Education planning has serious financial consequences

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As parents, we need to consider the effect that education will have on the future income and lifestyle of our children. When Steve Jobs of Apple knew he had a short time to live, he became assertively interested and vowed that he would do everything in his power to ensure that his son received a good education.

As the Internet brings many changes quickly, we are seeing many manufacturers moving plants overseas. Stephen Covey, the best-selling author of The 7 Habits of Highly Effective People, predicted a need for technological education several years ago, echoing what we see everywhere: manufacturing increasingly calls for brain work rather than metal-bashing that empower the industrial age — further making a point:

The winds of education reform are beginning to stir once again. Our collective conscience is being nudged. And there’s a good reason. The world has moved into one of the most profound eras of change in human history. Our children, for the most part, are just not prepared for the new reality. The gap is widening. And we know it.

Parents see the chaos, the economic uncertainty, the stress and the complexity in the world, and know deep down that the traditional three “R’s” — reading, writing, and arithmetic — are necessary, but not enough.

Today robotics and artificial intelligence call for another education revolution. This time, however, simply cramming more schooling in at the start is not enough. People must also be able to acquire new skills throughout their careers.

The following grid estimates the effect of educational decision-making on a child’s education. Income and future lifestyle can be severely affected by poor choices. When a child has the capacity and talent for a higher level of educational goal-setting and achievement, this needs to be developed appropriately.

What ways can we plan for our Child’s education? Consider using both the traditional Registered Educational Savings Plan (RESP) and the Tax-Free Savings Account (TFSA) as an educational savings vehicle. A TFSA offers parents another tax-efficient method to provide for education planning.

Using the TFSA for Educational Planning

Canadian residents age 18 or older can contribute up to $5,500 annually to a TFSA in 2018; and $6,000 in 2019. This is of particular interest to those who invest in stocks and equity funds since when the money is withdrawn, there is no tax consequence.

Using the RESP for Educational Planning

  • You can save for a child’s education using the RESP. The Government of Canada will also help you save money through the Canada Education Savings Grant (CESG).
  • Your advisor can help you understand what RESP options is available to you in your province.

Universal Life Insurance (UL) offers adjustability

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With a permanent Universal Life Insurance (UL) policy, there are many options and tax advantages available within the plan. Death benefits may vary, funds can be invested in tax-sheltered accounts, cost and types of insurance can be manipulated – all to the benefit of the consumer’s goals! What are the primary benefits of Universal Life (UL) for Estate Planning? The options abound:

• The death benefit is adjustable. The amount of life insurance can be increased or decreased to reflect an insured’s changing needs, and there are multiple options available when creating a plan. Typically, a person will choose an increasing death benefit that will pay out all life proceeds as well as any cash in the plan at time of death. Or, a person could choose a plan that pays out the death benefit as well as all premiums paid into the plan. This option ensures that family assets will not be eroded due to premium payments for the life insurance policy. A person may also choose a level death benefit, however the advantages of this structure are limited. Or, if a person eventually is insured, or does not require their current amount of insurance on their policy, they can simply reduce the death benefit. In the end, a policy’s death benefit can be structured to suit the needs and goals of the insured.

• Insure multiple lives in a UL plan Several lives can be insured or added to one plan, including a spouse and children. Business associates may also be named as multiple insured’s on a business policy.

• Special riders can be added In some cases, term riders can be added to the policy, allowing for a structured policy that addresses insurance needs now and in the future. For example, you can structure a policy with permanent Universal Life insurance as a base amount, then add a Term 10 or Term 20 rider.

• Disability riders can be added Policies may provide a disability rider called a waiver of premium. Upon disability, the policy premium can be waived until such a time as the person is no longer disabled.

• Create capitalized income for a surviving spouse Life insurance proceeds can be structured as an annuity, thereby providing lifetime income for the surviving spouse.

• Capital creation can be deferred Alternatively you can arrange to have the death benefit paid after the second spouse’s death to maximize the value of your family’s inheritance or meet your estate’s tax liabilities. These policies are typically called Joint Last to Die policies.

 

Universal Life Insurance

shutterstock_26411348There are many compelling reasons to combine your investments in a tax-advantaged life insurance policy. Tax advisors have been pointing their wealthier clients to these unique policies for years. Let’s examine some of the tax benefits, investment options, overall features, and for whom they are best suited. Depending on the insurer, there can be many possible options, but all enjoy some of the following essential elements.

  • You can earn and accumulate tax-deferred interest. A tax deferral aspect of the policy allows that you may effectively increase the after-tax yield of your investments and policy cash value over the long term. The fund from which the cost of internal cost of insurance offers interest-bearing accounts over various term periods. Comparatively for example, if you are nearing a 50% tax bracket and your after-tax yield on interest-bearing term deposits is a low 2.5%, you would have to earn 5% pre-tax. The UL deposits conversely are protected from secondary annual taxation on interest earnings until taken out.
  • The tax savings can pass tax-free to your beneficiaries. This offers an estate planning advantage. With your first premium payment, you secure a substantial death benefit in relation to premiums paid. If you hold the policy for several years, you can begin to create tax-advantaged growth within the policy. If the policy’s cash value grows, your entire principal, plus untaxed interest, including the remaining life insurance value, pass totally tax-free to your heirs.
  • The cost of insurance is paid with pre-tax dollars. The cost of insurance can eventually be paid from this growing interest-earning side-fund. Once enough money is held within the fund, over a long period, the cost of insurance is paid from some of these untaxed monies. Depending on the insurer, the insurance in the plan can be an annual term, 10-year term, or term to age 100, or a combination of term periods. Premiums for this insurance relate to your age, health, and smoking status. The premium costs are initially calculated to pay for the insurance and to increase the reserve cash fund designed to build funds that can be used to prepay future ongoing premiums.
  • The premium payments are flexible. You can pay what is referred to as a minimum premium. If you want to pre-fund the policy with more money, you may be able to increase your annual premium on a monthly, annual, or occasional lump sum basis, up to a specified maximum. A maximum premium is calculated and pre-set in order to keep your policy exempt from accrual taxation. Once your cash value increases, you may be able to reduce or skip premium payments altogether, without jeopardizing insurance coverage.
  • The premium payment periods are flexible. Some policies may have a minimum annual premium for several years. A well-funded policy’s money reserve (cash account) can continue to grow even as it pays for the cost of insurance. If you want to accelerate your tax-deferred interest savings, you may be able to increase premium payments. If you choose to select a limited-pay premium period, and interest rates are low, you may need to pay for several more years to compensate for the low-interest rate. Conversely, if interest rates are high, you may be able to shorten your premium-paying period. Once you stop paying premiums, the insurance, administrative charges, and cost of any additional benefits and riders would continue to be paid (deducted) from your side-fund’s reserve account value.
  • There are additional riders and extra benefits. In some cases, term riders can be added to the policy, allowing for simple, low-cost insurance on the life of the insured and his or her children. Some policies provide a disability rider, which could provide income in the event that the owner is disabled. Additionally, a waiver of premium rider could possibly pay for premiums.
  • There is potential creditor protection on the cash value. Special insurance laws may protect these policies from creditors, which could preserve the cash reserves if a business faced economic turmoil. However, a business owner cannot quickly hide money in a tax-deferred cash reserve if he or she knew there was potential bankruptcy looming on the horizon.
  • You can borrow against your cash account’s reserves. The cash surrender value (CSV) is just another name for the remaining cash in the side fund. If you had $100,000 in that fund, you would be able to borrow against it or withdraw it with some potential taxation. If you cancel the policy later in life, you should receive most of this cash value. However, there may be taxes due on a portion of the funds when withdrawn or when the whole policy is cancelled. For this reason, alternatively, a loan against the cash value may make more sense; which would allow the money to stay within the fund without accrual taxation, on reserve, while continuing to earn tax-free interest.
  • Funds are accessible. It is essential that such policies are well funded and that you monitor your cash reserves to avoid the cost of insurance overly reducing them (the cost of insurance can increase the older one gets). The tax-deferred funds can then grow to become a considerable liquid asset and result in an increase in your net worth. By carefully managing the cost of insurance (and perhaps reducing the insurance as the funds rise in value), you can minimize the reduction of the value of the tax-deferred account. While funding the policy sufficiently you continue to pay for the upcoming insurance premiums with pre-tax dollars
  • The tax deferral is a long term strategy. If you withdraw too much money too early, there may be applicable taxes due, and a surrender fee may apply. Early withdrawal may reduce the functionality of the strategic advantage because any increasing insurance cost can deplete smaller reserves.

The long-term benefit is the potential tax-advantaged investment growth that can outperform similar investments held in a taxable interest bearing vehicle. Policies can allow for future withdrawals to provide for special financial needs or additional retirement income. Premiums are always paid with after-tax dollars from the fund (which includes the initial tax-paid principal used to make deposits). This allows a good portion of any future withdrawals, in most cases, to be paid out tax-free. Moreover, the major benefit is that the entire death benefit including the cash value passes to the heir’s tax-free at death.

Talk to your advisor about any legislation changes that may affect taxation.

What evidence proves that life insurance is worthwhile?

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Life insurance has unlimited tactical financial uses.

Life Insurance includes cash benefit payouts arising from personal life insurance, disability insurance, group life and group disability insurance; and income from annuity payments, which together have risen to approximately 40 billion dollars per year in the first decade of the new millennium.

For a person running a business, a disability insurance policy can replace up to 75% or more of the value of a disabled person’s normal working paycheque.

“Life insurance is the first foundation of wealth preservation.”

Personally owned individual life and/or disability insurance can:

  1. Pay off a home mortgage if the family breadwinner dies.
  2. Pay debts and taxes accrued in larger estates leaving heirs with financial stability.
  3. Help small businesses using agreements pass the baton to new leaders.
  4. Fund key-man insurance to replace a leader in a small business.
  5. Help family businesses and farms stay in the family through succession planning while passing wealth (and paying off liabilities) to the next generation.
  6. Pay off capital gains taxes on second properties such as a cottage.
  7. Cover taxes due when remaining Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings.
  8. Pay off large capital gains on investments at home and abroad.
  9. Equalize estates divided amongst siblings whose parents own significant business assets, where some work outside the firm.

The use of life insurance is increasingly creative the more wealth preservation becomes necessary and can assist in this important strategic area of fiscal protection. It can pass substantial sums of cash to future generations using techniques such as estate bonds.

The time-line of Long-Term Care

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The life-time care time-horizon

Respite care is the provision of temporary relief to those who are caring for family members who might otherwise require permanent placement in a facility outside of the home. Respite programs provide planned short-term, time-limited breaks for families and other unpaid primary care givers of adults with an intellectual and/or physical disability.

Shared help from loved ones, and government part-time home care services, helps relieve the primary at-home caregivers to enable them to maintain their own wellness. It allows an aging population to move gracefully towards the potential need for a 24/7 care and/or a palliative care program when medical care or treatment concentrates on reducing the severity of the symptoms of diseases relating to aging, rather than striving to reverse progression of disease. At this final stage of care, the goal is to prevent and relieve suffering for people facing serious, long-term complex illness.

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.
  • Increase of choices when dedetermininghere you receive care and by whom.

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

Source: Some of the concepts and information are used with the permission of Patty Randall who is widely considered a leading advocate on the need for care-years planning in our country. Visit her website: “Aging Successfully with Passion and Purpose and Care-Years Planning” online at www.longtermcarecanada.com for discussions, ideas and to obtain family materials on this issue.

How do I make financial agreements with my fiscal partner?

When establishing a financial strategy involving other stakeholders, such as paying down a mortgage, develop a written plan that all parties agree on. You can create written point-form agreements for each to sign in areas of investing, registered vehicle planning, debt repayment, etc.

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When determining your goals, it is important to think positively and avoid language such as, “We will never have enough to retire,” or “We can’t seem to get ahead,” or “this debt is killing us.” Statements like this often become self-fulfilling prophecies. Rather, it is important to design an action plan and start working towards it together with all the stakeholders, such as your spouse or partner, referred to henceforth as your fiscal partner. Write your plans out regarding financial concerns such as:

Reduce or eliminate debt. One of the encumbrances to investing for retirement is that you may be servicing too much hard-core credit card debt, much of which is interest. Both fiscal partners may have credit cards doubling the family debt load and vastly reducing your net worth. Thus, it makes sense to pay down the debt on all credit cards, starting with those that carry the highest interest rates first. Aim to be 100 % debt-free of abnormal debt weighting in your net worth statement where possible (mortgages and car payments are normal).

You and your fiscal partner will appreciate the new clarity and increased financial freedom this gives. Slavery to debt repayment is financial bondage, and will increase fiscal-related emotional stress on responsible partners.

Start or maximize your monthly investment plan. Your plan will depend on your income and expenses. If you are young, begin investing now. Any given sum of money can double frequently depending on time and interest rate growth. At 6 % it can double every 12 years; at 4 % every 18 years. Simply divide the interest rate into 72 to get the number of years until doubling occurs.

This simple mathematical illustration reveals the importance of beginning to invest while you are young. If you are near retirement, you may ascertain that you need to ramp up your investing, increasingly over the fewer years you have. The average Canadian retires now at age 62. Become aware of your retirement options, choosing agreed strategies with your partner way ahead of time.

Reallocate assets as you near retirement. An investment portfolio still invested in close to 100 % equities near retirement is very risky. A portfolio must have some fixed income (government bonds, corporate bonds, safe mortgages, and real estate) to reduce stock market risk. Your partner’s risk tolerance while investing.

Take advantage of tax-saving vehicles. Registered investment vehicles can help you reduce or defer the tax hit. Some plans,can offer government grants that supplement your investment contribution to help your children go to post-secondary school. Discuss the viability of tax arrangements using registered investments best suited to both fiscal partners.

Don’t sell good investments amidst a volatile market loss. It may be better to stay invested and adjust your portfolio after the market begins to retrace any losses upward after a period of market volatility. If you hold a good fund, the stocks within that fund are probably good. Nevertheless remain aware of your investment goals and get periodic updates and review the situation with your fiscal partner. Your financial partner may not be able to handle stress caused by a volatile market so plan with this in mind.

Maintain financial accounts with transparency. Spouses and partners who share mutual financial goals have a right to be aware of the banking and investment accounts and movement of funds via frequent transparent discussion. Total honesty is necessary. One spouse should not borrow recklessly, nor use credit without the agreement of the other spouse, where funds are to be accounted together in mutual fiscal arrangements. There should only be private boundaries where agreed, such as business agreements, risk, or debt and/or income necessary for solvency. Business accounts or agreements increasing risk should not co-mingle with personal finance or accounts. Establish such boundaries in advance or hard feelings can develop.

 


EN 3.13

 

What are the benefits of an Employee Benefit Plan?

The following largely coincides with the guidance of the IRA’s information. The Information can change over time and your advisor and/or tax professional should be consulted.

Retirement can last a long time

  • Retirement can last for 30 years or more?
  • You might need up to 80% of your current annual income to retire comfortably?

Why should you set up a retirement plan, and what are some of the benefits?

A retirement plan has lots of benefits for you, your business and your employees. Retirement plans allow you to invest now for financial security when you and your employees retire. As a bonus, you and your employees get significant tax advantages and other incentives.

Business Benefits

  • Employer contributions are tax-deductible.
  • Assets in the plan grow tax-free.
  • Flexible plan options are available.
  • Tax credits and other incentives for starting a plan may reduce costs.
  • A retirement plan can attract and retain better employees, reducing new employee training costs.

Employee Benefits

  • Employee contributions can reduce current taxable income.
  • Contributions and investment gains are not taxed until distributed.
  • Contributions are easy to make through payroll deductions.
  • Compounding interest over time allows small regular contributions to grow to significant retirement savings.
  • Employee has an opportunity to improve financial security in retirement.

Examine the Future Retirement Income from potential savings in the following graph.

Source: Calculations by Adviceon

How do you set up a plan?

A good place to start is by contacting a tax professional familiar with retirement plans or an advisor and/or a financial institution that offers retirement plans.

Establishing your Employee Plan

You take the necessary steps to put your plan in place. Depending on the type of plan you choose, the administrative steps may include:

  • Adopting a written plan
  • Arranging a funding plan for the plan’s assets
  • Notify eligible employees about the terms of the plan
  • Developing a recordkeeping system.

Operating your Employee Plan

You want to operate your retirement plan so that the assets in the plan continue to grow and the tax-benefits of the plan are preserved. The ongoing steps you need to take to operate your plan may vary depending on the type of plan you establish. Your basic steps will include:

  • Covering eligible employees
  • Making contributions
  • keeping the plan up-to-date with retirement plan laws
  • managing the plan assets
  • providing information to employees participating in the plan

Drug Plan Management Solutions

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Drug Plan Management Solutions:  There is a wide range of drug plan options that can be fine-tuned to suit your organization’s needs, while allowing you to better manage the rising cost of prescription drugs. Yet you can still provide your plan members with the coverage they need. We can help you keep your drug plan affordable for both you and your plan members, by implementing drug plan cost management solutions.

Two-tiered plans:  A two-tiered drug plan design allows you to cover two formularies at two different levels of reimbursement. A tier-one managed formulary with a higher coinsurance can be supplemented by a more comprehensive formulary at a lower coinsurance level. This allows your plan to maintain broad drug coverage, while still lowering overall costs.

Managing your drug plan with formularies:  A formulary is a list of drugs the benefits plan will cover, out of the thousands of prescription and non-prescription drugs on the market today. There are many types of formularies, but the overall goal of each one is to control the eligibility of drugs, and therefore help manage drug costs by either: adding new drugs only after their therapeutic value and cost effectiveness have been proven, or allowing only generic drugs, or following the guidelines set by provincial governments.

Formularies may be designed such as:

Managing your drug plan with cost-containment options
We offer a number of plan design options to help you manage your healthcare plan costs. Let us help you determine which of these solutions fit your needs.

Using Generic Substitution
Cost reimbursement is established to the value of the generic equivalent of a drug, regardless of what has been prescribed, unless the physician indicates ‘no substitution’ on the prescription

Per-prescription deductibles:  This is the amount the plan member must pay for each prescription drug claimed. It can be set to a specific amount, or equal to the dispensing fee portion of the drug.

Coinsurance:  Coinsurance is the determined percentage amount that the plan will pay for eligible prescriptions after any deductibles have been met.

Dispensing fee limits:  This is the plan’s coverage up to the maximum amount of the fee pharmacies charge to cover their business expenses.

Drug maximums:  This is the maximum amount the plan will reimburse for prescription drug coverage per person, per calendar year; maximums can be set at a specified amount per year, or can be unlimited.

Note: Plan Sponsors in Quebec: The Quebec government has a public drug plan that covers anyone who is not eligible for coverage under a private plan. This plan is administered by the Régie de l’Assurance Maladie du Québec (RAMQ). The law in Quebec also requires private drug plans to provide equivalent or better coverage than the public plan. Plan sponsors in Quebec are limited in how much they can alter their drug coverage, since they must ensure it conforms to RAMQ.

Note: Plans and coverage vary depending on the carrier used.

Dental Care Benefits

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Dental Care Benefits

Whether you and your plan members require basic maintenance or major procedures, group dental care benefits help cover the cost of dental services and supplies offered by licensed dentists. Employees significantly value dental care benefits. Many coverage options are available, and electronic “real-time” claims filing directly from the dentist’s office can save time. Your organization can specify coverage percentages and/or apply a fixed dollar amount per year.

Dental care covers such options as:

  • Ongoing care and maintenance of teeth, roots and gums
  • Diagnostic services – exams, radiographs, X-rays and tests
  • Preventative treatment – polishing, scaling, oral hygiene instruction, it and fissure sealants, and space maintainers
  • Minor restorations – fillings, prefab crowns for primary teeth, and other services completed in conjunction with minor restorations
  • Endodontics – root canal therapy
  • Periodontics – treatment of gums
  • Denture maintenance – relines and rebases
  • Oral surgery – removal of teeth
  • Adjunctive services – anaesthesia, medications and pain relief

Major coverage includes work such as:

  • Crowns and Onlays
  • Dentures and bridges
  • Related items such as posts, pins and denture-related surgery
  • Replacements when the existing appliance is five or more years old
  • Appliance maintenance – denture relines and rebases, denture or bridgework repair

Orthodontic coverage includes work (with limitations) such as:

  • Ortho-exams, X-rays, diagnostic radiographs and casts
  • Braces and retainers (usually limited to children between certain ages)

Note: Plans and coverage vary depending on the carrier used.

Strategies for individuals and families

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An organized strategic financial future should be designed with these areas in mind:

  • Financial independence at retirement to provide you with a sustainable income.
  • Disability and Critical Illness Insurance to protect your income by providing replacement income if you are sick or disabled.
  • Liquidity of your assets in the event that an emergency or opportunity presents itself.
  • Survivor’s financial and estate protection at death provides immediate cash to meet short-, medium- and long-term living needs.

A balanced plan must also address the needs of elder care as our population ages.

You should address the potential for a long-term illness

Long-Term Care Insurance is designed to provide financial relief and assist with the daily expenses at older ages for personal care required as a result of loss of basic abilities to dress, bathe, transit to or from the bathroom, maneuvering in or out of bed or chairs, or feeding yourself.

Registered Retirement Planning

As we discuss retirement planning, we will look at Canada’s registered plans. For example:

  • The Registered Retirement Savings Plan (RRSP) while building your nest egg, and a Registered Retirement Income Fund (RRIF) during retirement, offer you the chance to defer tax on your investments and achieve some tax relief.
  • Tax-Free Savings Plan (TFSA) allows you to save money while deferring investment income on the after-tax monies invested.

We’ll help you create a plan just right for you.

You can enjoy peace of mind knowing you have a financial strategy that provides you with confidence that all of your financial resources are working together toward your long-term financial goals.

Your goals and dreams are as individual as you are. 

Whether you’re starting a new family, preparing for retirement, or running a business, we will work with you or your business to build a plan to meet your needs. A customized plan can help you manage risk and bring your goals within achievable foresight.

We can help you devise a plan that addresses objectives such as investment and retirement planning; minimizing income and estate taxes; assessing your life and disability insurance, will, and estate planning needs. A good financial strategy that reflects your changing life needs is unique—that is why we’ll support you with a financial analysis that will help you make wise financial decisions designed to meet your long-term and short-term goals.