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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.

Why is an estate plan important for retiring business owners

When a business represents the major component of an estate, planning is vital. Entrepreneurs may think about retirement planning, yet not all business owners implement plans to allow them sufficient freedom to follow their leisure dreams. If you ask the owner of a successful small business if he or she plans to retire, you may hear, “I will never retire because I love what I do”, or “I will retire in 10 years or so.”

Why is this risky planning? Those who feel they never want to retire may not have developed retirement investment interests outside of the company aside from RRSPs. However, most believe their company will provide investment capital when sold, or, if passed on to the next generation, a salary or dividend payments.

Are all your eggs in one basket? Therefore, for some, their personal financial stability is riding on the future success of the company. When a business represents the major value of an estate, planning becomes necessary. Yet, many are not convinced that they need to plan their estate or the succession of their business.

Estate Planning is vital to Succession Planning. Despite the financial importance of their business, most business owners do not know what the tax liability would be if both spouses were to die. An estate plan can ensure that these taxes will be paid from one or a combination of the following sources:

Life insurance;
The business, from cash flow or liquid assets;
RRSPs (also taxed when both spouses die);
Non-registered investments.

Consider the following:

Take the time to do some basic estate planning to determine who will take over the company, and where your retirement income will come from. Revise or complete both your will and power of attorney. Review your personal and/or corporate-owned life insurance, disability coverage, critical illness insurance, long-term care insurance and key-person insurance.
Many business owners carry life insurance but miss a very important coverage related to health. Disability insurance and/or critical illness insurance can pay off a buy-sell agreement and provide income.
In some cases, the payment of relatively small life insurance premiums can entirely solve the estate’s future capital gains tax problems, or generate capital to replace the tax that will be payable on your RRSPs when both spouses die.
Life insurance can also eliminate company debt and help a succeeding son or daughter with new business capital. Finally, it can help fairly equalize the division of your estate among all of your heirs.

What is the mind-set of financial independence?

Establishing the right mindset towards money will eventually show up in your investment portfolio as wealth that can provide a lifetime of income and the eventual achieving of financial independence. This may be impossible, without understanding how attitude affects one’s financial destiny. First, let’s examine a few of the correct attitudes versus erroneous thinking that could block our way.

Agree about money Most people need to consider the input of another person regarding how money is spent, invested, and managed. The problem is, many people never agree to a strategy of investing and stick with it – they’re still broke while arguing or doubting how to invest at age 55. Find a compromise, and stick to an agreed-on plan to invest.

Know the state of your finances Many never reconcile their bank account or organize their financial receipts or statements. They continue to make purchases, but never really know if they can afford them. Financial independence depends on financial management – you will need to establish orderly control. Purchase a filing cabinet, trays for receipts, files for all categories of purchases – a place for everything. Consider using computer software such as Quicken, posting your income and expenses weekly. Reconcile bank accounts and know your balances on a weekly basis, and your financial position, on a quarterly basis.

Buy only essentials on sale Sale signs are everywhere – the consumer can get up to 70% off in some cases. Those who sell goods know that sale signs encourage people to buy. Consumers legitimize the purchase in their minds, on the basis of saving a few dollars on an item. The problem is that over time one may buy many items on sale, despite the fact that he or she is spending above the household’s discretionary income, and may max the credit cards. While overspending this way, unmanageable debt is created. Instead of using discretionary income to invest; it all goes to paying down escalating credit card bills and high interest. In order to break free of this habit, save money first, and buy based on true needs. Stay clear of malls until the habit is broken. Be careful not to go to the other extreme and become a scrooge, ruining life’s enjoyment for others. Save money first, and buy based on true needs.

Limit need-for-prestige spending Many people buy more expensive computers, stereos, cars and gadgetry in order to impress the neighbours – yet these items depreciate in value over time. Add to that, countless upgrades when we become discontented, comparing new arrivals on the market. Such buying behaviour may create a false sense of prestige, negating one’s future retirement security. Income may drop or disappear all too soon, leaving many unpaid liabilities. Invest in assets that appreciate in value, such as a home, equity investment funds, or segregated funds, while not spending more in relation to increased income.

Eliminate procrastination based on fear What occurs in the U.S. or the Euro zone affects us all collectively, only insofar as how the markets that you invest in respond. Over 50 years, we find that the U.S. markets initially declined in a crisis, yet each recovered in a remarkably short period of one week. After the Suez Canal crisis: markets down 1.5%, gained 4%. The arms blockage in Cuba: down 2%, climbing back 4%. President Kennedy’s assassination: a decline of 3%, rising again within one week, 6%. The financial crisis of 2008 ruined many people’s investment retirement portfolio if they sold their funds or stocks. Those who were patient saw most of their funds and stocks climb to much higher values than before the crisis began.

How do individuals or families accumulate wealth?

They save by moving money received as income into a separate account before they spend it. It doesn’t matter if you have received an inheritance or won a lottery – the rule is the same. Save, and then invest before you spend.

Here are some excellent reasons for investing.

It gives us a sense of financial security, earned by continued discipline and adherence to the principle of saving, which adds to our sense of personal dignity.
We are eventually rewarded by seeing money make more as it works for us, gaining and compounding.
Saving paves the way for the actualisation of our goals and objectives in life, such as acquiring a home, making significant purchases, travelling, putting children through college or university, or going back to school ourselves.
Accumulated assets will increase our net worth and bring us financial independence. Such control and flexibility are within our reach if we start now.

Stumbling blocks to saving. Don’t defer to only saving what’s left at the end of the month or waiting until “things get better”. Usually, nothing is left at the end of the month, and things rarely improve because the philosophy has stayed the same – spending above income continues, and debts increase. Except for a home mortgage or loans for motor vehicle transportation, and in some cases for investing, debt is a deterrent to financial independence. Commit to a strategy to pay down all household debt and save at least 10-20% of your monthly income.

Inflation is a constant battle. Over the years, inflation has reduced our buying power. When increasing to reduce inflation, interest rates also increase our debt repayment load as a percentage of income.

Planning for your dependants. Ensure you have sufficient life insurance to pay off your debts, such as credit card balances, car loans, IOUs, and any business-related debt. Incorporate this with enough coverage to provide future income for your dependents. This is especially necessary if your debt exceeds your annual income, as it does for the average household where debt runs at 150% or more of income.

How can I assess the expense of leasing or buying a car?

The rising cost of driving.

The rising cost of fuel is making many consumers change their thinking with regard to driving expenditures. On May 5, 2011,the following was reported:

“General Motors Co. (GM-N) reported its highest quarterly profit in more than a decade, helped by fuel-efficient cars and smaller SUVs that were in demand as gas prices marched higher. The biggest U.S. automaker said Thursday that it earned $3.2-billion, or $1.77 per share, in the first quarter. It was a great start in a challenging climate that would have sunk the company just a few years ago when it was too reliant on gas-guzzling pickups and SUVs for profit.”

On average you will need to work 30 weeks to pay for your vehicle (not counting fuel or repairs). Because driving a car is one of the largest expenses in an individual’s budget, plan this expenditure carefully. From the graph you can see that expense accumulate given a payment of an average vehicle payment of $500 per month plus gas.

Kilometres are presented as the average busy driving use per vehicle as promoted by vehicle manufacturers of 24,000 km per annum. Both monies spent on a car payment and for fuel are added in the final column. Adviceon does not claim accuracy for the numbers represented as extrapolations in the table, and uses them only for illustration. Errors and Omissions are excluded.

Reduce your debts and increase your financial security

In 2008, escalating mortgage debt caused a financial crash that decimated the retirement income of many. Debt control is becoming a critical issue.

Credit interest eats away at wealth. Every household has a budget and must live within its means and save for the future. We each must be careful not to allow debt interest repayment to reduce our ability to live comfortably or retire with financial security.

Interest on the debt except for investment or business debt is paid with after-tax income. It reduces our capacity to pay down the principle on our mortgages or increase our investments for retirement.

Shift your financial paradigm away from debt The fact that so many people act without discretion while increasing debt shows that consumers need a more mature view of finance. We need to examine our genuine need for each purchase and consider the effect on our family’s income-creating ability before giving in to the temptation to buy more of what we cannot afford.

To avoid debt, we need to govern our response to each desire to have what we cannot afford. How do we do this? Work at not buying what you cannot afford, meaning living by a responsible paradigm of fiscal temperance. Learning to say to yourself, “No. I will survive without this item and will be better off debt-free!”

“If worst comes to worst, meet poverty halfway by retrenching expenses. That is what I am striving to do and reform before poverty forces me to do so. Furthermore, I have established enough levels in my soul where I can get along with less than I have; get along contentedly, I mean, Not by the calculation of our income, but by your manner of living and your culture, is your wealth really to be reckoned”. Montaigne

Reduce debt for societal justice Good financial discernment directs our actions when considering taking on debt. If a man, for example, has borrowed fifty dollars from a friend to go to a concert with his girlfriend, the goal of fiscal justice is to pay his friend back what is due to him. In conformity with the right reason, Justice demands that the fifty dollars be paid back. But how and when shall it be paid back? An imprudent man might never pay it back, so he would fail to observe the rule of social justice in finance.

Develop a strategy to pay back debt To pay back debt requires the resolution to set aside a small sum from our income each week or month until we have allocated repayment of our obligations. Look at all of your debts and begin to pay down the higher interest-bearing debts first. Another approach would be to pay off the smaller loans and credit cards first to achieve victories sooner while creating the habit of debt reduction.

What is your financial viewpoint? We must be determined to be directed by wise discretion regarding how we use credit to attain financial goals. This is for the good of all – family and society. Your financial advisor can guide you to reduce debt and increase your investment portfolio.

How do I diversify my portfolio?

By diversifying among carefully selected, different asset classes, you reduce the risk of being over-exposed to any particular asset class.

For example, an investor may hold assets such as bonds, GICs, balanced funds, equity funds, foreign equities, etc. The adage of “not putting all your eggs in one basket” applies to a diversified portfolio of assets. Having 10 different equity funds in a portfolio does not mean that an investor’s portfolio is diversified.

How do I bear up in a Bear Market?

If you are an investor who remembers the mortgage debt crisis of 2008-9, you know that the market lost significant value. From an investment standpoint, the real downside occurred precisely when some investors sold off their equity holdings due to fear mid-way or near the end of the market devaluation.

Hindsight is 20-20. The people who financially survived this market anomaly were the ones who did not sell their good stocks and equities held by investment funds. Many risk-averse investors who may have been tempted to sell but did not, in the long run, received a blessing in disguise! They had an opportunity to hold on and patiently watch their funds’ unit values increase again in one of the most extended bull market periods to 2014.

Investor risk is part of life in this world. Geopolitics, macro- and microeconomics, corporate banking and national solvency pose a significant financial risk to the world’s capital markets. Massive debt held collectively by individuals, companies or sovereign nations can indirectly affect currencies, bond markets, and interest rates.

Bull and Bear markets are cyclic. The nature of the market is cyclic. If there is a hurricane warning, you know it is coming and don’t pitch your tent near the beach. Yet, with the stock market, you rarely know when a correction or a bear market is coming (when the stock markets decline 15-20% in value for some time). Investment fund managers will work to retain your value while looking forward to the markets’ recovery in these periods. The intelligent investor who is well-studied and cautious is nevertheless a risk taker, realising that one must hold on to investments patiently until the stocks in the fund portfolio regain any lost value and enter a rising bull market period.

The market moves in mysterious ways. Though the major world stock markets went through a correction in early 2015, we saw some significant markets in North America break records. On March 12, 2015, for example, though four of our Canadian banks were down below 10-17% from their 52-week high, the Canadian TSX was only a quarter of a per cent below on the same day. This shows how various sectors can be in or out of favour and move up and down due to market concerns. Despite the TSX doing well, on March 12, 2015, the TSX Energy sector was down 38% due to the oil prices dropping worldwide, presently a great time to buy when stock prices are lower in energy-related investments.

Moving money in a family of funds Most funds allow you to carry a portion or all of your money into the money market, bond, and balanced funds amidst an investment fund family (those offered by the same company), or your advisor may be able to move them into an alternate investment vehicle.

Buy more fund units when prices drop. Consider seeking opportunities among bargain-priced investment fund units. In this way, wealth can be created when buying stocks of many companies held by investment funds when they are priced lower. If you take this strategy, you must be ready to stay invested over the long haul.

An effective Dollar cost averaging (DCA) strategy can win. This involves buying fund units at regular intervals and investing the same amount of money each time. Thus, you buy more fund units when the value is lower and fewer when higher. DCA is the wisest investment strategy to utilise during a long-term bear market because you increasingly purchase more fund units at lower prices. If you need to get more familiar with the benefits of that concept, please feel free to talk to your investment fund representative.

As you realise the risk of investing in producing long-term gain and beating inflation, you can make bear markets work for you if you are patient. This is because a bear market paves the way to the next bull market when rising prices may take your investment funds higher in value.

How can I avoid making financial mistakes?

Every good decision requires a thorough understanding of time-tested financial guidelines. Today we are witnessing an age of entitlement, in which many people are incurring debt as they put their wants ahead of their needs.

Here are a few principles that you’ll need to consider when making every financial decision:

Avoid speculation.
Aim to increase your net financial worth by increasing your income and/or education to advance your position, rather than engaging in speculative schemes. An enticing program or a “guaranteed” money-making scheme may be unethical, illegal or simply unrealistic, not to mention risky.

Every monetary strategy must be assessed in the light of your individual goals while asking these questions: “Is this venture necessary?” “Could this venture fail or cost me money, negating the so-called benefits?”

Keep your finances current.
Manage your finances day to day, according to your monthly budget and financial goals. It’s best not to borrow money beyond your abilities to repay. When investing or consuming, consider every financial obligation in light of known current income or available savings, not as-yet-unknown future change of income or opportunity, or potential income.

Maintain a frugal reputation.
Consider all decisions, especially financial decisions, on the basis of their effect on your reputation, staying true to financial commitments and maintaining an impeccable credit score.

Give. Do not loan.
Avoid lending to those in need if giving is possible. If someone approaches you requesting financial help in order to acquire “wants” or “desires,” seriously question the potential for impulsive spending. However, if that person is in need and your family’s financial well-being will not be jeopardized, consider your ethical responsibility to supply that need on an interim basis. For example you may provide $100 to a family in need for groceries for a month or two until they get back on their feet.

Never co-sign, even for your best friend.
To co-sign is to pledge your family’s personal assets against the debt of another. This means that your energies in life’s ventures (for which you have been paid over time) are being pledged against another’s liabilities and could mean the potential exhaustion of these life energies by a person whose actions you have no control over. You may also place yourself and/or your family in a situation where you legally assume the debts, as well as the legal issues associated with documents co-signed. This could in turn involve liability of collateralized assets like your car(s), or house and your income, or even culpability when there is harm to a third party. Though you may know an individual, often you do not know anyone in the related financial institution, which will hold you responsible for the debt once you sign an agreement. What if they demand payment or sue you for obligations?

Moreover, there is also a tremendous potential to harm your relationship with the individual for whom you co-sign. By signing, you may enable a person to engage in a risky venture, instead of holding off or reconsidering all alternate options.

Avoid indulgence.
Discern the difference between “needs” versus “wants” in every financial transaction — including purchases of material goods and investments. Distinguish between luxuries and necessities and ask: “Do I need to find fulfillment through this expenditure now?”

Prepare for decreases.
Prepare yourself for unexpected decreases in funds as a vital part of keeping financially current. Ask: “What would happen if there were even a small decrease of income or available funds?” “If there was a sudden drop in my income, would I need to drastically reduce my current living standards?” Avoid operating at the upper limit of income or cash on hand.

Let peace rule.
If a financial decision process makes you feel uncomfortable, the inner turmoil (known as lack of peace) may be your conscience guiding you according to your innate higher values. Consider the pros and cons in the light of all your opportunities, including saving money for a particular goal. If you do not have peace, wait, sleep on it and then see how you feel, or do not get involved in the objective or expense. Moreover, if a quick decision is required (such from sales pressure), do not get involved. Take the time to think about each decision, carefully weighing the potential consequences of either gain or loss.

What final expenses occur after my death?

Many watch their parents grow older, and some are passing away. Children of aging parents could face the unpleasant task of last minute planning and subsequently receiving invoices for large funeral and burial expenses.

It is wise to plan your burial ahead—even if you are in great health—by establishing dialogue with everyone concerned. In addition, make sure that you have a will in place that reflects your wishes. Funeral and burial expenses can be expensive. Think over some planning questions now to evaluate your options such as:

• Should the service be in a religious sanctuary? Some people are very committed to their religious affiliation. Often in these cases, the service is held in a sanctuary where the congregation is present.

• What funeral home should be selected? Usually people select one that has been used for other family members over time.

• How do I make arrangements with the funeral director? They are professionals who take care of the many details of the services. Your loved ones will appreciate this preparation.

• Has my burial option been selected? The common burial methods are: earth (and should the plot be near other family members?), cremation, or mausoleum.

• Who shall speak on your behalf at the service? Often your religious leader or someone close to you will say a few words at your service, working with the funeral director.

• Should you request a donation to a charity in lieu of flowers? The immediate family can buy flowers, working with the florist and funeral director. Others might want to donate to a charity of your choice.

• How can you get the best value for services rendered? Each funeral director will have various packages and prices to offer.

• At what location will the after-service (with food, coffee, tea, etc.) be held? Typically, they are held at the home of the deceased or a relative, a religious sanctuary’s social hall, or at the funeral home.

Methods of payment for these expenses. You can prepay your funeral package all at once or by making installments, or you can use life insurance to pay for it later with a tax-free benefit, specifically when needed at death, thus freeing up more cash for retirement. By making these decisions now, the pre-arrangements can save your family a lot of last minute stress and money.

Using life insurance for funeral and burial expenses. The timing of a life insurance benefit payouts is specifically designed to cover cash needs at death, one of which includes final expenses. Consider purchasing a life insurance policy to cover any amounts in excess of your pre-arranged funeral expenses. If it amounts to $50,000, buy a permanent policy for that amount (such as whole life, or term-to-age100).

Life Insurance for parents’ funeral expense. Often children will work to share the premium with siblings for a life insurance policy on the lives of one or both parents to cover their last expenses. This is preferred to the children needing to come up with the cash all at once. Additionally, it allows all the children paying the premium together, to help mom and/or dad. Life insurance works to solve these problems, while creating new cash right when it is needed.