How market volatility can work for the investor

What is market volatility? Volatility is when prices of stocks and equity funds increasingly shift in value up or down. When a low-volatility period is followed by increases in volatility, stock markets may begin to offer lower prices, which can effectually present lower priced fund units, both offering a buying opportunity for the investor.

The stock market can both gain value in a “bull market” and can have periods of slow down referred to as a “correction” or if more prolonged, a “bear market”.

Many investors have seen their investments increase dramatically since the 2008-9 financial crisis that affected all the world’s markets. Further, since 2020 during the pandemic, the market has experienced remarkable gains as investors moved into another big opportunity after an extreme correction based on fear in mid-March 2021 occurred. Many of these investors have also witnessed a remarkable bull market taking many stocks and equity funds much higher than their previous years’ valuation. Conversely, investors who unwisely sold their holdings out of fear lost money.

The ideal strategy exercised by most successful contrarian investors like Warren Buffet is to buy investments when others are fearful, and they are selling their holdings at lowering prices.

When buying opportunities abound The market can experience increased volatility due to fears such as various wars, debt crises of countries, economic slow-downs, or the potential of rising interest rates.

Nevertheless, during periods of higher volatility, wise investors think positively, relying on the professionals managing their investment portfolios.

Predesigned investment plans are important Though periods of volatility occur, it is important to exercise patience while maintaining a balanced and well-diversified portfolio according to a prescribed investment plan.

Plan with your advisor to establish a buying plan when others may be fearful. Market cycles of volatility are normal and expected.

 

Is a Life Insurance benefit taxable?

The advantages of life insurance are well known: It is foundational to a sound financial plan to ensure peace of mind for your family if anything were to happen to you.

A policy’s death benefit, payable to your estate or beneficiary when you die, maintains financial stability. The family can pay final expenses, any debt such as credit cards or business debts, and cover ongoing costs.

Is the death benefit taxable?

Most of the cash received from a life insurance contract is not subject to income tax. Your beneficiaries — spouse, children, grandchildren or other beneficiary allocated will not need to report life insurance benefit proceeds on their tax return as taxable income. However, if you have assigned your estate as the beneficiary, the death benefit could be subject to tax. Moreover, fiscal gifts or inheritances generally are not taxable. 

Beneficiaries or heirs do not owe estate inheritance tax or death tax. It is the estate of the deceased that pays any such tax due to the government. If the policy owner’s estate is the policy’s beneficiary, the death benefit may — in some cases be subject to tax. 2 

When could a taxable situation arise?

When you own a permanent life insurance policy, accumulating interest or equity investments made to a policy’s cash value, taxes will be payable on that growth gained above the cost base of money invested. 3 

Upon your beneficiaries receiving any investment earnings from the policy, along with a death benefit, the increase on investments, not the death benefit, would be taxable as income.

Likewise, you will pay taxes on any increase in cash value based on the investments in the policy fund — should you surrender the policy and receive its cash value in return. 

Tax Reporting Rules for Life Insurance Payouts

The Canadian Revenue Agency (CRA) makes receiving life insurance proceeds easy for beneficiaries relative to tax reporting. Unless the tax is due on the above-stated earnings, these amounts do not need reporting as taxable income on a tax return.

What if there is an increase in the cash value? 

These amounts don’t need reporting as taxable income on a tax return unless some tax is due on interest earnings. If there are interest earnings, it will be reported to the beneficiary by the insurance company on a T5 slip, reportable on line 121 of the beneficiary’s return (or of the policy owner when surrendering the cash value of the policy).

1 Canada.ca 

2 Turbo Tax

3 Turbo Tax

4 Canda.ca

 

Long-Term Care Insurance (LTCI) 

We face a rapidly ageing population.

Since the 1920s, the ratio of seniors over the age of 85 has more than doubled. This number increases into the 2050s will be over age 85.

Who will care for you in your old age? When our health is fine, it is hard to imagine that we may, as many will, lose the ability to manage basic daily activities such as bathing, toileting, walking, dressing, feeding, or moving from our bed to a chair. Many also lose mental faculties that we often take for granted, such as memory, logical or conceptual thinking or referencing dialogue with others. Without assistance, it is near-impossible to function without these capacities.

Long-Term Care Insurance is an insurance contract with an insurer designed to provide care for our chronic illness, disability, or an accident, all of which have a higher potential of occurring as we age.

Some families are incapable of caring for a senior LTCI protects our families from the financial strain of providing long-term care, just as important as life and disability insurance protects the income of younger families. The question is, who will financially support long-term care for you? LTCI is not just for seniors but for those who become similarly incapacitated at any age.

Without a plan, your choices may be limited. It is essential to plan for our long-term care independently because our government healthcare budgets and initiatives are limited. They generally place people in government-funded facilities that have beds available. As we witnessed in the pandemic, many long-term care facilities had difficulty coping with the virus spread.

Most people entirely overlook the enormous expense of paying for a private long-term care facility (some cost up to a quarter of a million dollars for five years). Why are they so expensive? They offer 24/7 high-level nursing care in a highly secure environment. Note: Anyone can call a few private long-term care companies and inquire about their care costs.

Ageing baby boomers retiring will increasingly depend on long-term care insurance, either paid for by themselves, their children or professional health care services.

The need for Long-Term Care Insurance is increasing as medical intervention and medications keep us living longer.

  • Every year, about 50,000 strokes occur in Canada. A stroke is the leading cause of a transfer from a hospital to a long-term care facility.
  • Nearly 10% (1 in 11) of Canadians over age 65 are affected by Alzheimer’s disease or related dementia.
  • An increasing demographic (7%) of Canadians age 65 and over are residing in healthcare institutions.
  • An additional 28% of Canadians age 65 and over receive care for a long-term health problem outside of a healthcare institution.

As the populace ages, more care for the elderly, such as respite care (additional home care services), will increasingly be needed to provide family members with the medical guidance and support they need to continue caring for their loved ones. With this in mind, are our families financially prepared to deal with peripheral costs associated with providing long-term care for loved ones?

  • A study authored by Dr Marcus Hollander and Neena Chappell of the University of Victoria found that approximately $25 billion worth of unpaid care is provided willingly by family members and friends in place of paid care.

What does Long-term Care Insurance (LTC) offer? Long-term care insurance provides money to pay for the care that you both desire and need. With LTC insurance, you have:

  • Broader choices about the quality and amount of care you receive.
  • An increase of options when determining where you receive care and by whom.

Source: Statistics Canada, pre-baby boomer info

Sources: Canadian Institute for Health Information, Alzheimer Society website, Statistics Canada

 

How can indebtedness jeopardize a business?

Business Banking relationships are important. If a business owner who has a good relationship with his bank were to die, chances are the bank may call the loan if the business begins to experience financial duress and defaults on repayment. Many businesses have no option but to acquire a bank loan collateralized by the full value of their assets to survive financially.

  • Avoid collateralizing personal assets. The prospect may not be favourable when the loan equals or exceeds the value of the business assets and/or personal assets.
  • Following established rules, a bank may ask a business owner to collateralize a loan, not just with business assets and land, but with additional personally owned assets, which may encumber a spouse’s co-owned assets.
  • Add to that a possible collateralizing of any assets of a son or daughter (and spouses), who also share in family business ownership.
  •  Family members of small business owners can also lose their financial security if the business defaults on loan repayments.
  • If you own a business, avoid being held financial hostage by the lending institution or forced into liquidation.

Can life insurance reduce the risk associated with family businesses debt? You can solve this to a degree in a family business such as a farm by insuring the oldest and succeeding generations using joint-first-to-die life insurance policies or individual plans. Where there are non-family businesses, each owner/partner should be insured to cover the debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans and essentially win back ownership and discharge any liens of personally owned assets.

What if there is a Critical Illness?  Also, for the same reason, consider purchasing a Critical Illness Insurance policy on each principal business owners and key persons. This product could provide a substantial sum of money to pay off debt if one were to experience a major illness such as a heart attack or stroke. If an individual were to be incapacitated, he or she may need to be bought out by a partner or an heir (there should be a buy-sell agreement in place). The risk of a loan being called increases when an owner-manager is critically ill, and the bank manager loses confidence in the stabilizing influence of that owner.

Group Benefits and Employee Addictions

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Ten percent of the Canadian population report symptoms consistent with substance dependency. In the USA, the ratio is similar.

Source: Statistics Canada

Employers may watch for:

  • regular absence patterns
  • late for work
  • poor focus affecting production
  • confused about directives
  • appearing tired or stressed, or lazy
  • not collaborating well with other employees
  • a short temper
  • increased mistakes or wrong interpretations of duties

Have a policy for your employees who may suffer from substance abuse. Employers may have to find ways to approach, address, manage and/or get counsel for an addicted employee. The policy can also advise that your company suggest accessing an organization’s employee assistance program (EAP).

For an employee who suffers from an addiction to be eligible for group benefits, a group benefits plan may require that the employee disabled by addiction be introduced to a treatment program.


 

Group Critical Illness Insurance

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Group Critical Illness Insurance 

News of a critical illness can be very upsetting to a plan member. When you can offer them financial support during a difficult time with a Group Critical Illness Insurance plan, the employee can manage with the extra resources better.

Group Critical Illness Insurance Allows the critically ill to focus on recovery rather than worry about finances. It pays a lump sum amount when a plan member is diagnosed with a covered life-threatening illness.  The insurance benefit payment can be used as the plan member chooses. It is available to plan members and dependants.

Once a claim is approved for someone diagnosed with a covered illness, he or she is paid a lump sum. The money may be used however the person chooses, such as private nursing or medical care, modifications to a home or childcare costs, allowing the person to focus on recovery and managing the illness.

You can offer Group Critical Illness Insurance to plan members and their dependants while giving them an option to purchase additional coverage for themselves and their spouse. Benefits can be structured as either a flat amount (i.e. $25,000 to $100,000) or a multiple of the plan member’s salary.

Covered illnesses

Most standard plans cover these common major illnesses:

  • Heart attack
  • Stroke
  • Coronary artery bypass surgery
  • Cancer

Dependent on the plan, it may cover the illnesses above, plus:

  • Alzheimer’s disease
  • Aortic surgery
  • Benign brain tumour
  • Blindness
  • Coma
  • Deafness
  • Heart valve replacement
  • Kidney failure
  • Loss of independent existence
  • Loss of limbs
  • Loss of speech
  • Major organ transplants
  • Motor neuron disease
  • Multiple Sclerosis
  • Occupational HIV
  • Paralysis
  • Parkinson’s disease
  • Severe burns

Understanding the mortgage stress test

As of June 1, 2021, a new mortgage stress test has come into play. Here’s what you should know before you apply for your next home loan:

The new rules that banks must follow are to protect you, the borrower. Interest rates have been so low, so it is easy to believe that the rates will not rise, but they will. Therefore the rules are in place to ensure that you will be able to afford your home when the rates eventually rise and not default on your mortgage payments which could end with you losing your home.

When applying for a mortgage, your credit score will determine how much you can borrow. The financial institution will then offer a mortgage interest rate corresponding to that score. In addition to the rate offered, it will make a future calculation based on a higher future rate increase of an additional percentile amount. For example, borrowing $500,000, with a rate of 1.78%, means that you’d need to prove that you can make payments of $2,981 per month (at 5.25%) though the payment would actually be less at $2,063. Previously the 5.25% pre-July 1 test guideline would have been 4.70%.

As a licensed mortgage provider, we are here to answer your questions.

Understanding mortgage rates

The influence of the Bank of Canada, in tandem with the markets, influence your mortgage rates. The following are excerpts from the Bank of Canada website:

Buying a home is probably the biggest purchase you’ll ever make. If you’re like most people, you won’t pay cash—you’ll borrow most of the money by taking out a mortgage. And over the life of the mortgage, you’ll pay a lot in interest. Small changes in interest rates can make a big difference in how much you’ll pay. So it’s important that you understand what determines the interest rate on your mortgage, even if you already own a home. Many factors go into the interest rate you pay. 1

Think of a mortgage as a product you buy. Any business that sells you something tries to make a profit. To do that, the price they charge for the product has to be higher than the cost to make it. A lender profits on your mortgage because you pay more in interest (the price it charges) than what they paid to borrow the money themselves (their funding cost).1

This funding cost makes up most of the interest rate on your mortgage. Other factors include your lender’s operating costs and how much the lender needs to cover the risk that you won’t repay the loan. But funding cost is the most important factor.1

So, what determines funding cost? The Bank of Canada doesn’t set mortgage rates. But it does have some impact on them. When the economy is strong, we may raise this rate to keep inflation from rising above our target. Likewise, when the economy is weak, we may lower our policy rate to keep inflation from falling below the target. Changes in the policy interest rate lead to similar changes in short-term interest rates. These include the prime rate, which is used by the banks as a basis for pricing variable-rate mortgages. A policy-rate change can also affect long-term interest rates, especially if people expect that change to be long-lasting.1

In the past, high and variable inflation eroded the value of money. In response, investors demanded higher interest rates to offset those effects. This increased funding costs for mortgage lenders. But since the Bank of Canada began targeting inflation in the 1990s, interest rates and uncertainty about future inflation have declined. As a result, funding costs are now much lower.1

Your past credit history and some of the features you choose for your mortgage determine how much risk lenders face when lending to you. More risk means a higher interest rate. 1

Repayment relates to your credit risk. The most important risk for the lender is that you won’t repay the loan. A high credit score can help lessen this concern, as it shows the lender you’ve been good at repaying your debts. So, you may pay a lower interest rate than those who have a lower score. 1

If your mortgage is worth more than 80 percent of the value of the home, you’ll have to buy mortgage default insurance. But since insurance protects the lender from the risk of default, you may get a lower interest rate than if you go for an uninsured mortgage with a bigger down payment. 1

Interest rate risk. Most mortgage loans in Canada are renegotiated every 5 years, but they can be as short as 6 months or as long as 10 years. The more often you renegotiate, the more often you face the risk that the new interest rate will be different from the old one. If you are more comfortable with having your rate fixed for as long as possible, prepare to pay a premium for that peace of mind. 1

Prepayment risk. The lender risks losing money if you repay your mortgage early—known as prepayment risk. That’s because the lender won’t be able to profit as much from the funds they raised, particularly if interest rates have dropped since the mortgage started. So, an “open” mortgage, which lets you repay all of the loan early, usually has a higher interest rate than a “closed” mortgage, which limits how much you can prepay. 1

Source: 1 Bank of Canada

How to prepare to qualify for a mortgage

When you apply for a mortgage, there are several questions that a lender may ask that you can prepare for. They will want information relating to:

The primary information they will need.

  1. Employment and income
  2. A summary of your outstanding debts
  3. Cash reserves, bank account cash, investments, and other assets
  4. The down payment that you have on the property you are purchasing and is it your own money
  5. Will the loan also be to consolidate any debts?
  6. What will be the use of the property?
  7. What is the equity you now have in your current home, if applicable?

Employment and income.

  • Who is your employer?
  • How much income do you make, and can you provide payment receipts/stubs?
  • How long have you been working at your job?
  • Is your income a salary or other income such as sales commission?

Your liabilities.

  • What are your outstanding debts?
  • What commitment level per month do you have to pay debts?
  • What is the cost per month for auto loans?
  • How much of your income goes to pay off credit cards, and what is the gross credit card debt?
  • How much money will be left after you pay for your down payment and closing costs?
  • If you are refinancing debts, how much debt will your mortgage cover and reduce your equity?

What you will use the real estate for:

  • Will this be your residence?
  • Will you rent a portion of the home out?
  • Is it an investment property?

Property type

  • A condominium?
  • A duplex?
  • A single dwelling?

Responses that can work in your favour:

  • I have steady employment with the same employer for two-plus years.
  • I carry little debt with a debt-to-income ratio of 25 per cent or less.
  • The mortgage is only for a home purchase.
  • My down payment of at least 30 per cent of the sales price with my own money.
  • The cash reserves will pay several months of the mortgage payments once the property closes.

Responses that can work against you:

  • Self-employed or contract worker.
  • High debt with credit cards maxed out, with a total debt-to-income ratio of more than 30 per cent.
  • The property will be renovated for rental use.
  • The liquid cash situation is tight once everything is paid after we close the deal.

Mortgage planning cautions


Mortgage planning cautions

  1. Don’t overburden your cash flow. North Americans are taking on far too much debt, partly influenced by lower borrowing costs. When money is cheap, people take on more debt; when interest rates rise, they reduce debt.
  2. Rates Rates Rates Please do your homework and check our mortgage rates. It is far too easy to take out or renew a mortgage from your local bank that you visit regularly. When you get a mortgage renewal letter from your current lender, work at negotiating a contract or comparing lenders who may have fewer restrictions plus at a competitive rate. A broker or lender may offer much lower rates. A few basis points can make a big difference when it comes to paying off a mortgage.
  3. As a mortgage specialist, I can help. For personalized financial advice, you should speak with a licensed mortgage broker to compare and sell mortgages. He or she will focus on your specific needs, which is just as crucial as a reasonable rate.
  4. Read the fine print. Blessings or potential problems can be ascertained in the details. Know what you’re signing. What are the prepayment options, late payment fees, and refinancing penalties? Is a variable rate mortgage convertible into a fixed rate? If so, how will the lender calculate the fixed rate?
  5. Maximize the frequency of your payments. Consider paying bi-monthly versus monthly to shorten your payment amortization period.
  6. Further, reduce your amortization period. After paying a mortgage for five years, try to reduce the amortization period by those five years. In this way, a 25-year mortgage amortization period is reduced to 20 years.
  7. Know your mortgage facts. It is essential to know the facts about your current mortgage and one that you may renew. Check out what your interest rate is and what your monthly payments are per month. Find out when your mortgage is up for renewal. In certain cases, there may be a penalty for getting out of your mortgage early or restrictions. A change in your rate, such as moving from a variable rate to a fixed rate, might be a good move. Know your total income, liabilities, debt repayment costs and expenses. The lender will then determine how much you can afford. A good rule of thumb is that your mortgage payments should not exceed more than 40% of your net income.