Life Insurance – Page 13 – Adviceon Library

The Guardian Clause: Protect your children

A will can protect your children’s financial future

Very few Canadians have a will, and fewer have a currently updated will. Without a will, you cannot outline directives regarding your most “priceless asset” – your children. A will allows you to clarify your selection of a legal guardian for your children. Here are some steps to take to prepare for the transfer of parental responsibility when planning your will with your lawyer.

Choose an individual. Perhaps your parents, a brother, a sister or a friend could assume the appropriate parental role in your absence. Consider their living quarters, age, health, ethics, financial means and current family stress load. More importantly, talk to them and get their approval first. Do not simply assume that your parents or siblings will take care of the children.

• Select a contingent guardian in case the first choice refuses the guardianship, takes ill or passes away.

• Ensure that the guardian will have sufficient capital to provide for the children, which may include the need for life insurance. Know your current financial net worth and how much income it can generate for your children.

The guardian clause is only an interim appointment. In your Will you can insert a provision that you are appointing someone as your child’s guardian – which most lawyers do. It is important to remember that any such appointment is only good for 90 days, because it is an interim appointment only. It therefore allows all interested people to appear before the court, and the court will make the final decision about who will be the guardian. Why include the guardianship clause if it is only an interim appointment? You should include it, because the guardianship clause provides strong evidence of the parents’ choice of guardian, although it is not determinative.

Include the following parameters in your will:

• Choose a trustee to invest and manage any money that your children may inherit.

• Express your financial directives regarding the maintenance and education of your children and the age when they may personally receive the balance of the inheritance.

• Update your directives when your circumstances change, reflecting for example, changes in your net worth; a new child in the family; a deceased beneficiary or desired guardian; or special wishes regarding the transfer of certain assets to specific children.

• Choose a competent, informed, and trustworthy executor with the patience to follow time-consuming legal detail.

What is an Estate Bond?

Life insurance can ensure estate-planning tactics

Prominent in the ’90s, the term “estate bond” is an old concept of the life insurance industry that mathematically proves how life insurance can protect and transfer certain assets that may otherwise be left vulnerable to market-related erosion or taxation.

Although investment assets and life insurance are indeed different parts of your strategic financial goal-setting. They can work in unison to create wealth. How they work together goes far beyond the adage “buy term and invest the difference,” which simply uses term insurance at the level of basic financial protection, unlike the alternative, advanced features of the estate bond, built right into a tax-planning manoeuvre.

How does an estate bond help to defer taxes?

This concept is an estate’s all-encompassing wealth preservation strategy because it is designed to work upon the death of the insured. Although an estate bond is not an investment designed for short-term financial planning, it can increase the tax-free wealth that you pass on to heirs.

The estate bond is ideal for the investor who has already maximized his or her tax benefits using an RRSP or has significant investments in vehicles to defer capital gains tax. This investor may enjoy a thriving business enterprise, hold a large fund or stock portfolio, and want to maximize some of the capital that will be left to heirs.

Consider a situation in which a couple of age 65 would like to leave funds to their grandchildren to help them purchase their first homes as well as enhance their future.

How does it work? For example, with an initial investment of $150,000, you can acquire a joint last-to-die life annuity. This life annuity will pay $7,000 per year after tax (after the marginal tax rate is paid). This $7,000 payment is then used to purchase a permanent joint last-to-die life insurance contract – on either one spouse’s life or both spouses’ lives – with a face value of $350,000. At this stage of the financial planning, the $150,000 of estate value grows to $350,000, which will one day pass to the estate tax-free! Note: The figures vary based on circumstances and interest rates.

Note: Note: Joint last-to-die Life Annuity based on a male, age 65; female, age 65, single premium non-registered deposit of $150,000, joint survivor annuity. Life insurance is based on a male age 65, non-smoker, female 65, non-smoker, joint last to die for $350,000 death benefit (with a level cost of insurance, and increasing death benefit). Ask your financial advisor to compare the projected growth of permanent life insurance (some use tax-sheltered GICs and tax-advantaged segregated funds to enhance the face-value growth) versus taxable investments (such as equity investment funds and/or GICs). In most cases, the estate bond, along with certain guaranteed benefits, will far outperform the initial capital invested with respect to the after-tax value passed on to the estate.

The estate bond is definitely an estate-planning tool to maximize wealth payable to heirs after death. It is true that there is far less liquidity in the life insurance contract. Therefore, consider this advanced planning concept if you have already amassed enough money to guarantee a good retirement lifestyle. Because life insurance proceeds are paid to your beneficiaries tax-free, you can be assured that the government can’t take any tax bite out of this wealth bequeathed to your loved ones.

Plan to anticipate changing circumstances

Financial planning must anticipate change. Your plan will reflect your specific financial goals and objectives, with a consideration of your level of investment risk tolerance.

Your plan can be flexible enough to anticipate life’s many changes. Financial circumstances and responsibilities often change over time such as a career or income change; the birth and education of your children or grandchildren; major purchases such as a home; retirement; and other life events, such as a disability or need for long-term care.

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 do you transfer a family cottage to the children?

If you want your heirs to inherit the family cottage, rather than a capital gains tax bill, examine the benefits of life insurance. Only your principal residence can accrue capital gains without capital gains coming due in the estate.

Where the cottage has increased in value If the cottage has gone up considerably in value, would you want your heirs to inherit the cottage together with a large income tax bill? Where the property passes to the deceased’s spouse, taxation of the capital gain may be deferred. However, once it passes to the next generation, a nasty tax liability is finally due all at once.

Life insurance solution The most effective and least expensive way to cover any capital gains tax liability on a family cottage is to purchase a permanent life insurance policy on the owner(s) for the projected amount due in the estate. These plans often offer a competitive rate of return on your investment and the full benefit is payable as cash at death, entirely tax-free.

The solution is immediate An additional benefit is that by virtue of the life insurance guarantee, the entire coverage needed is available after the payment of just one monthly premium. Once the policy is in force; if you die, your beneficiaries will have the cash to pay the debt, rather than having to quickly sell the cottage to pay taxes due.

Consider taking out a permanent policy on your life (or a joint policy that insures your spouse as well) that will increase in value to meet the tax on the rising capital gain on your cottage property.

How does a family adjust their level of life insurance?

As life insurance needs change through your lifetime you can parallel those anticipated changes with multiple life insurance policies. A capital needs analysis or review reveals the money you would need to meet your current and future needs. This capital need can lessen over your lifetime as you accumulate assets.

For most families The years of child-rearing present the largest life insurance need to create capital for income replacement, child care, clothing, food, college education and the extras.

What plans are best?

Young families may purchase a large personally owned term insurance plan, or combine it with a small amount of permanent life insurance, depending on affordability. The most important is that the family’s needs are covered properly. Note: Group insurance from work may run out if you change your employment or lose your health. It is not owned independently thus there is no real control over such a plan. If possible shift monies paid for group term to your own term plan.

For empty nesters Life insurance needs may be less when the children have moved out. However if a wage-earning spouse dies, a life insurance benefit can offset the loss of income, pay off the mortgage and/or accrued debt, create an emergency fund, and help shore up capital needed for retirement. Thus life insurance is usually still needed.

What plans are best?

If the capital need remains high, consider converting a portion of any term insurance you own into a permanent plan, or use a hybrid plan where term is mixed with permanent insurance. You may be able to reduce the face amount while adjusting the total coverage to meet your current need and work out an affordable payment.

Paying for final expenses During retirement every man and woman will one day present the need for his or her spouse or family to have capital to pay for final expenses in relation to and depending on the funeral expenses. Not everyone has saved up sufficient funds for this expense. Where there is life insurance it can save children and/or siblings the possible need to pay that expense for you.

What plans are best?

It is wise to have a certain amount of permanent life insurance to offset these expenses. At the age of 50 plus consider converting some or all your term insurance if you do not yet own a permanent life-time plan. Aim to own at least $25-50,000 worth of permanent life insurance just to pay for the final expenses.

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 is the purpose of life insurance?

Individual life insurance is primarily designed to protect against the financial loss that can occur with the death of a loved one. While individuals are typically very good at insuring their car or their home, they frequently do not insure their most valuable asset; their ability to earn an income. Life insurance provides a death benefit that can provide much-needed income to support your family, your business, or to send your children to college. Additionally, life insurance may offer many tax advantages.

There are two types of individual life insurance: Term life insurance and permanent life insurance. Both term and permanent policies offer an income tax-free death benefit to the policy beneficiaries. There are, however, several key differences to keep in mind when purchasing the right life insurance. It is one of the most important decisions that you can make.

How does life insurance protect my income in the future?

In the event of the death of the insured, life insurance is designed to create capital precisely in the unpredictable event of death. It provides a precautionary financial strategy to stabilize the financial security of loved ones reliant on your income or your capital provision.

Current one-time capital uses are provided by life insurance, such as:

Pay off liabilities such as credit cards, bills outstanding, loans, and/or estate taxes upon death.
Pay for the final expenses associated with a funeral and burial.
Create money to pass on to heirs such as children or a spouse.

An ongoing future use of capital is provided by life insurance, such as:

Investments can be purchased from which to create an income to cover the living expenses of a family; often providing for the retirement of a spouse.
Funds can establish a trust, from which family can acquire income.

What if an insured lives and cannot work due to a disability?

The individual should include some form of disability coverage to replace his or her income. Talk to your advisor about the following other types of insurance:

Income Replacement Insurance: This covers a percentage of your income in the event that you cannot work for a certain period of time due to a disability; some allowing coverage for a lifetime.
Critical Illness Insurance: In the event of a critical illness such as a stroke or heart attack, a significant lump sum benefit can be paid, depending on the plan’s coverage.

Check your group insurance benefits at work which should be considered when buying the above insurance.

Can insurance protect my financial security if I have a critical illness?

Our provincial health plans do not allocate funds to help patients who face a critical illness, to recover financially. They are established, not to build or replace wealth, but to provide basic health care. If you have little or no income, these plans would pay you only a small disability benefit if you meet specific situations. ¹

1. Lump-sum benefits are paid: Critical illness insurance offers a lump-sum payout of cash if you are diagnosed with a critical illness covered by the policy (such as stroke, heart attack, or cancer). Its purpose is to provide a considerable amount of money (referred to as a living benefit).

2. Allows time to convalesce: The critical illness insurance capital can help you convalesce over longer periods and in the company of loved ones, without a concern that the expenses related to a previously enjoyed lifestyle must be immediately eliminated. After all, there may be an extended time necessary to recover before you can return to work.

3. Money for exceptional health care: Critical illness insurance can fund expensive drugs or out-of-country health care. You may need to employ a private nurse to live in your home, hire a nanny, receive physical therapy and/or renovate your home to meet accessibility needs related to the illness. Critical illness insurance can help pay these bills.

4. Critical illness insurance enables a career change: Due to medical advances, many people totally recover from critical illnesses and re-enter the workforce. Unfortunately, many others live the rest of their lives partially disabled, unable to do the same work. There may be a need to finance training for a career and search for new employment. Before you establish a new source of income, where will your money come from? Critical illness insurance keeps you financially stable through a critical illness.

¹ Canada Disability Benefits – Canada.ca