Article – Page 13 – Adviceon Library

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 does aging affect Critical Illness and Long Term Care?

The majority of the population of North America is approximately 50 years or older. This demographic truth increases the need for two specialized types of insurance: Critical Illness and Long Term Care.

Critical Illness Insurance Critical Illness Insurance protects your dependent(s) in the event that you suffer a disability due to a major illness such as heart attack, coronary bypass surgery, stroke,terminal cancer, blindness, paralysis, or kidney failure. It pays out a tax-free lump-sum benefit. You could clear outstanding debts such as the mortgage, finance home renovations to meet changed living access needs, or pay for specialized medical treatments not covered under your health insurance such as certain chiropractor or masseur fees. There are no restrictions on how you use the lump sum benefit. It is not based on your ability to work, even if you fully recover. Collecting the benefit will require a doctor’s statement regarding your health, and confirming that you have survived the critical illness, generally for at least 30 days.

Long Term Care Insurance Long Term Care Insurance will pay for the cost of long-term care associated with a disability or chronic illness. It covers relocation to a long-term care facility or in-home caregiver assistance. Usually, the available benefit consists of a fixed tax-free amount up to several hundred dollars per day to pay for long-term or other healthcare. As the policy’s issue age for this coverage increases, the premiums for this insurance also increase. Look for policies renewable for life that will include coverage for skilled care, intermediate care, rehabilitation centres and nursing homes. Ask if conditions such as Alzheimer’s are covered and if extended care at home is an option.

How can life insurance protect key business people?

Every business has one or more key players who lead. Our economy depends on small family businesses which employ millions of people. If family businesses are to remain successful in our fast-paced economy, they must address the following issues:

Continuing success depends on leadership. Continued success may depend on the leadership of the founding owner. If the owner desires to retire in 10 or 15 years, succession planning may be necessary today. Have you made plans to sell, or to pass the company on to the children or another successor?

Talk to your CA or tax lawyer to assess possible capital gains tax liabilities. If these liabilities exist, life insurance policies may be able to solve the problem in advance; purchased individually or jointly on the lives of the owner and/or the spouse while in reasonably good health.

If the owner of the company will depend on the company’s resources for retirement income, it may need to be budgeted as an ongoing disbursement during his or her retirement via a salary or dividend payments.

Groom successors to take over the business. An immediate (as well as long-term) successor can be groomed to take over the company, just in case the owner suffers a disability. Owners need to ask, “What would happen if I was laid up and incapable of giving directives? Would that force a quick sale of my company?”

To prepare for the potential event of a disability, owners should make sure that they are covered with both disability and critical illness insurance to replace income or deliver a lump sum emergency benefit.

What could happen if a business owner died unprepared? Life insurance can meet capital needs and cover liabilities such as company debt. Acquiring loans may be harder for unknown successors. Servicing debt could get costly if interest rates go up. Life insurance can wipe out company debt entirely upon an owner’s death, spouse’s death, or after both have died (using a joint-last-to-die policy).

Owners need to make sure that key family members actively working in the company (including active owners), and important employees, are covered with key-person insurance. If a key-person is afflicted with a disability or dies, the business may need money to acquire replacement help.

Agreements direct the insurance benefit’s use. Buy-sell agreements are essential for partnerships and many corporations. Often family members in joint ventures will overlook this planning device as they feel they can solve business issues when one dies or is disabled. Without proper pre-planning, businesses could get bogged down in conflicts, and may not have enough capital to buy out the interest of a partner. Back up the agreement with life insurance, disability insurance, including critical illness insurance coverage to solve these often hidden business risks.

Can you pay your bills if disabled?

Disability insurance (DI) can be purchased from a life insurance company to cover up to 80% of your regular income (or more) if you become disabled. This coverage is referred to as “income replacement” insurance.

If you work for a corporation, your employer may offer a group plan with short-term disability (DI) coverage. Could you review it to determine the coverage period and ensure it meets at least 60% of your current income for longer than three months?

Additional DI can be purchased (and owned privately) to extend the income payment period and increment payments to the increasing cost of living. Some policies increase paycheques according to the consumer price index (CPI).

If self-employed, If you have dependents, it is essential to ensure that you have income replacement insurance to pay your expenses until age 65. Caring for your own needs is also wise if you are single.

Consider the following questions about where the money might come from if you could not earn a living for a month, a year or forever.

Would withdrawing part or all of your retirement savings and money on deposit at the bank to use as income when convalescing affect your retirement?
If you need to access the equity or your home to create an income, will this deplete your net worth?
Could you borrow money if your banker knew you might never work again?
Could you live on your spouse’s income?
Could you ask a parent, sibling or friend to loan you money? How would you repay it?
Would you rely on the government to pay a disability income that lasts until you retire?
Would you want to sell your house or cottage?

Note: Life insurance taxation varies in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide effective business strategies relative to succession or an estate.

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.

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.

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 the difference between volatility and risk?

Volatility and risk are different concepts, but both have a role in determining your investment success.

Volatility is simply how much the market will increase or decrease, whereas risk is the amount of loss or gain you are willing to accept. How volatile your investments behave is often derived by the level of risk you are willing to accept. During periods of market volatility, it is important to stay focused on your asset allocation goals according to your predetermined risk profile.

Volatility is simply short-term instability that can affect all stocks, including good stocks or good equity funds, because of fear generated in the markets. The Euro-debt fears in 2012 are a good example of this. When markets are down, even a company that provides a useful, durable product may be affected. When the market calms, however, the company’s stock price may rise again.

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.