed personal property with a cost exceeding $1,000taxable support payments received - see CRA pamphlet P102 for information on when support payments are taxable (and deductible to the payer)RRSP income from T4RSP slipsother income, including taxable scholarships, apprenticeship incentive grants, lump sum payments from pensions and deferred profit sharing plans, severance pay and retiring allowances, etc.net income from self-employment (business, professional, commission, farming, and fishing)Line 147 other payments (included here, but deducted later, at Line 250: workers' compensation benefits from T5007 slipsocial assistance paymentsnet federal supplements from T4A(OAS) slipThe total of the above is total income for tax purposes, line 150 on the tax return.
Net Income Before Adjustments - Line 234To calculate Net Income Before Adjustments (line 234 on the tax return), deduct the following items from Total Income for Tax Purposes:registered pension plan deduction from T4 and T4A slipsRRSP deductionSaskatchewan pension plan deductioneligible pension income transferred to spouse (see pension splitting)annual union, professional, or like dueschild care expensesdisability supports deductionallowable business investment lossesmoving expensesdeductible support payments - see CRA pamphlet P102 for information on when support payments are taxable (and deductible to the payer)carrying charges and interest expensededuction for CPP or QPP contributions on self-employment and other earningsexploration and development expensesother employment expensesclergy residence deductionother deductions repayment of certain amounts (other than salary and wages) that you included in income in the current year or a previous year, such as OAS benefitsrepayment of EI benefits (from box 30 of T4E slip)deductible legal feesdepletion allowances - see CRA topic Line 224 - exploration and development expenses and depletion allowanceunused RRSP contributions refunded to you or your spouse in the current year (and included in Total Income) - see CRA forms T476 - calculating your deduction for refund of unused RRSP contributions, and T3012A - tax deduction waver on the refund of your unused RRSP contributionscapital cost allowance on a Canadian certified feature film or production as per T1-CP slipThe above deductions result in net income before adjustments, line 234 on the tax return. This amount is used to calculate clawback of OAS or employment insurance.Net Income For Tax Purposes - Line 236Deduct line 235, social benefits repayment re OAS pension (clawback), employment insurance, or net federal supplements. The above deduction results in net income for tax purposes, line 236 on the tax return.Taxable Income - Line 260To calculate Taxable Income (line 260 on the tax return), deduct the following items from Net Income:
webbot bot="PurpleText" PREVIEW="Ad 336x280 ATF Channel 336x280 ATF" webbot bot="PurpleText" PREVIEW="End of Google Ads" Canadian Forces personnel and police deductionemployee home relocation loan deductionsecurity options deductionsLine 250 allowable other payments deduction re workers' compensation benefits, social assistance payments, and net federal supplements which were reported on Line 147limited partnership losses of other yearsnon-capital losses of other yearsnet capital losses of other yearscapital gains deductionnorthern residents deductionsadditional deductions: foreign income exempt under a tax treaty (if included in Total Income)15% of U.S. social security benefits included in Total Income as other pensions or superannuationvow of perpetual poverty - deduct earned income and pension benefits given to a religious orderqualifying adult basic education tuition assistance, if included in Total Income, from box 21 of T4E slipnet employment income from prescribed international organizationsThe taxable income is then used to calculate income tax, before deducting non-refundable tax credits and refundable tax credits. Alert - items not affecting taxable income may still affect tax credits, benefits, and clawbacks.Line 236, Net Income For Tax Purposes, is used in calculating eligibility for income-tested benefits such as the GST/HST credit and Child Tax Benefit. It is used in the calculation of the medical expense tax credit, age amount, and other personal tax credits, and affects the ability of a spouse to claim a spousal tax credit for the taxpayer. Certain non-taxable items affect these benefits and tax credits, as they are included in Net Income, and deducted later on line 250 so that they are not included in Taxable Income. Some of these non-taxable items are: workers' compensation benefitssocial assistance payments, andnet federal supplements from T4(OAS) slipCapital and non-capital losses carried forward reduce Taxable Income, but not Net Income (line 236), so are of no benefit when calculating eligibility for income-tested benefits. Although capital gains may be eliminated by capital losses carried forward, they may trigger a clawback of Old Age Security (OAS) benefits or a clawback of EI benefits, because the clawbacks are based on line 234 of the tax return. Several tax credits use the Net Income (line 236) amount in their calculation, including low income tax credits, and the refundable medical expense supplement. The tax rates which are used to calculate income taxes can be found in the tables of marginal tax rates. See also non-taxable amounts for details of many items which are not required to be included in income
Ontario 2013 and 2012 Personal Marginal Income Tax Rates
The Ontario tax brackets and personal amount were increased for 2013 by an indexation factor of 1.018. The Federal tax brackets and personal amount were increased for 2013 by an indexation factor of 1.020. The Ontario 2012 Budget added a tax bracket for taxable income in excess of $500,000, which is also indexed for inflation. The rate for this tax bracket is 12.16% for 2012, and 13.16% for 2013. Please read the article Understanding the Tables of Personal Income Tax Rates.
webbot bot="PurpleText" PREVIEW="Start of Google 160x600 ad channel Tax Rates - targetable (text/image)" webbot bot="PurpleText" PREVIEW="End of Google ad" Ontario (ON)
Personal Income Tax Brackets and Rates Before Surtax2013 Taxable Income 2013 Tax Rates2012 Taxable Income 2012 Tax Ratesfirst $39,7235.05%first $39,0205.05%over $39,723 up to $79,4489.15%over $39,020 up to $78,0439.15%over $79,448 up to $509,00011.16%over $78,043 up to $500,00011.16%over $509,00013.16%over $500,00012.16%Ontario (ON)
Combined Federal & Provincial Tax Rates Including Surtaxes2013 Taxable Income 2013 Marginal Tax Rates2012 Taxable Income 2012 Marginal Tax RatesOther
Dividendsfirst $39,72320.05%10.03%-1.89%2.77%first $39,02020.05%10.03%-1.89%2.77%over $39,723 up to $43,56124.15%12.08%3.77%7.90%over $39,020 up to $42,70724.15%12.08%3.77%7.90%over $43,561 up to $69,96331.15%15.58%13.43%16.65%over $42,707 up to $68,71931.15%15.58%13.43%16.65%over $69,963 up to $79,44832.98%16.49%14.19%17.81%over $68,719 up to $78,04332.98%16.49%14.19%17.81%over $79,448 up to $82,42235.39%17.70%17.52%20.82%over $78,043 up to $80,96335.39%17.70%17.52%20.82%over $82,422 up to $87,12339.41%19.70%19.88%23.82%over $80,963 up to $85,41439.41%19.70%19.88%23.82%over $87,123 up to $135,05443.41%21.70%25.40%28.82%over $85,414 up to $132,40643.41%21.70%25.40%28.82%over $135,054 up to $509,00046.41%23.20%29.54%32.57%over $132,406 up to $500,00046.41%23.20%29.54%32.57%over $509,00049.53%24.76%33.85%36.47%over $500,00047.97%23.98%31.69%34.52%Marginal tax rate for dividends is a % of actual dividends received (not grossed-up amount).
Marginal tax rate for capital gains is a % of total capital gains (not taxable capital gains).
Marginal tax rates above do not include the Ontario Health Premium, which increases the above rates by up to 1.2%ON Surtaxes20132012ON surtax rate (included in above rates)20%36%ON surtax rate (included in above rates)20%36%Surtax is on ON tax greater than$ 4,289$ 5,489Surtax is on ON tax greater than$ 4,213$ 5,392Person with only basic personal amount - surtax starts at taxable income of$ 69,963$ 82,422Person with only basic personal amount - surtax starts at taxable income of$ 68,719$ 80,963Note that the 36% surtax is in addition to the 20% surtax, for a total surtax of 56%. The surtax increases the 2013 rate of 13.16% to 20.53% (13.16% x 1.56). ON Basic Personal Amount2013Tax Rate2012Tax Rate$9,5745.05%$9,4055.05%Federal Basic Personal Amount2013Tax Rate2012Tax Rate$11,03815.00%$10,82215.00%
Tax Free Savings Account or paying down debt?
Tax Free Savings Accounts
(TFSA) are really gaining traction and popularity. Everywhere I go, people seem to be interested in the TFSA because they are tax free. And why wouldn’t tax free appeal to you?
That being said, I am reading more and more articles that suggest TFSAs are better than RRSPs and will eventually make the RRSP obsolete as a savings vehicle for retirement. This is just ridiculous.
If you want my take on the new debate between RRSPs and TFSAs check out some of my previous work.
How about a new debate between TFSA and debt?
I’ve written about other debates in the past like the RRSP vs mortages
, the RRSP vs the TFSA and the RRSP vs non-RRSP but let’s tackle a relatively new debate that seems to be quite common.
I see a lot of people with TFSAs invested in savings
as opposed to stock, Mutual funds, etc. But many of these people are carrying debt and many times I wonder if this is the right strategy.
Tax Free Savings Account vs paying down debt
I recently sat down with a couple (let’s call them The Smiths) that have a $400,000 mortgage which is costing them 4.35% in interest. They also have $20,000 in a Tax Free Savings Account (TFSA) invested in a savings account at 1.75%.
When I asked them why they bought the TFSA, they said it was because their bank suggested they open a TFSA account because the money would grow tax free. Some of their friends and collegues also confirmed that a TFSA was the next best thing since sliced bread.
As much as tax free growth is good, the problem with the Smith’s situation is they are losing money every day they have the TFSA. Think about it from this mathematical perspective . . . the TFSA makes 1.75% but the mortgage is costing them 4.35%. If they used the $20,000 and put it against their mortgage, they would benefit by 4.35% instead of 1.75%.
Imagine I am the bank. Can I borrow $20,000 from you please? I will pay you 1.75% on that $20,000 and any interest I pay you is tax free. But at the same time I am going to lend you $400,000 and charge you 4.35%. Basically I make money off you anyway you look at it. No wonder the banks are so profitable!
A simple view
Let’s look at this chart. If you have $5000 in a TFSA earning 1.75% and a $5000 balance on a Line of Credit costing you 4.35%, you will be earning $87.50 in the TFSA but paying the debt costs you $217.50. That means you lose $130.
If you take the $5000 in the Tax Free Savings Account and pay down the debt, you stop losing $130. It’s pretty simple math if you ask me but yet I see a lot of people like the Smiths making the banks more profitable.
Do you have any thoughts or insights to add?
How to Increase Your Returns by 10 Fold in Your Bank Account
Normally I am not one for completely misleading headlines like the one in this article but the truth is it may not be misleading at all. Canadians have over $100 billion dollars in regular savings and chequing accounts. Add in the fact that there is another $55 billion in money markets and you have a lot of money sitting in short term accounts earning next to nothing. Frankly, this surprises me considering that most bank accounts are paying a meager 0.25% or less.
There are two very important questions that you need to ask yourself:
1. How much interest are you earning in your bank account?
2. How much are you paying in service fees for your bank account?
In most cases the answer to question one is “little to nothing” and the answer to number two is “way too much”. There is a real opportunity to change the way you do banking so that you turn this situation around. Several financial institutions now offer high interest bank accounts, many of which have low minimum balances and no fees.
What rates are these banks offering?
Currently, there are about a half a dozen institutions offering high interest bank accounts that range from 1.50% to 2.20%. While that may not seem overly high, keep in mind that it is higher than most money market funds and higher than the 1-year posted GIC rate at the major banks.
In fact, more often than not they pay higher rates than conventional bank accounts, money market funds, cashable GICs and sometimes even higher than shorter term GICs. The benefits are very clear – high interest and less fees. So why would someone not use these high interest bank accounts?
1. Savings vs. Chequing accounts – In some cases, these high interest bank accounts act strictly as savings accounts. However, there are some institutions like Manulife Bank that offer chequing privileges at no extra cost. There are solutions for both savings and chequing accounts.
2. Awareness – I think many investors are just unaware of the options. For many, high interest bank accounts are foreign to them.
3. Convenience – In my opinion, this is probably the biggest hurdle that you must overcome. Mainstream bank accounts offered by the 5 big banks have been part of our habits for so long that it can be difficult to change the way in which we bank. Many of these high interest accounts are offered by companies that we do not naturally relate to banking like ING, President’s Choice, Manulife Bank, AMEX, or MRS. I know many people who have banked at the same bank for 30 years or more. Regardless of all the change in personnel, the fact that the bank has been there for as long as they can remember, why should they change?
4. Security – Many investors fear not knowing much about these banks that offer high interest accounts. Part of the fear of the unknown is the lack of brand recognition and the fear of the bank going under. There are two things to keep in mind. First, find out if the bank is a member of CDIC and whether you would be covered up to the $100,000. In most cases, I think you will find you will be covered. Secondly, keep in mind that many of these banks are part of the big 5 banks. For example, President’s Choice Financial is actually owned by CIBC. BMO and Scotiabank have also entered the high interest bank account market.
The bottom line
When you simply do the math, you can increase your returns on your bank account by 10 times. This in itself is reason enough to take the time to look into high interest accounts. You might be amazed at what you will find: It is possible to get your bank statements and actually earn interest each and every month. It is possible to reduce the amount of fees that you pay without a lot of effort or bartering.
Next week, I want to share with you some real life examples of people who have started reaping the benefits of high interest bank accounts. If you have a story to share about using high interest banks accounts, I would love to hear from you. I think the more people that use high interest bank accounts; the more pressure there will be on all banks to offer higher interest rates and less fees when it comes to banking.
No fee bank account gives a bonus
I don’t often promote specific products but a little creative marketing motivated me to share this promotion with you.
Last week, I got a box in the with an empty ice cream tub container, a plastic scoop and a press release with a coupon for a free tub of President’s Choice Ice Cream. President’s Choice is promoting their no fee chequing account.
I’ve been a big fan of high interest, no fee bank accounts for a long time. Here are some of my past articles on the topic:
I believe bank accounts are the heart and soul of your finances. Bank accounts are something you use every day of your life. Too many people are banking the conventional way where they are paying fees and earning interest which just contributes to the banks profitability.
I say turn those profits in your favour by changing the way you bank. The President’s Choice no fee chequing account
is an example of a bank account that helps you to be more profitable by turning your bank account into a profit center where you can actually earn interest on the money you save and pay no monthly fees at the same time.
High interest bank accounts and ice cream
One might ask what ice cream has to do with bank accounts. Not much except that you could afford to buy more ice cream with the money you save from paying fees at the conventional banks. In fact, if you open up a no fee bank account at a President’s Choice in store pavilion across Canada before July 31st, you will receive a coupon for a FREE tub of President’s Choice ice cream.
Other bank account options
Both President’s Choice Financial
have come out with new no-fee chequing accounts but their interest rates are not great. However, if you couple these accounts with a high interest savings accounts, then you can really take advantage of higher rates and no-fee banking. President’s Choice also links their banking into PC points that can be used at Superstores, Extra Foods or Loblaws.
Other options for bank accounts include Ally
, which has really made a mark by offering really competitive rates. They do not have cheque options so you may need a chequing account somewhere to write cheques.
My two cents
Many people have asked me which account I use and I am never afraid to share. I have been banking with Manulife Bank using their Advantage Account
since 2002 and I have never looked back. My bank account is a chequing account that pays high fees with no minimum balance requirement. I love my account and it’s the only account I have.
I also have a President’s choice savings account that we opened up a long time ago but we do not really use the account. If find it easier for us to just use one account instead of two and I like that Manulife makes it easier to just use one bank account instead of having to separate a chequing account from a high interest savings account.
Note: I do not get any financial kickbacks or commissions promoting these accounts. There is no affiliate links here. I do not sell or profit from these accounts so use this information for what it is worth. As much as I think high interest and no fee bank accounts are great, do your homework to see if they fit with your finances.
Are you using a high interest or no-fee bank account? If so, please share with my readers so we can all benefit from the good, the bad and the ugly when it comes to banking.
Keeping a Minimum Balance in Your Bank Account
Do you have a bank account that gives you certain perks if you keep a minimum balance? Many financial institutions waive the monthly service fees if you maintain a minimum monthly balance in your account. Depending on the institution and the type of account, minimum balances range from $500 to $5,000. On most accounts, however, the minimum balance is generally $1,000 or $2,000.
Maintaining a minimum monthly balance can often waive the monthly fee associated with your services package. However, is this really a perk? Or is it really a cost?
Whenever you run into a situation where you are getting a cost savings, you should consider your opportunity cost. In other words, by keeping this money in a bank account at low interest, you forego other uses for that money. For example, you could use that money to pay down a loan rather than to keep the funds in your bank account to save the monthly service fees.
How much is a minimum balance costing you?
The best way to illustrate the cost of a minimum guarantee is to look at a couple of examples. When compared to a one year GIC, you can save much more by maintaining the minimum monthly balance in your account, than you would earn if you invested the amount in a GIC.
In his current situation, Jake Smith has a chequing account at a financial institution where if he maintains a minimum monthly balance of $1,000, his monthly fees of $6.50 are waived. As an alternative to keeping $1,000 or more in his account, Mr. Smith could invest these funds in a one year GIC, with an interest rate of 3.0%.
Over the course of a year, Mr. Smith’s annual savings by maintaining a $1,000 minimum balance is $78, which is simply $6.50 times 12 months of fees.
Alternatively, if Mr. Smith took that $1,000 and bought a 1 year GIC instead of keeping it in the bank account, it would earn $30 of interest over that year (before tax). If we take off taxes, he would have about $22 after tax.
In this example, it is to Mr. Smith’s advantage to keep the $1000 in the bank account to avoid the monthly fee of $6.50. It is in his interest to maintain the minimum monthly balance in his account until he finds an investment with after tax returns higher than 7.8%.
Janet Doe who a chequing account at a financial institution where, if she maintains a minimum monthly balance of $5,000, her monthly fees of $12.00 are waived. Let’s assume that as an alternative to keeping $5,000 or more in her account, Ms. Doe could invest these funds in a one year GIC, with a hypothetical interest rate of 5%.
In this example, it is to Ms. Doe’s advantage to invest in the GIC because the interest is higher than the fees paid. By keeping the minimum balance, Janet would save $144 in fees ($12 times 12 months) over one year. Alternatively, if Janet invested the $5,000 at 5%, she would earn $250 of interest, which is considerably higher than the $144 in fee savings. Even if we take off taxes, Janet would be better off to invest the money in a GIC and pay the bank fees.
Is it a perk or a cost?
The bottom line is to make sure you take the time to determine the benefit and the alternative to keeping a minimum balance in your bank account. The higher the minimum balance and the higher the rates offered by alternative investments, the more likely it will be that a minimum balance in your bank account will be a cost. Don’t be too quick to think of minimum balances as perks.
On the other hand, in the case of Mr. Smith, it was a perk and it was clearly advantageous to keep the minimum balance to avoid fees.
Today, there is a whole myriad of banking alternatives and there are many new high interest bank accounts that allow you to earn higher returns with lower or no fees. Shop around and you may be pleasantly surprised at what you will find. Bank accounts with a minimum balance may not be as much of a perk as you think.
A List of things not taxed in Canada
In Canada, we pay a lot of tax
. In fact, it’s been said there are two certainties in life – death and taxes
We hear lots about how much tax we pay especially this time of year but I ran across this list of things from Canada Revenue Agency (CRA) that are not taxed. It’s not a big list but still a good list to know. When you are doing your tax planning for the future, it’s important to recognize things that are not taxed just as much as it’s important to know what is taxed and how its taxed.
According to CRA, you do not have to include certain amounts in your income, including the following:
· child assistance payments and the supplement for handicapped children paid by the province of Quebec;
· compensation received from a province or territory if you were a victim of a criminal act or a motor vehicle accident;
· lottery winnings;
· amounts paid by Canada or an ally (if the amount is not taxable in that country) for disability or death due to war service;
· most payments of the type commonly referred to as “strike pay” you received from your union, even if you perform picketing duties as a requirement of membership;
As I mentioned, this list was taken right from the CRA website
. I have one more to add to the list and that is proceeds from the sale of your principal residence
. When you sell property that is not your principal residence, you have to pay capital gains taxes if you sell the property for more than you originally paid for it. This would include rental property, investment property, and recreational property. Your principal residence qualifies for a principal residence exemption. Can you think of other income that is not taxed?
It is important to note that if you invest income sources from any of the above amounts, you will be taxed on earnings. For example, if you won $1 million dollars in a lottery and you invested all or part of the winnings, the investment earnings are taxable.
Not all income is taxed the same
The best income to have is income that is not taxed. the next best income to have is income that is taxed at a lower rate. I call this tax efficiency
. Most income (like salary, bonus, rental, and interest as examples) is taxed at your marginal tax rate. Some investment income
is tax preferred like dividends and capital gains because they are taxed at lower rates which creates greater tax efficiency.
Life insurance is the Foundation of your Financial Life
Life insurance is one of those things you can’t touch it, feel it or see it. Most people never want to discuss life insurance or see a life insurance agent, but it is the foundation of a good financial plan
. Without life insurance, an unexpected early death could crumble the rest of the plan.
Much to our surprise the two things we are guaranteed in life is that we are born and we die. To keep it simple, let’s cover the different types of life insurance
and the main concerns of clients main when they come to see me.
Buying life insurance without proper analysis
I work in an insurance brokerage firm, where other brokers sell home, auto, commercial, farm and ranch insurance. As a result, I see many people when they have bought a new home
or remortgaged their home. I find that most people do not really understand life insurance and what type they have or why they have the kind they do. Many simply tick off ‘yes’ at the bank or the mortgage company. Most people want to be sure the home is paid for if they were to die early. Many do not think of the other debts and one of the most important reasons; survivor income for those left behind. Also a beneficiary and contingent beneficiaries are needed so the proceeds do not have to sit and wait for the estate to be settled before the monies can be dispersed.
I find that most people are willing to spend far more insuring their “things” than themselves. Without you; how is your family going to pay for the “things” that are so important. If you buy your life insurance while you are young and healthy it is more affordable than you might think. In fact, it can be more affordable than other insurance policies. For example I recently quoted a $500,000 Term 30 policy for a 21 year old Male $41.65 per month. This far less than the cost of insurance for their $50,000 vehicle.
What kind of life insurance?
There are three main types of life insurance:
· Term Insurance
· Whole Life
· Universal Life
Term insurance is simple pure insurance with no complicated parts to it. You are guaranteed to pay the premiums listed in your policy and the policy will end generally between the ages of 65 to 90. Every companies product varies. The premiums increase in Term insurance at every renewal period:
· Term 5 – every 5 years the premiums (the payments you make) will increase.
· Term 10 – increases every 10 years
· Term 20 – increases every 20 years
· Term 30 – increases every 30 years
· Term 100 – level premiums for “Life”
Term insurance is meant to cover “Your Needs” for a period of time. After that time, it can be canceled, rather than renewed at the higher premiums because the need for insurance no longer exists. For many clients I do a combination of different Terms. For the young married clients with children and a spouse who either stays home or works part time;
· Term 10 – would cover any short term needs – debts that will be done in 10 years
· Term 20 – would cover the income needs for the family while the children are growing up
· Term 30 – would cover the mortgage for the life of the mortgage
· Term 100 – would cover any longer term needs there may for income replacement for the spouse, final expenses and if the estate will incur and taxes due.
You often hear of Riders on a policy this means these are extras added on to the main policy. There are many types or riders but you should choose wisely and choose the ones that would be needed most by you or your family. The three riders I use the most for clients are:
Child Life and Critical Illness – which are very good value for a family with children
Critical Illness – most people do not have critical illness coverage (this is another topic to explain)
Whole Life Insurance
The main reason to buy one of these policies would be to have insurance as long as you live to pay for final expense or leave a small survivor income. Premiums are generally higher on these policies as you you tend to keep these policies longer therefor thy have a greater chance of being paid out. Most of these products have a level premium for your whole life and many build a cash surrender value. You may also choose options to “Pay up the policy early”.
Generally there are several options to choose for the “Dividends” (Dividends in life insurance are usually not guaranteed and are defined as a refund of premiums – that would be why you do not claim these dividends as income on your taxes each year)
You can take a “loan” on your cash value or you can surrender your policy and take only the cash value. When you do this there may be taxes payable on the cash surrender value.
These are the most complicated and varied policies. The policies have two components an insurance portion and an investment portion. These policies are mainly sold to cover a more complicated need life protecting a business, farm or for a larger estate. Sometimes they may be sold with no intention of using the savings portion and simply sold for the value of the Term insurance of the policy. The policy can tax shelter the growth of the investment. Many business owners will buy these types of policies.
The need for insurance is often greater when young, as you have debts and dependents, slowly the debts are paid off, children grow up, you begin to accumulate assets (RRSPs
Before you buy life insurance, you should know that you are getting a product that is good value and fully underwritten. If you have life insurance, it is important that you understand what you have, why you have it, and if it is performing as promised. Every person and business has different needs which change through your life. An Insurance Specialist is trained to review these issues for you eliminating the need to buy over the phone/online or at the bank/mortgage company.
Caution before you cancel life insurance policies
In many cases, the best way to determine if you need life insurance in retirement is to apply the golden rule “Only buy insurance if you need it.” If you don’t need it, then get rid of it.
But use caution before you cancel your life insurance policies
Before you cancel life insurance make sure you’ve covered all the angles because you have one chance to make the right decision. Once you cancel, it’s really tough to get it back and in many cases, you won’t be able to get it back. Here are some important things to think about before you cancel your life insurance policy:
1. Talk to your beneficiaries. Before cancelling insurance, maybe it makes sense to have a discussion with your beneficiaries about why they may want to keep the policy in place and pay for the premiums. Insurance can be one of the best investments your beneficiaries ever make. Open up the lines of communication about two tough topics – death and money.
2. Talk to your spouse. If you have a spouse, they are likely to be the key beneficiary of your life insurance policy. Have a good realistic discussion about whether they need money when you pass away.
3. Get a medical. One piece of advice before cancelling insurance is to get a complete medical examination. The feasibility and cost of life insurance all depends on life expectancy. If you go and get a complete check-up and discover your life expectancy might be shorter than you think, you may want to think twice about cancelling your insurance. Life insurance is one of those things that is easy to get while you are healthy and really tough to get when you are not.
4. Converting Group insurance. A complete check-up will also help you in the decision to convert group insurance into a personal policy or whether you don’t maintain coverage after retirement. If you are not healthy, then you may want to consider converting the group insurance into a personal policy because it provides coverage without underwriting. If you are healthy, they you may be able to get insurance on your own for a more cost effective price.
5. Keeping wholelife and universal life might not be a bad thing. It is tough to replace permanent policies because they become more valuable, the longer you own them. Much of the costs happen up front in the early years. Later in life, it is difficult to replace these policies because you can never buy the insurance cheaper. Some people get lured into cashing out the policies because of the cash value of these policies but cashing out means you will lose the death benefit. Before you cancel, consider talking to your beneficiaries about taking over the payments on the policy, as it may be the best investment they ever make.
6. Don’t wait until costs are too high. Remember, insurance costs more the older you get. Waiting to make decisions till you retire might mean choices will be more limited due to costs.
Cathy’s Story of Life Insurance
The last couple of weeks, I have talked about life insurance, which is one of the cornerstones of financial planning. To summarize, you need to know how much you need, what kind to buy and who to buy it from.
In this article, I want to tell you about Cathy and her needs for life insurance. Cathy is a 45-year old single mother of 5 children. The kids range in age from 7 to 22 and are all currently living at home, dependent on their mother. Cathy is raising these five children on a total income of about $40,000. In the words of Cathy, “My life is about kids, kids and should I say kids.”
The decision to buy life insurance
A few years ago, Cathy took on a sacrifice. Although she was living day to day on every paycheck, she decided that she needed to put some life insurance in place to make sure that the kids would be taken care of in case of her death. She met a life insurance agent and after a couple of discussions, it was recommended that she buy $200,000 of permanent life insurance for $120 per month. As much as Cathy was not sure where she would find $120 per month, she knew that life insurance was an absolute necessity.
Personally, I cannot imagine what it takes to raise five children as a single parent on $40,000 per year and then having to sacrifice $120 per month when every single penny counts. The question is did Cathy do the right thing?
Did Cathy get the right amount of insurance?
Without question, Cathy did the right thing and put some life insurance in place. However, if you do the analysis, she did not buy enough life insurance. While it makes sense that she could not afford to spend more that $120 per month on additional life insurance, it is easy to see that $200,000 of life insurance would not last too long to support 5 children.
How much life insurance does Cathy need? The first thing we need to look at is insuring against the debts. The only debt Cathy has is her mortgage. She has about $50,000 outstanding. The next thing to look at is income replacement. On an after tax basis, Cathy is earning about $30,000 per year. In order to replace $30,000 per year, she will need about $500,000. The last thing to consider is whether she would like to have some extra money to cover final expenses like legal costs and funeral expenses.
There is no perfect number, but if you take into account that Cathy has some assets to cover these needs, Cathy needs about $500,000 of life insurance coverage. With only $200,000 of life insurance, Cathy would be considered underinsured.
What kind of insurance should Cathy have?
For $120 per month, Cathy is paying for a Universal Life insurance plan. As long as Cathy keeps paying the $120 per month, she will never outlive life insurance. Her premiums will never go up. The issue is that at some point in time (ten years), when the kids grow to independence, Cathy may not need life insurance. The issue is that she is currently uninsured and may be over insured in the future.
For Cathy, we took a look at what it would cost to buy lower cost term insurance instead of more expensive permanent insurance. For $500,000 of ten-year term insurance, it would cost her $50 per month, more than twice the insurance for 40% of the cost.
I use this real life example to illustrate some key points when you are making the decision to buy life insurance:
· This is clearly a case where the wrong type of insurance and the wrong amount of insurance was put in place. For less money, Cathy was able to get a lot more insurance. Although term insurance is more temporary in nature, the fact is the primary need is also temporary.
· Cathy’s intentions were in the right place. However, this is a clear example of someone who is paying too much for the wrong type of insurance. After we made some changes to put term insurance into place, Cathy was able have the peace of mind that she had the right amount of insurance for her kids to survive on. With the monthly savings, she could afford to put in place some disability insurance and even contribute monthly to an RRSP.
· Every life insurance plan needs to be reviewed from time to time. Life changes, assumptions can change and certainly personal needs change. For Cathy a review made a significant difference to her future.
· Start with determining if you need insurance and only buy insurance if you need it. Then, determine the right amount of life insurance before you decide what type of life insurance to buy. Finally, shop around, as there are different products and different costs. Make sure you buy the type of plan that best suits your needs.
What Is The Best Type of Life Insurance?
If you’re not familiar with life or living benefits insurance, it can seem like a different language. You’ll hear things like whole life, universal life, critical illness, term insurance, and temporary and permanent needs. Understanding a bit about insurance can help you make an informed decision about the coverage that’s right for you, your family or your business. Basically, life and living benefits insurance can be broken into two types: insurance to meet your temporary needs and insurance to meet your permanent needs.
Choosing the Right Policy
Choosing the right policy can be a confusing process. Some questions you should ask yourself are:
· Will the policy meet my current needs?
· Will the policy provide the flexibility to meet my future needs?
· What does the policy cost–both current and expected lifetime costs?
· Is the provider established and financially strong?
· Will the company back its guarantees?
Term Life Insurance
If you’re looking for basic insurance coverage for a specific period of time, term insurance is a good place to start. It’s a cost-effective and simple plan, with some flexibility to adapt to your long-term goals. Over time, your needs may change. Term life insurance can evolve with your needs by providing options to extend your coverage period or even to transfer to a permanent life insurance solution.
One of the key benefits of term insurance is it is cost-effective for a short period of time. You are only paying for basic death benefit coverage so your insurance costs are minimized for the length of the term.
Term coverage is available for 5 years, 10 years, 15 years, 20 years or to age 100. Premiums stay the same for the term but increase once the term is being renewed. For example, say I buy 10-year term insurance (T10); I will have the same premium over the 10 year period. After 10 years, I will expect to pay a higher premium for the next 10-year term. Depending on your policy and age at the end of your chosen term, you can renew your policy for another term, or convert it to a permanent life insurance solution.
There are two potential problems with term insurance. Firstly, term insurance gets more expensive the older you get. Often this makes term insurance cost prohibitive at some point in time in the future. Secondly, term insurance will eventually run out. In fact, you may wind up paying for premiums and never collecting a benefit of any kind.
Here is a sample of what it will cost per year for $100,000 insurance coverage for a 10-year term:
Permanent Life Insurance
Permanent insurance solutions allow you to insure against the unexpected while increasing the value of your investment over time. Plans can also be flexible. You can also select a plan that gradually minimizes insurance coverage so you can maximize your policy’s investment potential.
There are three kinds of permanent insurance:
1. Term to 100 (T100). Some people may classify this as a type of term insurance but the reason I classify this as permanent coverage is because you can never out live the benefit. T100 is the most basic form of permanent coverage.
2. Whole life Insurance. Premiums remain fixed as long as the policy is in place. As long as the premiums are paid, the policy remains in effect. As the premiums continue to be paid, the policy builds up a cash value and also dividends. These dividends can be used to lower premiums, purchase more insurance or pay for term insurance. Whole life requires little to no management.
3. Universal Life. The policyholder has more control over how the policy is structured. Policyholders are given more options to choose the type of insurance and investment options. This is the most flexible type of contract but with flexibility comes ongoing decision making.
Permanent insurance is more expensive and more complex than your basic term policies. Many financial gurus speak the benefits of “buy term and invest the difference” but remember that everyone has a unique situation and there are many instances where permanent insurance may make the most sense.
To help you sort through your options you may want to speak with a professional financial advisor. He or she will have the expertise to help you choose the products and company that best meets your needs.
Life Insurance Jargon
If you have even bought insurance of any kind, you know it can be confusing. It is no different for life insurance, but here is a simplification for life insurance.
Generally there are two types of life insurance, term or permanent. The name says it all. Term is payable for a period of time or term. Permanent is that it will always be there for you. Some compare the two to renting or buying. They both have their pros and cons, but it is all for what you need it for today and more importantly, in the future.
First, term life insurance has a renewal option. In every set number of years it renews at a higher price. Typical term rates are yearly term or for five years, ten years, twenty years, to age 65 or age 100. The number of years describes the term rate or price you pay. It usually doesnt affect the amount of coverage, only the rate you pay. So you can select your terms based on how long you want the coverage.
Permanent life insurance has several types such as universal life, whole life, participating, non participating, dividend reinvestment etc, etc.
To keep it simple, decide on the amount of coverage you will need today and in the future as the primary goal.
The secondary goal is how much you want to invest or deposit into a plan for future use. Just like rrsps while the money grows inside most permanent plans, you do not pay tax on the growth or interest on your money each year. Only in the future you will pay tax.
Todays life insurance companies design policies for consumers needs. One will be to pay tax on an estate of a holder of a large rrsp or rrif account. Other policies are designed for tax shelters for business owners or professionals.
Then there are policies designed to maximize an estate for a spouse or family in the future and give more retirement income today.
Because of the complex retirement planning needs of Canadians, life insurance can be an effective planning tool once you get past the jargon.
Car Insurance for Canadian Drivers
Many of us like the independence that having a car provides. However, with the ability to drive a vehicle comes responsibility. Every province and territory in Canada requires that you have insurance if you want to drive a car. In fact, if you drive without insurance, you run the risk of losing your driver’s license.
Car insurance is a necessary expense for Canadians, but it doesn’t have to be overly costly. If you are careful about your coverage, and you take the time to compare your options, you can find cheap car insurance
that provides you with adequate coverage at a reasonable cost.
What Auto Insurance Coverage Do You Need?
First of all, you want to make sure that you have all of the auto insurance coverage that you need. Canadian drivers are required to have basic liability coverage. This is coverage that kicks in when you damage someone else’s property, or if you cause injury to someone else. The idea is that your insurance pays for such damage or injury when the accident is your fault. That way, someone else isn’t paying (financially, at least) for your mistakes.
Other typs of insurance include the following:
· No-fault: This is insurance that protects you if the other driver is at fault and you don’t want to go through the hassle of contacting his or her insurance. It also protects you and pays the bills for your own injuries and damage if the accident is your fault.
· Collision: This is insurance that covers damage to your own car. It doesn’t even have to be damage by another car.
· Comprehensive: Other types of insurance won’t cover non-accident typs damage. With comprehensive, you receive protection in the event of natural disasters, fire, theft, and vandalism.
· ERS: Emergency Road Service is all about helping you get back on the road. If you breakdown and need a tow, or if you need light repairs made, this coverage will take care of the costs.
How to Pay Less for Auto Insurance
If you want to pay less for auto insurance, the key is in your driving behaviours, as well as in the coverage that you have. The higher the coverage amount you require, and the more coverage you ask for, the higher your premiums will be. However, you can get a break in the cost if you are a safe driver. If you aren’t at fault in accidents, and if you don’t have traffic violations, you will have lower premiums.
Your premiums are also influenced by what type of car you drive, where you live, and the deductible that you set. You want to make sure that you have adequate coverage so that you are protected from paying big in the event of an accident, no matter who is hurt — and no matter who is at fault.
A higher deductible, meaning that you pay more out of pocket, can help you keep a lid of regular premium costs. If you are worried about paying a higher deductible, you can start an emergency car fund in order to help you afford the cost so that you aren’t running into problems when it comes to pay your higher deductible.
In any case, the risk of not having car insurance is too high. You need some coverage in order to make sure that you are adequately protected.
Do You Have the Right Home Insurance?
Insurance is designed to help you protect your assets. And one of your biggest assets is your home. A home is an expensive purchase, and when damage is done to your home, it can be costly to repair.
Insurance can help you better handle those costs. When you pay regular premiums, the insurance company promises to pay the cost of damage to your home, and to its contents. Home insurance can also provide you with liability protection if someone is injured on your property, and compensation for items stolen from your home.
Without insurance coverage, all of these items can be financially devastating. With insurance coverage, you have a way to avoid having it all come down on you at once.
What is the Right Home Insurance Coverage?
Your first order of business is to determine whether or not you have the right coverage for your home. At the most basic level, you want to make sure that you have enough money to cover the cost of replacing your home if it is destroyed. You also want to make sure that you have enough contents insurance to replace the items in your home. Finally, consider a minimal amount of liability insurance so that you can offset costs if someone is injured on your property and needs medical attention.
It’s important to look a little deeper as well. Some policies don’t cover all types of damage. You might not have protection from flood damage, or damage from earthquakes. If you run a home business out of your home, you might not be completely covered, either. Some policies only offer very limited coverage of home business equipment in your home. Finally, if you have particularly valuable items, such as fine paintings or heirloom jewelry, the contents insurance you have might be insufficient.
Look carefully at your policy papers to determine what, exactly, is covered. You might need to purchase additional coverage to make sure that your individual situation is fully taken care of. This is especially true in the case of home business activities, and in the case of particularly valuable items.
Review Your Coverage Over Time
Once you purchase your home insurance
coverage, you aren’t done. You need to check up on the status of your policy over time. If your home has appreciated since you bought it, there is a chance that it is no longer completely covered. If you bought your home for $150,000, and got a policy for $200,000 more than 15 years ago, you might find that you are short on coverage. What if your home is worth $275,000 now? What if you have bought more things for the inside of the house, so the contents are worth more?
Regularly review your home insurance coverage, and determine whether or not you need an increase. It might mean a higher premium (you can offset a higher premium with a higher deductible in many cases), but it also means that you know you are covered. And you can’t put a price on peace of mind.