Dual MF + LI – Page 11 – Adviceon Library

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.

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.

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.

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).

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.

What is taxable in my final tax return?

Taxation in your final return.

In the year of death, the deceased’s executor must submit a final tax return (also known as the terminal return) to the Canada Revenue Agency (CRA).

All income that dates from your last tax return to the day of your death must be reported, such as:

• Gains on Capital Property Where your property has increased in value above what you paid for it, that gain needs to be reported. In the year of death, one-half of the combined capital gains or losses from capital properties is a net taxable capital gain or a net capital loss. A net capital gain is taxed in the year of death. A net capital loss can be applied against the taxable capital gains of the three immediately preceding years. The balance of the net capital loss can then be applied to reduce any other income in the year of death and/or the immediately preceding year.

• RRSPs and RRIFs If you intended to pass all the remaining value in RRSP/RRIF holdings to your heirs, think again. The entire amount left in your RRSP or RRIF will be classified as fully taxable income. If your spouse or common-law partner survives you, the money will be rolled over to him/her and later taxed as it is withdrawn or after his or her death. Contributions made prior to death are deductible in the year of death. An executor can contribute to an RRSP of the surviving spouse within the allowable limits and within 60 days of the calendar year-end, and get a deduction against the income of the deceased in the terminal tax return.

• Registered Pension Plans (RPPs) A death benefit of an RPP is fully taxable as income of the recipient estate or beneficiary, subject to rollovers to plans for the deceased’s spouse, common-law partner, or dependent children under the age of 18.

• Regular Income All taxable income from employment, a business, or investments must be included in the terminal return. This will include any accrued income not received prior to death, such as holiday pay from an employer.

• Investment Income This will include interest on term deposits, interest due on money you have out on loan, interest on bonds, and the taxable portion of annuity income accrued to the date of death.

What tax advantage does life insurance offer to my estate?

There are certain life insurance policies offered with interesting tax-planning advantages. Legal tax exempt rights are allowed in our tax legislation in relation to life insurers, which allows the possibility to accomplish the following:

• Premiums over and above the associated costs of insurance, can be invested and accumulate tax-deferred within certain plans.

• Tax-deferral of the investments continues until such time that withdrawals are taken from the policy.

• Tax is avoided on both the face amount of the insurance, plus any ongoing cash accumulation in the policy, when paid out to the beneficiaries on the death of the insured. Thus, tax is permanently avoided.

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

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 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.

Why is inflation a risk to my retirement income?

Statistics Canada releases inflation figures regularly to determine the health of the Canadian economy. Increasing inflation indicates that the economy’s overall prices are rising. On the upside, this means there is good economic growth pushing these numbers higher. Some inflation is necessary to a vigorous economy. Fast increases in the index percentile can spark the Bank of Canada to raise our interest rates to keep the costs of goods and services in check.

When you go to the pumps or to the grocery store, ask yourself, “will my retirement investment portfolio create sufficient income to pay for all these rising expenses?” Only by accumulating assets in your pre-retirement years, will you be able to increase your net worth, which can lead you to financial independence. The cost of our basic retirement needs will increase.

Investing to beat Inflation is a constant battle.

The importance of the economic fact of inflation may not be obvious. “What does the fish know about the water in which it swims?” asked Albert Einstein. Over the years, inflation has radically reduced our buying power. Interest rates when increasing as a policy to combat (reduce) inflation can also increase our debt repayment load as a percentage of income putting a strain on our budgets. In this respect, both inflation and interest on the debt are the foremost enemies of wealth creation.

How inflation is calculated Canada’s national statistics are weighted to reveal increases for the basket of goods and services in the Consumer Price Index (CPI).¹ Consumer spending patterns for 12 months up to October 2021, can be seen by visiting Statistics Canada.

Three of the eight major components saw unprecedented growth in their basket weights, the statistics agency said, led by shelter representing soaring house prices during the pandemic–the highest-weighted major component, which grew to 30% as a share of the basket. The share of the household operations, furnishings and equipment component grew to 15.21% and alcoholic beverages, tobacco products and recreational cannabis went up 4.86%. The Bank of Canada targets overall weighted inflation at 2%, with a 1%-3% control range. ²

You can get ahead of inflation now by investing. A healthy investment fund portfolio can give you a sense of financial security, earned by continued discipline and adherence to the principle of saving, which adds to our sense of personal dignity.

Saving on a month to month basis while purchasing investment fund units can help you realize your goals and objectives in life (such as acquiring a home, making major purchases, travelling, putting children through college or university, or going back to school yourself). Finally, your investments must outpace inflation—the rising cost of goods and services—the investor’s worst future enemy. Ask your financial specialist to do a complete analysis of your retirement income potential.

^{1 StatsCan}

^{2 Reuters}

What are my Retirement Income Options?

Retirement Income Options are strategies that provide you with a retirement income paycheque from the funds saved during your working years.

Registered Retirement Income Funds The most common retirement income option is a retirement income fund (RRIF). It is like a registered retirement savings plan (RRSP) in reverse. It has the same tax-deferred growth, flexibility and choices you had in your RRSP, with the added benefit of being able to withdraw a retirement income and have the flexibility to determine the amount of income you withdraw each year (where a minimum annual amount is determined by a federal government schedule).

When you need to begin receiving income, or at the latest by December 31st of the year you turn 71, you must convert your RRSP to a RRIF. A RRIF is designed to provide you with income while keeping the assets retained in your RIFF tax-deferred.

What are the types of Locked-in Retirement Savings Plans (LRSPs)? Locked-in RSPs originate from Registered Pension Plans (RPPs) which are plans where funds are set aside by an employer, and/or employee, to provide a pension when the employee retires.

If you are a member of a fully vested Registered Pension Plan (RPP), once employment is terminated, the proceeds of your RPP will be considered ‘locked-in’ and must be transferred into certain ‘Locked-in Plans’ which include the following Locked-in RSPs and Locked-in Retirement Income Options:

LIRAs and LRSPs Locked-in Retirement Accounts (LIRAs) and Locked-in RSPs (LRSPs) are registered retirement savings plans which are established by the transfer of locked-in pension fund assets from a Registered Pension Plan (RPP) or another locked-in retirement savings or income plan (such as a LIRA, LRSP, Life Income Fund (LIF), Prescribed Retirement Income Fund (PRIF) or Locked-in Retirement Income Fund (LRIF).

Tax on the interest you earn in these plans is deferred until you withdraw the funds, and are only accessible prior to retirement age under certain conditions. Upon reaching retirement age (most are at 55), you can transfer the plan to one or more eligible Retirement Income Options available for a regular RSP.

LIRAs and LRSPs must be converted to a Retirement Income Option such as an Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF), or a Prescribed Retirement Income Fund (PRIF) before December 31st of the year you turn 71.

Life Income Funds (LIFs) Life income funds are purchased with a Locked-in RRSP (LRSP). You are required to roll over your LRSP assets into an annuity (Life Annuity in some provinces) or a Life Income Fund (LIF) by the end of the year you turn 71. You will have the ability to withdraw an income and you maintain the flexibility and choices you need within prescribed limits similar to a registered retirement income fund (RRIF). However, the minimum and maximum withdrawal schedule for a LIF is calculated differently and changes each year.
Locked-in Retirement Income Funds (LRIFs) Locked-in Retirement Income Funds are purchased with a Registered Pension Plan (RPP) or a Locked-in Retirement Account (LIRA).

A LRIF is different from a Life Income Fund (LIF). The maximum payments are based on the investment returns, not your age or current interest rates. And there is no requirement to purchase an annuity at age 80. LRIFs are only available in certain provinces.