Facts of life: creative uses for life insurance
However, life insurance is often the only
feasible solution to financial problems. If you’re in your 30s and earning a
six-figure income, there is no more effective way to protect your spouse and
kids who rely on your income.
A joint last-to-die (JLTD) insurance policy
would cover the capital gains taxes on that cabin. Because this type of
insurance pays out only on the second death – when it’s really needed – it’s
inexpensive. “With the death of the second spouse,” Grimes writes, “the policy
pays out the death benefit to the kids, who use the money to pay the capital
gains taxes. And – voila – the cottage stays in the family, and one child is
not forced to go into debt or sell his or her share.”
“If both spouses die, then those kids could
be in a lot of trouble,” Grimes writes. “That’s a great use for joint
Imagine that you and your spouse take a
$200,000 JLTD policy. Let’s say the premiums are $4,000 per year and the second
death occurs in 20 years. You’ve paid $80,000, and your estate collects
$200,000. The $120,000 gain represents a tax-free return of about 8.8 per cent
for your beneficiaries.
Your insurance advisor can do a needs
analysis to determine if you should buy this insurance – and the cost.
The role of insurance in estate planning
is the unselfish benefit. Those that purchase life insurance may not benefit from it. It’s the beneficiaries that really benefit from life insurance. Life insurance is one of the few assets that transfers to beneficiaries completely tax free. As a result, insurance can be a great tool in the estate planning
When you think of life insurance, you probably think it is something you need when you are younger — when you have dependents and more debts. Many experts have argued that you should only buy life insurance when you need it and as a result, they suggest that you should only buy term insurance. However, we believe that the estate planning reasons to purchase life insurance are much more varied.
When considering insurance as part of your estate plan, it is so important that you consider four key issues.
1. Do you need insurance?
Just like cereal and milk or strawberries and whipped cream, life insurance and estate planning go really well together. As we said, the most obvious reason why people buy life insurance is to protect their dependents. However, there are other equally important reasons why you might want to have life insurance:
· To cover taxes at death on illiquid assets
· To pay off debts
· To cover final expenses like funeral expenses, and lawyer’s and executor’s fees
· To provide income for your dependents
· To leave a larger estate for your beneficiaries
· To create a pool of cash to allow your executor to make things equal for your beneficiaries when some things can’t be divided
· To help corporations and business arrangements remain viable
· To help businesses cope with the loss of key people.
Obviously, this list is not exhaustive but it does represent some of the key uses of life insurance in the estate planning process.
2. The right amount of life insurance
Once you know why you need insurance, you then need to know the right amount of insurance. This is one of the most important steps in planning for life insurance. Determining the right amount is not always easy. We think it’s more of an art than a science. You need enough to meet your goals, but you don’t necessarily want to buy more than you need. When in doubt, get help from a professional advisor.
3. The right type of life insurance
The next issue to consider is the appropriate type of life insurance to use. Basically, there are two kinds of life insurance: temporary insurance and permanent insurance.
· Another name for temporary insurance is term insurance. Term insurance is the most cost effective type of insurance. It is designed to protect you for only a temporary period of time. As you get older, term insurance gets more expensive. Once you reach 70 or 80 years of age, you will not be able to get any term insurance coverage.
· The second type of insurance is permanent insurance. Permanent insurance stays in force until you die. As long as you pay the premiums, your permanent life insurance policy remains an asset in your estate planning. The benefit with permanent insurance is a price that is fixed over your lifetime unlike term insurance where the price increases as you get older. There are three basic types of permanent insurance: Term to 100, Whole Life, and Universal Life.
Life insurance contracts are the unselfish benefit because it’s really the beneficiaries that benefit when you die. Living insurance is a more selfish type of insurance because it pay you before you die. Two good examples of this are Long Term Care insurance and Critical Illness insurance.
Which type of insurance is best for you? The answer is found in your reason for buying insurance in the first place. For example, if you want insurance to pay off your mortgage so your family is not burdened with debt, then term insurance is probably all you need. On the other hand, if you want insurance to create a bigger estate for your heirs, then a permanent policy is probably more appropriate.
4. Shop around
Just like anything else in life, not all life insurance products are created equally. That is especially true when it comes to price. Once you have an idea of what type of life insurance you need and how much you need, it is critically important to shop around for the best deal. If you are not sure how to accomplish that, then seek advice from an independent insurance broker who can shop around for you.
Remember that life insurance is a very unselfish financial tool. We call it unselfish because the greatest benefit typically comes after you die. Life insurance money does not benefit you as much as it benefits other people – usually the people you love most.
Life Insurance Options
When you purchase your life insurance there are a variety of options available to you. These life insurance options are known as ‘riders’ and serve a wide variety of purposes. Like buying a new car, adding these bells and whistles can add substantially to your costs without necessarily giving you a better ride. Let’s review the various riders, and decide if they’re worth the extra money or not.
Accidental Death rider (AD)
This rider allows you to purchase an additional amount of coverage that will pay out subject to accidental death. By contrast, it will not provide additional benefits should you die due to medical reasons. Accidental death provides coverage at a very low cost. But here’s the question we need to answer – do you need more coverage if you die as the result of an accident instead of due to medical reasons? I can’t imagine a case where how we die impacts how much coverage we should purchase. If you need more life insurance, purchase it as a regular policy. If you don’t need more coverage, then save your money. In either case, accidental death rider is an option you should pass on.
Disability waiver of premium (WP)
This is an interesting and unique rider. If you purchase this rider and become disabled for longer than 6 months, the rider will kick in and pay your life insurance premiums for the balance of your disability. Certainly covering your bills upon disability is a great idea – as Forrest Gump said, that’s one less thing to worry about. But let’s pause for a second and consider what happens if you become disabled. Your insurance premiums are now paid, but who’s paying the mortgage? And the groceries? And your heating bills? The answer is nobody, unless you have proper disability protection. A proper disability plan should cover a substantial portion of your full income and not just your life insurance premiums. Effectively you want a new paycheque should you become disabled. That replacement paycheque should be enough to cover all your bills, including your life insurance premiums. In other words, if you have proper disability protection then you don’t need a disability waiver of premium rider on your life insurance policy. So make sure you have proper disability coverage (that’s extremely important!) and then take a pass on this rider.
Children’s Protection rider (CPR)
This rider covers all of your children until they are adults. Typically the premiums are small, in the range of $5/month for $10,000 of coverage. As the coverage lasts until they are adults and then is assumed to lapse, this is basically term insurance for your children. While deciding if you should cover young children with life insurance is beyond the scope of this article, if you do decide to purchase insurance on your children until they’re adults, this is an extremely low cost way of accomplishing that goal. In short, if you want insurance on your children while they’re at home,consider a Children’s Protection rider.
Guaranteed Insurability Option (GIO)
This rider guarantees that you have the option of purchasing additional insurance in the future, without a medical exam. Should you take advantage of the option, you will have to pay the additional insurance premiums – the cost of the rider doesn’t cover future insurance costs, only the option to purchase more insurance. This is an option rarely used by individuals and is much more commonly used by businesses that are growing. It provides the ability for a business to manage risk by guaranteeing future insurance purchases. You can generally ignore this option if you are purchasing life insurance for personal reasons. Consider the option if you are purchasing life insurance for business reasons, to guarantee that you can purchase insurance in future years, but compare it to the cost of just purchasing the full amount of the additional insurance today.
Second insured rider
If you have a base policy, it can be noticeably less expensive ($60-$70/year) to add a second person to your life insurance policy. This is because life insurance premiums consist of a monthly administration fee and an insurance cost. When adding a second person as a rider, the monthly administration fee is either discounted or waived, leaving just the basic insurance costs. This is a particularly effective way to add insurance for younger female nonsmokers, as their actual underlying cost of insurance is negligible.
Rather than taking out additional coverage as a separate policy, a term life insurance rider allows you to top up your coverage for a period of time. Just like a second insured rider, adding additional term rider coverage on your life can save you the monthly administration fee when compared to a seperate policy thus providing some savings. Consider doing this if you need additional term coverage for a period of time.
Which life insurance options make sense for you?
That covers most of the common rider options available on Canadian life insurance policies today. When purchasing a life insurance policy I recommend ensuring you have proper basic coverage first and foremost, and then examine the additional riders and options individually and separately.
Do You Need Life Insurance?
I recently read a discussion forum about life insurance. In this forum, there were some incredibly intelligent people that ranged from financial advisors, fee for service advisors, life insurance agents and even do-it-yourselfers.
Life insurance has forever been a controversial topic of discussion. The roots of negativity stem from the stereotype of the plaid suit salesman, who goes from door to door pitching the merits of life insurance. Traditionally, it was more about making the sale than incorporating life insurance into a complete financial plan.
While some of these ‘salespersons’ still may exist, they may not be as transparent. The life insurance agent today, can often hide behind the financial planner title or a financial planning designation.
Critics of life insurance also question the commissions that these agents make. In many cases, life insurance can pay exorbitant commissions and bonuses. To be fair, there are some life insurance products that pay more commissions than others. No matter how you look at it, life insurance is an important part of the overall financial plan and simply one of the financial tools in the toolbox. The hope is that there are many good life insurance agents in addition to the bad ones.
Good life insurance agents are typically professionals who incorporate total financial planning.
How do you find a good life insurance agent?
According to my partner Jim Steeden, who has been in the life insurance industry for 26 years, there are some key things to consider. “The first thing you want to know is how long they have been in the business. While years of experience does not guarantee success, remember that 75% of life insurance agents do not make it past 12 months in the business. Next, you should know if your life insurance agent can provide a range of products from a range of companies. No single company has the corner on the best products all the time, so it is important to shop around or find someone that can do it for you. Finally, watch for the CLU designation (Chartered Life Underwriter). This designation signifies a financial planner with advanced knowledge in life and health insurance.”
Start with the basics
The biggest problem with life insurance is that it involves emotion in the decision making process. Yet, good financial decisions are founded on logical processes and good research.
Start with the golden rule of life insurance “Only buy insurance if you need it.” There may be many reasons why you might need life insurance. The reasons may not be completely logical. Life insurance is what I term the unselfish benefit. Those that purchase life insurance may not be the ones that reap the true rewards of the product.
Some of the reasons you might buy life insurance are to pay off debts, replace income, cover funeral expenses, provide a legacy, donate assets to a charity, or cover a final tax bill on the estate. The most obvious need comes if you have dependents that rely on your current income.
Buy term, invest the difference
Just like in investing, rules of thumb work many times but they do not work all the time. While I do believe that buying low cost term insurance is a very smart strategy, it may not apply to everyone all the time.
It all depends on Needs, Wants, Goals and Means. From there it is possible for me to determine what kind of Insurance they should buy. Life Insurance is not a “One-Size-Fits-All” solution. To many people make general assumptions and apply rules of thumb out of those assumptions.
Do you need life insurance in retirement?
It may sound like an easy question to tackle but it may be more complicated than you think. The biggest problem with life insurance is that it involves emotion which is not always the best way to make important decisions. It’s not easy to look into the future and envision a life that has not been lived. For most there is no context for the circumstances that may arise when you die. In other words, how do you know what life will look like when you die if you have never (and will never) live that life?
When you think of life insurance, you probably think of something you need when you are younger — when you have dependents and more debts. Many experts have argued that you should only buy life insurance when you need it and as a result, they suggest that you should only buy term insurance while you are young because you will not need it later in life. Although there is some truth to this general rule of thumb, it’s a little too simplistic.
Insurance in retirement
Just like cereal and milk or strawberries and whipped cream, life insurance and estate planning go really well together. As we said, the most obvious reason why people buy life insurance is to protect their dependents. However, there are other situations where life insurance in retirement might make sense.
1. To pay off debts. It used to be that retirement happened only if you paid off all your debts. However, we live in times where debt is abundant and in many cases, Canadians are retiring with more debt than in the past. This debt comes in many different forms like lines of credit, credit cards and even mortgages. If you are carrying debt in retirement, then life insurance can be used to pay off those debts when you die instead of having to liquidate assets (sometimes at times when you do not want to sell). Alternatively if you have enough liquid savings or assets to pay off debts to the estate, then life insurance may not be necessary.
2. To cover taxes at death. When you die, there may be a substantial tax bill to the estate as a result of income from RRSPs, capital gains from investment portfolios, real estate and other sources of income. Life insurance can be used to ensure there is money in the estate to pay for this tax liability. Keep in mind that the government will still get paid their share of tax. You can’t avoid that. Life insurance just means your beneficiaries will get more because the tax bill is paid with life insurance proceeds.
3. To cover final expenses like funeral expenses and legal fees. Every estate has expenses but where will the money come from to pay for these expenses? It is crucial to ensure there is enough liquid cash to pay for fees and expenses. For some, life insurance can be a great way to inject liquid cash into the estate.
4. To provide income for your dependents. Generally, the plan in retirement should be to not have dependents but these days kids are staying home longer. Or if they do leave, sometimes they are coming back home later in life and occasionally they could be bringing children with them. The more common dependent in retirement may be your spouse (not the kids). Will your spouse need your income when you pass away? If they need some or all of your income to make ends meet, then you are a likely candidate for life insurance in retirement unless you have significant savings or assets to leave behind. Before you jump the gun on this questions remember the best way to think about this is to simply think of yourself as the survivor.
5. To leave a larger estate for your beneficiaries. The standard joke in retirement planning is the notion that the ideal strategy is to spend your money so you can die broke. The flaw with this strategy, of course, is you never know when you are going to die. Most people never die broke because running out of money is the biggest fear we face in life. In fact, leaving money to your spouse, kids, grandkids or others is not a bad thing. Leaving money represents relationships and creates legacies. Life insurance is a great way to pass money on to the people you love as it passes tax free.
6. To equalize your estate. Life insurance can create a pool of cash to allow your executor to make things equal for your beneficiaries when some things can’t be divided. One common example is where real estate is involved. For example, you might have a family cottage that is really only being used by one of three children. If the cottage is willed to the three kids, there is a good chance the one child that uses the cottage will have to buy out the other two siblings but where will the cash come from? Life insurance is a great way to equalize the estate by giving the cottage to the child that wants it and giving cash through a life insurance policy to the other two children.
7. To help corporations and business arrangements remain viable. There are many uses for life insurance and estate planning when a business is involved. Every situation is unique and should involve a team of professionals.
8. Provide for charities. Most often when we donate money to charities, we do it in the form of a direct contribution. Typically, someone knocks on your door or solicits you through the phone. Sometimes, we give a little by leaving our change at the cash register or even by attending a fundraiser of some sort. Charitable gifting with life insurance is much different. The most attractive advantage using life insurance is that it allows one to make a much larger gift to a charity. In addition to the goodwill, giving to a charity through your estate can save a lot of money in taxes.
Obviously, this list is not exhaustive but it does represent some of the key uses of life insurance in the estate planning process. Life insurance is one of the few assets that transfers to beneficiaries completely tax free. As a result, life insurance can be a great tool in the estate planning process.
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.
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.
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.
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.
Understanding Pension Splitting Rules
Written by Jim Yih
New pension splitting rules were introduced in Canada in 2007 and in my opinion, it was one of the most significant tax breaks given to retired couples.
is a great strategy to reduce taxes if you can move income from a higher income earner to a lower income earner. An individual who makes $80,000 per year would pay considerably more tax than a couple that earned $40,000 each. There are three common income splitting strategies available for retirees:
3. Pension Splitting
What is pension splitting?
Pension splitting allows a spouse to give up to 50% of their eligible pension income to their spouse for tax purposes only. There is no need to cut a cheque or give cash. Pension splitting is a paper transfer done via the tax returns.
What is eligible pension income?
For those people who did not have a registered pension plan through work, they can take advantage of pension splitting by converting their RRSPs or deferred profit sharing plans into income through a life annuity
or a RRIF
. Unfortunately, those individuals that do not have a registered pension plan, have to wait until after the age of 65 to split their pensions.
Who should take advantage of pension splitting?
There are three conditions to pension splitting:
1. You must be married or in a common-law partnership with each other in the year. (You cannot be living apart for more than 90 days because of marriage breakdown).
2. You were both resident in Canada on December 31 of the year
3. You received eligible pension income
The general rule of thumb that I use to see if pension splitting makes sense goes something like this:
If the pension earner is in a higher marginal tax bracket than the spouse, then it makes sense to move money from a higher tax bracket to a lower tax bracket.
Taking advantage of the pension income tax credit
The Pension Income Tax credit
is available to you if you are 55 years of age or older. Basically, it enables you to deduct, from taxes payable, a tax credit equal to the lesser of your pension income or $2,000.00.
If a spouse does not have pension income, the spouse with the pension should give the spouse without a pension a minimum of $2000 of pension income through income splitting so that the spouse can qualify for the pension income tax credit. This effectively means the pension earner can get $4000 out of the pension without tax.
In the case of a two pension household where both spouses have pensions, they can’t each give the other $2000 to get $4000 of pension tax credits. There is a limit of $2000 per person.
Having pension income does not automatically qualify you for the $2000 pension income tax credit. You must claim the credit on line 314 of your tax return.
The paperwork for pension splitting
Both spouses must sign the form. It’s a pretty simple process so make sure you take a look to see if pension splitting will save you some tax.
Online Guide for RRIFs
When people retire, the money that people have in their RRSPs
typically finds a new home. That home is called a Registered Retirement Income Fund or RRIF
for short. When Canadians need to set up a regular income stream from their RRSPs, they have the option to use a Registered Retirement Income Fund or a Life Annuity
. RRIFs are by far the more popular option these days. Here’s a list of great articles to help you make important RRIF decisions:
Understanding the basic RRIF rules
This article is a great starting point to learn about RRIFs and the basic rules of how they work. If there is only one article you read, this is it. This articles has been one of my most popular articles on the site.
RRIF minimum income rules
A RIF is designed to create a regular stream of income for retired Canadians. The government has imposed some rules around how much money can be taken out each year. They call this the minimum income
Should RRIF minimums be changed?
Some people think the RRIF minimum rules are old and needs some updating to make the rules more current and relevant to the times. What do you think?
Converting your RRSPs to income
Before you convert your RRSPs to income, it is important to take a look at the amount of money you will receive from different options including the RIF. How can you make a decision without having some numbers?
RRIFs vs Annuities
When you retire, you can convert your RRSPs into income using a RIF or a Life Annuity. This article will highlight some of the basic differences.
RRIFs and estate Planning
Designating Beneficiaries for RRSPs and RRIFs
One area of tax planning that does not receive enough attention is the designation of beneficiaries when it comes to RRSPs andRRIFs. Make sure you understand the tax implications of different beneficiary designations.
RRSP and RRIF tax traps
When you die, RRSPs and RIFs become fully taxable to the estate. Many people designate beneficiaries on the RRSPs and RRIFs at the time of application and more often than not, they do not put the estate as the beneficiary. This can potentially create a tax trap.
What happens to your RRSPs and RRIFs when you die?
Although it’s not something we like to think about it is an important issue with RRSPs, especially when it comes to tax. On death, the tax consequences really depend on who is listed as the beneficiary of the RRSP.
Taxation of RRIFs
Income splitting strategies in retirement
In 2007, the government introduced Pension Splitting rules. Once you turn 65, you can also used the Registered Retirement Income Funds to take advantage of the pension splitting rules. This one is really worth checking out because it can save couples a lot of money.
RRIF meltdown strategy
One popular question I get is how to get the money out of registered funds without paying tax. Because it involves leverage and borrowing money, I do not often recommend this strategy. It’s still worth reading about how to do it.
Investing your RRIF
You don’t want too much risk in a RRIF
When you convert your RRSPs to a RRIF it is critically important that you review the investments and make the portfolio much more conservative. The math of withdrawals to create a retirement income stream can work against you when there is too much volatility.
RRIFs can be a retirees best friend if used properly. I hope this guide has helped you create retirement income.
RRSP and RRIF tax traps
The designation of beneficiaries is a very important component of estate planning especially when it comes to the RRSPs and RRIFs. It has been regular practice for financial advisors and institutions to list a beneficiary designation for the Registered Retirement Savings Plans (RRSP) or Registered Retirement Income Funds (RRIFs).
Generally it is common practice if you have a spouse to list your spouse as the beneficiary because the transfer will qualify for a tax deferred rollover to the spouse and there will be no tax paid. Remember that CRA will get their money later.
With a RRIF
only, if you are going to list your spouse as the beneficiary, you may want to designate your spouse as a successor annuitant instead. In this case, the spouse simply takes over from the deceased and continues to receive RRIF payments in his/her place. The investments in the RRIF are not affected by this, as there is no need to execute a new contract.
Watch beneficiaries other than the spouse
When someone other than the spouse is listed as the beneficiary, the RRSP/RRIF is deemed to have been sold just prior to death and the tax burden goes to the estate. Here’s a quick example of this:
Richard was in his second marriage and wanted to make sure that his 2 children, Beth and Art would get part of his estate. As a result, he listed his two kids as the beneficiary of his RRSP. His new spouse would get the house and his pension.
When Richard passed away, the kids got the RRSP money but the RRSPs were still taxable to the estate. When the final tax return was done, there was a significant tax bill but no money in the estate to pay it. The house and the pension did not go through the estate as it went directly to the spouse.
In the end, the kids had to pay the tax but the problem was they spent the money right away. The relationship with their mother-in-law was damaged for life because they felt that she should pay for part of the tax bill.
My two cents
There are a few possible solutions to prevent this trap from happening. The first is to simply watch the designation of beneficiaries on RRSPs and RRIFs. Just remember that no matter who gets the money, there will be tax that has to be paid.
Also remember the joke “Die broke and have fun at it”. The reason it’s a joke is because it’s really hard to do. That being said, when it comes to RRSPs, it’s best to have spent them before you die because they all become taxable when you die. The key is not to die with too much RRSPs but rather spend them while you are living.
And lastly, remember that life insurance can be a great estate planning
tool because it creates liquidity. One of the benefits of having life insurance is it can create money in the estate to pay for the tax liability.
There’s an Easy Way to Protect Wealth… Yet, Many Don’t Use It
Part of protecting wealth is protecting your privacy. Yet, any stranger can pay a fee and receive a copy of a probated will. After all, it is in public domain.
In a probated will, you see lists of assets, who the beneficiaries are and the amounts they receive. You see where and how the money was invested and the type of investments held. If you have a sizeable estate, would you want every family member and the world to know?
For some, this may cause great family feuds, leaving more problems behind to worry about today. Is this what you want to think about for your estate? There may be a better way for you.
Investing with a life insurance company( CIBC WOOD GUNDY) into a GIC, annuity or segregated fund portfolioallows you to make a beneficiary designation.
Bingo, the privacy issue is avoided. Since it acts as a life insurance contract, it is between you and the beneficiary. The investment is not probated and the privacy issue is carefully avoided.
Seniors who discover the benefits such as privacy, probate and 100% guaranteed death benefit with their funds soon discover that Canadian life insurance companies have helped people protect their wealth for decades, making it an easy way to protect your wealth. With GICs the rate is guaranteed for the term you choose, say one to ten years. They are also deposit insured up to certain limits per account. With segregated funds, there are some additional benefits:
· 100% of your investment guaranteed upon death to your beneficiaries, no loss of capital upon death.
· A maturity guarantee of 100% of your principal investment regardless of stock or bond market conditions.
· While your investment grows, so does your guarantees upon maturity and to your beneficiaries, thus locking in future profits for you and your family.
· Creditor protection for professionals and small business owners. Under the insurance act, you have the potential to protect those investments from creditors. A professional such as accountant, dentist, doctor or small business owner may benefit.
· Finally the investment benefits.
· You have the security of the written guarantees, the estate planning and creditor benefits, plus you also have access to most of the top performing investment managers available to build a truly diversified and well managed portfolio.
Insurance & AnnuitiesCapture The Investment Potential Of Insurance
In building a profitable portfolio, smart investors spread their assets over a variety of investments to be able to benefit from the higher returns of equities and the safety of fixed income investments. This makes perfect sense because over the long term diversification has proven to be a prudent approach to successful investing. To their loss, some investors avoid investments that can deliver higher returns because they can't deal with the potential volatility. What they don't realize is that they are forfeiting the opportunity to grow their assets in a bid to protect themselves from possible loss.
One solution to this dilemma of growth versus safety is to incorporate insurance into your financial plans. Insurance policies can enable you to build or maintain your wealth, while limiting risk to your capital. This strategy can work especially well in later years when you need to protect your investments for today – and for your beneficiaries when you're gone.Get Connected To Insurance Solutions
Life insurance has often been overlooked as a source of investment opportunities. Now, especially with a rapidly growing retirement population, there's increasing awareness that some life insurance offerings are specifically designed with an investment and a life insurance component. In some cases, the investments that can be held have the potential to deliver higher returns than the more popular investment vehicles
These include guaranteed investment annuities (GIA), segregated funds and insured annuities. And with insurance, you also gain the benefit of arranging your affairs and selecting your investments to achieve certain desirable results for your estate on your death.Let's Talk About The Possibilities
Through our partnerships with strong insurance companies in Canada, we can provide you with access to the possibilities that life insurance can offer. Sorting through all the investment choices available to you can be time consuming and difficult – even more so when they include an insurance component. Your CIBC Wood Gundy Investment Advisor can introduce you to a qualified Estate Planning Specialist (Financial Security Advisor in Quebec). To find out how we can help you, use our Find An Advisor tool to contact a CIBC Wood Gundy Investment Advisor near you.
The information contained herein is considered accurate at the time of posting. CIBC and CIBC World Markets Inc. reserve the right to change any of it without prior notice. It is for general information purposes only.
Insurance services are available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are available through CIBC Wood Gundy Financial Services (Quebec) Inc.Life InsuranceGet The Most Out Of Life
You've attained the good life: Earning a good income, accumulating a sizable portfolio, paying off your liabilities and maximizing your RRSP contributions. Along with your financial success comes increased taxes and the worry of protecting your assets today and in the future. Without proper preparation, the good life you've worked so hard to create could be short-lived.
One solution to decrease the likelihood of this happening is life insurance When many people think of life insurance, they only consider its ability to protect against the unexpected. While this is true, life insurance is a powerful financial tool that can also do double duty as an effective investment vehicle. And it can safeguard your wealth as well as potentially minimizing your taxes.Protect And Grow Your Assets
Some types of insurance are strictly geared to protecting your assets. However, universal life insurance goes beyond that to offer a savings component along with life insurance and can also be useful for estate planning. Universal life insurance combines permanent life insurance with tax-advantaged investment options in one policy. You can benefit from considerable choice and flexibility in investment selection, premium amount, and death-benefit options. Other advantages include:
§ Tax-sheltered investing and tax-free payout to the beneficiary
§ Investment has the potential to fund the cost of the premium
§ Relatively unrestricted switching of investment options
§ Investments may be withdrawn (subject to taxes) before the death of the policy holder Let's Work Together
Not all universal life policies are created equal. We partner with all the top insurance companies in Canada to be able to bring you a wide breadth of policies. We can provide the expertise to help you design a universal life policy that is optimally suited to your lifestyle. Your CIBC Wood Gundy Investment Advisor can introduce you to a qualified Estate Planning Specialist (Financial Security Advisor in Quebec). To find out how we can help you, use our Find An Advisor tool to contact a CIBC Wood Gundy Investment Advisor near you.AnnuitiesSafeguard Your Income For Life
Many of us dream of filling our retirement years with leisurely activities, travels around the globe or simply taking the time to enjoy life. Just because you have significant funds and income to pursue your retirement aspirations doesn't mean you're safe from outliving your savings and also reducing the assets you pass on to your loved ones. Enjoyment of your later years could be severely reduced without proper planning.
Investment solutions offered by insurance companies could help you protect your income during your lifetime while providing benefits for your estate. Life insurance policies like a guaranteed investment annuity (GIA) or if you are insurable, an insured annuity, can go a long way to protect your savings during your lifetime and beyond.Invest For Income With A GIA
An estate-friendly equivalent to a guaranteed investment certificate (GIC) is a guaranteed investment annuity (GIA). With a GIA, you can also purchase a guaranteed rate of return with a corresponding term of maturity. The maturity term is usually one to 10 years, but can extend to 15, 20 or more. GIAs offer many advantages:
§ Choice of income paid monthly, quarterly, semi-annually or annually, or compounded
§ Ability to designate a beneficiary under the annuity contract to avoid probate and other costs (probate fees do not apply in the province of Quebec)
§ Creditor protection, providing certain criteria are met Get The Benefits Of An Insured Annuity
An insured annuity is essentially a life annuity and a term 100 life insurance policy, purchased together. An annuity provides a guaranteed regular income stream, while a term 100 life insurance policy provides a cash payout upon death. The combination of the benefits is ideal for those seeking guaranteed income and the preservation of their capital. Benefits include:
Guaranteed, regular lifetime income
Preservation of capital
Ability to bypass the process and cost of probate and other estate-settlement costs
We only work with the leading companies in the insurance business to be able to bring you the most effective solutions that are right for your needs.Make The Most Of Your Opportunities
If you're nearing the retirement phase of your life, we can provide the expertise to guide you through the myriad of insurance solutions. Your CIBC Wood Gundy Investment Advisor can introduce you to a qualified Estate Planning Specialist (Financial Security Advisor in Quebec). To find out how we can help you, use our Find An Advisor tool to contact a CIBC Wood Gundy Investment Advisor near you.Segregated FundsA Way To Build Wealth And Limit Risk
If you're looking for a unique investment opportunity that combines potential for growth with peace of mind, segregated funds could work for you. Segregated funds are professionally managed investment funds that give investors the opportunity to build wealth while minimizing their risk. Though similar in many respects to mutual funds, segregated funds offer investors some distinct benefits.The Potential To Secure Your Gains
In addition to the strong opportunity for growth offered by equity mutual funds, segregated funds provide potential protection against downturns in the stock market on maturity or the death of their owner. This is possible because they offer a reset feature that enable you to lock in your gains. By combining the protective benefits of an insurance contract with the investment performance potential of mutual funds, segregated funds can be an effective strategy for long-term investing.
As an investor, you benefit from the ability to:
Protect your principal by locking in gains
Avoid probate fees (do not apply in Quebec) by naming a beneficiary if you are the named owner
Potentially protect your assets from creditors Take Control Of Your Portfolio
Leading mutual fund companies and institutional investment managers have joined forces with insurance companies to provide investors with the flexibility to build a highly diversified portfolio by offering segregated funds. Much like with mutual funds, professional money managers make investment decisions based on the objectives and the management style of the fund. However, you maintain control through the ability to allocate your investment over the major fund categories and to change the asset mix of your funds.We Can Help
We can offer you a broad range of segregated funds issued by Canada's top insurance companies. Your CIBC Wood Gundy Investment Advisor will help you determine if segregated funds are a suitable investment vehicle to assist you in meeting your investment goals and objectives. To find out how we can help you, use our Find An Advisor tool to contact a CIBC Wood Gundy Investment Advisor near you.
Financial resolution – Get a will
In financial planning, we spend so much time worrying about accumulating, managing and protecting our assets but spend so little time contemplating how these assets will be distributed when we are gone.
One financial resolution to consider is to get a will in place. At the same time, consider getting a power of attorney and a personal directives and you will have the three key documents for an estate plan.
Dying without a will
If you’ve been thinking that it’s not a problem to die without a will – think again. This “little” oversight can cost thousands of dollars in legal bills, bitter family disputes, as well as legal battles between siblings and/or their spouses. All of this would be avoided with the drafting of a proper will.
When you die without a will, you are said to die “intestate”. Essentially, this means that the Intestate Succession Act governs your estate which can cause problems, frustrations, delays, and add unnecessary costs. Dying intestate means that:
· You can’t choose who your beneficiaries will be;
· You can’t choose who will administer your estate;
· You can’t plan your estate to minimize taxes;
· You can’t choose a guardian for your children.
Dying without a will means letting the government decide on how your estate will be settled and being charged to have this done?
How much will it cost?
When my wife and I drafted our will, it was about $750 for all three documents. Some lawyers will do it for less and others for more. What I can say about the cost of a will is it is probably the most cost effective route to take. I’ve seen many legal bills far exceed the cost to draft a will when disputes arise because of lack of proper planning and execution. Saving money is always prudent, but paying to have a will correctly drafted is one of the wisest investments you will make!
How of often should you update your will?
According to Marvin Toy, a lawyer who has practiced in the fields of tax law and estate planning for the past 12 years, “well-written wills should be flexible and contemplate future changes in your life. Nevertheless, you should review your estate planning documents when significant changes happen.”
Some examples of changes that can trigger a change to a will are:
· You get married, separated, divorced or remarried
· You live with someone in a conjugal relationship for over a year
· You have a child or a grandchild
· You have a significant new asset
· You anticipate financial difficulties in the future
· You move to another province or country
· Your health deteriorates
· Your child gets married, separated, divorced or remarried
· Your spouse or your child is facing financial difficulties
· Your spouse or your child develops an addiction (alcohol, drugs, gambling)
· Your spouse or child dies
· Your adult child become financially dependent upon you
· Your child no longer has any contact with you
· Your executor or trustee moves to another province or country
· Your executor or trustee becomes elderly, ill, or dies
· Your executor or trustee no longer has any contact with you
Keep in mind that you can change your existing will or create an entirely new will as often as you’d like.
If you don’t have a will, don’t wait till it’s too late. If you have a will and you have not reviewed it for a while, it’s probably time to pull it out and see if it needs updating.