Protect Wealth – Page 3 – Adviceon Library

How much life insurance should I purchase?

Determining, how much life insurance is necessary for your family’s financial security will require an objective viewpoint as you assess the following:

Evaluate the death benefit that you need.

Your advisor can assess the death benefit you need, by using a mathematical calculation that is referred to as a “capital needs analysis”. You may want to have enough capital to pay for your funeral, final taxes in your estate, outstanding loans or a remaining mortgage, and/or your credit card debt.

If you earn an income and support dependents, you may need to provide a significant amount of money to invest, from which your family can earn an investment income to provide a quality lifestyle. Life insurance can also provide enough money to cover a child’s education or top up the potential retirement income needs of a spouse if a breadwinner dies.

Where there are two spouses providing an income for the family, many couples purchase enough life insurance to reciprocally protect the potential income loss of one or both income sources, by covering both spouses appropriately.

Business Owners have special insurance needs

In many families, one spouse is employed, and another is self-employed. If one spouse owns a sole proprietorship business, he or she may need to consider income replacement insurance which can create a replacement paycheck in case you become disabled. There may be business-related debts and expenses, which if not paid, can create liabilities for the family.

If you are in a business partnership, you may want to look at establishing a buy-sell agreement, and/or succession planning facilitated by life insurance capital if you or a partner die; or income replacement insurance if you or a partner are disabled and can no longer work at your business.

Critical Illness Insurance

Many are also using Critical Illness insurance for personal or business planning, which can offer capital solutions if one becomes critically disabled. Once you are certain how much you need, your advisor can offer quotes and several plans most suited to your circumstance.

How do you purchase segregated fund units?

Segregated funds from insurers offer you an insurance policy contract.

The value of your interest in a seg fund is equal to your share of the securities owned by the seg fund. This is credited in terms of the number of units an investor owns of a seg fund. With seg fund policies, you own an interest in an investment portfolio as stated in an insurance policy contract.

You pay premiums that “deposit” money into a seg fund policy that further invests in the seg fund.

Why is life insurance coverage motivated by love?

Look through a wider lens to see life insurance at work. Life insurance protects you against income loss and the adverse effect that less income can have on your family if one were to die or have a disability.

As you build on that foundation by creating your assets and net worth, you may need to reassess your level of coverage. Caring for others is at the root of life insurance planning.

You have family responsibilities. Adequate coverage allows a surviving spouse and surviving family to maintain their current lifestyle.

You can support a stay-at-home parent caring for your children. If one parent’s income is currently relied on to provide all living expenses, the death of that individual may cause financial insecurity for all family members, particularly when there will be a stay-at-home parent caring for the children.

Life insurance protects children. The coverage needed will be affected by:

the number of children and their ages
educational expenses of the children
the current value of your assets
your current income
debt accumulation
your future employment goals versus stay-at-home parenting
your overall financial goals

You can place young children as secondary or contingent beneficiaries; thus allowing them to receive the death benefit if your spouse if the primary beneficiary predeceases them. A trust can manage funds on behalf of the children. It can direct investing the proceeds of the death benefit to create guardian income for loved ones.

Continue coverage throughout college or university. When children go to college, many of us tap into our savings to help meet their tuition and housing expenses. We may purchase a child’s first car, or pay him/her income for one or more years. If you die without providing continuing support, your young adult child may need to quit seeking a higher education due to a shortage of funds.

Protect your income in case of a disability. Have you thought about how becoming ill or injured could affect your children’s financial security? Would your income be reduced, placing them under duress? Disability insurance is designed to replace approximately 70% of your pre-disability income and is especially necessary for the self-employed.

Why are segregated fund management fees higher?

Reserves must be kept to protect your guaranteed capital.

A life insurance company holds a reserve in relation to the capital guarantee provided in the policy contract. Because of the need to assess and insure the capital guarantee, the involvement of life insurance is required.

The insurer is required by law to maintain adequate reserves of capital that may be needed to pay any future liability due to a capital loss. Companies now offering seg fund investments also work in conjunction with a life insurance company to facilitate this reserve and insures the capital guarantee. The management fee charged to the segregated fund includes the cost of that insurance.

What types of permanent life insurance are available?

There are several different types of permanent insurance some of which policies are similar.

Whole Life, also called “ordinary life insurance”.

This traditional permanent life insurance will cover the insured for his/her entire (whole) life. The premium payments generally remain the same for the life of the insured.

Variable Life. This permanent life insurance policy offers a fixed premium payment schedule (like whole life), while it accumulates a cash value account offering other non-guaranteed accounts which invest in securities, with the associated risk of the stock market (portfolio performance can fluctuate either positively of negatively).

Universal Life (UL). This plan offers more flexibility than traditional whole life insurance. Universal life insurance allows the policy owner increased flexibility to pay premiums on a flexible basis, versus a fixed schedule. However, a certain level of premiums must be paid into the policy to cover the costs associated with the insurance coverage. Failing to do so may cause the insurance policy to lapse. Flexible tax-deferred interest rates on the policy’s cash value (some have guaranteed interest rates) add to the appeal of a Universal Life policy.

Indexed Universal Life Insurance. This coverage provides a death benefit, with tax-deferred growth on your cash value account which is indexed to one or more stock market indices. Many allow for a guaranteed minimum interest rate to protect the policy owner against the odds of a market downturn.

Variable Universal Life (VUL). Blending the premium payment flexibility benefits of universal life insurance with an invested portfolio with the upside market potential of variable life, many VUL policies feature tax-deferred earnings. Allowed policy withdrawals and loans from the policy cash value (which will reduce the cash value and death benefit) are subject to interest charges. Like variable life insurance, VUL policies are designed to invest primarily in securities with the upside potential to grow the policy’s cash value, with the associated market risk of losing money. Purchasing the right life insurance is an important strategic decision as you aim for financial independence.

How can life insurance pay off my mortgage if I die?

Homeowners typically insure their mortgage and/or credit line debt with the lending institution which sells creditor insurance. This ensures that the indebtedness would be paid off upon the death of the debtor. An alternative route is to purchase a life insurance policy when signing the mortgage papers. Evaluate the following questions when considering buying mortgage life insurance through a lending institution.

Are you limiting your life insurance death benefit coverage? The lending institution’s life insurance death benefit is generally limited to the amount left owing on the mortgage (according to its amortization schedule). Conversely, if healthy, most people can purchase an amount well over their home mortgage debt. An increased death benefit could cover multiple liabilities such as increased debt resulting from fluctuating lines of credit, credit cards, or home renovation loans with any creditor.

Can you establish or change the beneficiary? Owning your own distinct life insurance policy allows you to designate and/or change a beneficiary who would have the choice of using the money for an alternate purpose, as circumstances require. For example, a surviving spouse may simply desire to keep a low-interest mortgage. He or she would have the option to invest all the life insurance proceeds or pay off higher-interest debt. When using creditor insurance the mortgagee is the only recipient of all of the proceeds.

Is the death benefit creditor-proof? If you own the life insurance policy, the death benefit payment is generally creditor-proof. With creditor insurance only your financial institution collects the proceeds at death.

Who will own and control the life insurance coverage? You have no ownership or control over a life insurance policy bought only to pay off the debt of a mortgage with one financial institution. It terminates upon repayment of the mortgage; or when you rewrite your mortgage with a different financial institution; or if you sell your house, or foreclosure occurs.

How can I ensure the portability of my mortgage insurance? Many people like to shop around for lower interest rates and/or unique mortgages. An individual life insurance policy may be kept as long as you wish, for portability from mortgage to mortgage among different lending institutions, or for other life insurance needs; such as if you were eventually to have capital gains tax payable on your cottage or a second residence at death. This can also be pre-funded when you own your own more permanent policy.

Can mortgage insurance be cancelled? Personally owned life insurance policies cannot be cancelled by the insurer. However, the creditor insurance may be cancelled upon renewal of the mortgage, especially if one’s health deteriorates. Such cancellation may mean that you have become an “uninsurable risk” by the next time you renew your mortgage. It is precisely during a health problem that one might choose to increase the mortgage or associated debt (where the home is the collateral in a hybrid type of mortgage with lines of credit, etc.).

Can you customize your coverage? Unlike creditor insurance that is directed by the creditor to provide protection for the creditor, personally owned life policies allow individuals to tailor their coverage to their specific needs and requirements. Such flexibility could allow for the inclusion of policy provisions that would allow for the purchase of additional insurance regardless of health, the conversion of a term policy into permanent coverage, or a variety of other customizable options to meet individual needs.

Will a surviving joint-owner retain coverage? Creditor insurance may cover two parties who jointly mortgage their property. However, it pays only on the first death, even if the two were to die. When one spouse dies, creditor insurance no longer covers any survivors. In contrast, by owning your own insurance policy, two spouses or partners may each own separate life insurance death benefits. In the case where both parties die, double the benefit would be paid, thus adding increased value to the estate. If one survives, the coverage on that life continues.

Can you avoid future insurance medicals? If one is currently healthy it may pay to take the opportunity today to acquire a personally owned life insurance policy––or increase the coverage on an existing plan––and keep it over time. In this way, you may be able to sidestep the limited future functionality of mortgage insurance offered by creditors. Many group insurance plans and creditor plans offered by insurance companies are asking for full medicals before initiating the coverage.
What about group plans offered at work? Similarly, insurance offered by any group benefit plan, especially in light of plant closures, carries the risk that group insurance would be lost at some point. And any plan offered by a bank or a credit card is actually some form of a group plan offering no true ownership, portability, or guarantee of long-term continuance.

Note: Before cancelling or excluding the use of creditor insurance, make certain that you are properly protected with a life insurance policy benefit appropriate to your financial needs. In some cases, you may need to assign a life insurance policy for collateral at a financial institution. There may be disability insurance coverage included with your creditor insurance that may be important to acquire or retain. There may also be costs or fees associated with cancelling or replacing an existing policy.

How are Segregated Fund distributions handled?

Distributions are received by the segregated (seg for short)) fund from the assets held, such as stocks and bonds. Depending on the assets held, distributions could include Canadian dividends, foreign income, other income, and capital gains. A seg fund may also realize capital gains upon a disposition of fund assets (including redemption of seg fund units). It is also possible for a seg fund to incur capital losses on the disposition of fund assets. Seg fund income as well as capital gains and losses are allocated each year to the contract holders.

Tax rules that apply to seg funds are quite complex, especially when a spouse dies who holds a seg fund contract in an RRSP. However, there are tax strategies that your insurance advisor can develop to make the use of seg fund’s ability to establish a policy beneficiary.

You may be a good candidate for seg fund use if:

You are a conservative investor and yet want higher returns than GICs offer.
You are a pre-retiree who needs growth, but can’t afford to lose money over the long term.
You are a senior who requires estate protection and certain capital guarantees.

What advantages do segregated funds offer?

Segregated funds limit the amount of money you can lose in order to protect your investment and your family’s lifestyle. A segregated fund offers the investor fund choices such as equity funds, bond funds, balanced funds and money market funds, etc. Some of your capital is guaranteed by a life insurance company with some advantages.

1. Guaranteed capital upon maturity or if you die. A seg fund has a maturity date after a period of years such as 10-15 years, or at death. Upon the maturity date, an amount of 75% to 100% of your invested capital is guaranteed by the life insurance company. If you die your designated beneficiary is paid a guaranteed sum.

Resetting the capital guarantee. Some companies permit the resetting of the guaranteed capital at a higher value with a new maturity date. Long-term investors may appreciate this safeguard, especially when investing in equity segregated funds, though there may be higher associated fees.

2. Creditor protection. A seg fund with a preferred beneficiary named on the contract might be protected from creditors if an investor faced a lawsuit or bankruptcy. After the policyholder’s death, all beneficiaries are protected against claims made by the policyholder’s creditors. Such protection may be worth the higher management fees of a seg fund where an investor either owns a business or is nearing retirement.

3. Estate exemption from probate and executor fees. When a seg fund policyholder dies with a beneficiary designated on the policy (outside the estate), the fund exempt from probate and executor fees. Your beneficiary receives the policy benefits quickly while the estate remains responsible for any final taxes.

Note: Talk to your advisor about historic or current legislation that may or may not affect your province.

Will my life insurance planning change over time?

Life insurance is an essential component of your financial security. Evaluate your policy as you move into a new stage of your life. Be sure it meets your current needs. As we journey through life, our circumstances change dramatically. So do our needs for life and disability insurance. Review your life insurance at these times:

When you get married. Assess your life insurance coverage to ascertain if it will meet your objectives if you die. Carry adequate coverage to allow your surviving spouse and surviving family to maintain their current lifestyle.
It may be best to name your spouse as the policy beneficiary rather than leave bequests via your estate’s will. This will ensure that your spouse receives the monies without having to go through the process of probate.
If your group insurance is being reviewed. One spouse may have an employer-sponsored group insurance package that you can review. Establish coverage for the other spouse if offered in the plan; and/or purchase additional insurance directly from a life insurance representative.
If one or both spouses are in business, consider putting income replacement insurance in place, in case of an illness or disability.
When you have a young family. When you are starting a family, life insurance is purchased to provide new tax-free capital in case one or both of the parents should die. If one parent’s income is currently relied on to provide all living expenses, the death of that individual may cause financial insecurity and stress for all family members. Equally important, consider the financial cost of a stay-at-home parent. Compare potential increased daycare and housekeeping expenses if a spouse needs to work. Both parents can carry adequate life insurance to cover any potential expense that could result from their death.
As the family grows. Re-evaluate your life insurance in view of your changing goals. Where two parents depend on each other’s combined income, consider the duration a surviving spouse would need to stay home with the children. Life insurance can help the family meet its financial obligations and maintain its current lifestyle.

Your life insurance needs will be affected by:

the number of children and their ages
educational expenses of the children
the current value of your assets
your current income
debt accumulation
your future employment goals versus stay-at-home parenting
your overall financial goals

Beneficiary Strategy You can place young children as secondary or contingent beneficiaries; thus allowing them to receive the death benefit if your spouse or preliminary beneficiary, predeceases them. A trust can manage funds on behalf of the children. It can directly invest the proceeds of the death benefit to create necessary guardian income.

Managing family insurance risks Each of these areas of risk may benefit from careful life insurance planning:

At the time your children go to college or university. When children go to college, many of us tap into our savings to help meet their tuition and housing expenses. We may purchase a child’s first car, or provide an income for one or more years. If you die without providing continuing support, your young adult child may need to quit seeking a higher education due to a shortage of funds.
When you want to protect your income in case of a disability. Have you thought about how becoming ill or injured could affect your family’s financial security? Would your income be reduced, placing the family under duress? Disability insurance is designed to replace approximately 70% of your pre-disability income and is especially necessary for the self-employed.
When making the decision to protect your lifestyle in case of a critical illness. This insurance pays out a lump sum in case of a critical illness such as heart attack, stroke or cancer.
If you have ageing parents and are concerned about expenses. You can insure your parent with life insurance to provide enough money to pay for funeral expenses and or pay off debts. If your parents are dependent upon you for care, you may want to consider insuring yourself, naming a dependent parent as the beneficiary, to provide elder-care income that will still provide for their care in the event that you pass away.
When you will face a large tax liability in your estate. As you approach retirement, you may have accumulated assets that will be taxed on capital gains, such as a cottage, a business, or your accumulated savings. Life insurance can provide for final income tax that will come due if the estate is not passed on to a surviving spouse or a dependent. This can include paying taxes that may be due on remaining retirement savings assets.
When you’re considering a donation to an organization or charity. Individuals may wish to provide money to a cause or organization that they strongly believe in and life insurance can be a valuable tool in providing such assistance. By naming an organization or charity as a beneficiary you can ensure that your wishes are followed. Additionally, there may be tax benefits associated with donating life insurance policies to recognized foundations, charities or schools.

Segregated funds diversify your investment

Segregated funds have their shares protected to a certain degree by insurance.

The insurance protection advantage The notable advantage is that some segregated funds offer to insure up to 75% or higher, of the principal invested in a segregated fund if held for a number of years, typically 10. Depending on the situation, there may be some creditor protection if an investor went bankrupt if he owns segregated funds.

Diversification advantage Segregated funds offer the investor the benefit of maximum diversification, with minimal exposure to any one stock. You pool your investment with the combined capital of other investors, which allows everyone to invest in many companies, not just focus on two or three larger stocks.

Segregated Fund managers usually diversify among at least 20 companies, investing no more than 10% of the fund’s total dollars into any one security.

Other advantages of Segregated Funds

• You can buy additional shares of a segregated fund at any time.

• An automatic purchase plan called dollar-cost averaging (DCA) lets you invest equal amounts at regularly scheduled intervals. You buy more fund shares when the prices are lower, fewer when prices are higher, thus averaging out the price of the shares purchased.

• Segregated fund contracts can be registered in RRSPs or RRIFs.

• Dividends, where applicable, are easily reinvested.

• Some fund companies allow transfers between their funds without charge.

• You can borrow against segregated fund assets (unless the contract is registered).