Dual MF + LI – Page 9 – Adviceon Library

How simple is it to invest in segregated funds?

You may want to consider using segregated funds when the market is offering low snail-paced returns on guaranteed term deposits.

The following advantages, make investing in segregated (seg) funds simple:

Invest in stocks when interest rates are low Interest rates on term deposits pay a very low percentile return per year, whereas the stock market can grown rapidly.
Simplified investing You can select an industry or sector, for example, without having to hand-pick each security. The segregated fund manager does this selection process for you. You don’t have to be assessing which stock or bond may or may not be a winner. A seg fund manager is trained to weigh out all the market contingencies which can affect investor performance.
Low-cost diversification A small monthly purchase plan can have you moving forward in your segregated fund investments in a day. Your money can buy a piece of many different investments held within one or more funds.
Dollar-cost averaging Dollar-cost averaging allows you to buy more seg fund units when the unit values are down, less when they are high, giving you some benefit from downward volatility.
Flexible access to your money You can sell your seg fund shares in one day. Your proceeds are available the next day if your money is needed in the short term.
Portfolio balancing Choices include the full range of seg fund types and strategies which are available to use such as strategic balancing of your funds holdings.
Automatically invest You can automatically invest more in segregated funds at any time or use dollar-cost-averaging.
Professional management Segreaged funds have active professional management watching over your investment
Segregated funds also offer some certainties Some guarantees are offered or optional as far as principal retention goes or the investor, which are quite different than segregated funds, which may differ according to the segregated fund policy.

Talk to your advisor about how you might benefit from the use of seg funds in your investment planning strategies.

What is an investor risk/reward trade-off?

Understanding investor risk/reward trade-offs.

The risk/reward concept states that the higher the risk of a particular investment, the higher the possible return. Although there is usually risk with any equity investment, assessing just how much risk your portfolio should carry is essential. Risk involves the potential for gain or loss of monies invested.

Many people take on more risk, hoping to achieve a higher return without regard to cyclic markets. If an investor expects higher returns based on the past, he must understand that markets can go through gain and loss periods.

In theory, many think that the higher the risk, the more you should receive for holding the investment. With cyclic markets, this is not necessarily true. Conversely, in theory, the lower the risk, the less you should receive. Unfortunately, the dilemma is this: a higher potential for above-average returns comes with a higher risk of below-average returns. Conversely, safer investments, such as cash and bond instruments, have a lower potential for high returns and a higher potential to not keep up with inflation.

While choosing investments for your portfolio, you need to be conscious of risk/return trade-offs and risk tolerance. Different types of securities have associated levels of risk. Every investor’s goal should be to find a balance that allows you to not experience undue anxiety in the markets and achieve your long-term financial goals at the same time.

Media chaos causes investors to fear investing.

Psychological fear can hold one back from investing. People behave according to their mindset. Some of the following thinking can keep one from not putting their money to work by buying equity investments such as equity investment funds. If you have said any of the following statements, you may be experiencing investor anxiety:

“I think the markets will pull back and lose some value.” I will wait and invest when this happens.” This viewpoint is based on the need to confirm a belief before acting, where the investor must minimize any evidence that contradicts their belief mantra. The media frequently offers terrible news if the market has a low day, and it is easy to hear only this information while filtering out other positive news. This process can paralyze an action plan to invest for years.

“I want to sell the investment if I see a profit.” People might sell an investment early once it rises in value for fear of future loss. Aside from considering taxation, once sold, an investment with either a gain or a loss ends any future potential of that investment rising in future value. To avoid this mindset, one should have a disciplined written plan for buying and selling assets that can be frequently referred to.

“The market is bound to correct and head down because it is at a peak.” Anchoring our point of view occurs when someone assigns a reference number, like a 52-week high or low, to compare the price of an investment stock, the unit value of a fund, or a stock exchange’s last peak value. Past price movements are poor predictors of future price performance. When you invest for the long-term for retirement, using past price patterns is comparable to driving your car while gazing in the rearview mirror as a reference.

Conclusion
The above emotional mindsets can ruin or avoid forming an otherwise excellent investment plan. They can help you develop a risk tolerance profile and investment plan. Please work with your investment advisor to help you understand how the mind can trick us into failure simply by not investing over the long term.

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” Benjamin Graham

What insurance planning fits a good Estate Plan?

What are the key insurance components of an Estate Plan?

An estate plan is a singular categorical part within organized financial strategies aimed at achieving financial independence. Life insurance, disability insurance (group or personal), critical illness (CI) insurance and long-term care (LTC) insurance policies are key components of a good estate plan when protecting your family’s financial security.

Keep your documents up to date with your life needs. It is important that an individual maintains and updates a will and two powers of attorney documents: 1) for property such as real estate, bank accounts, and investment assets, and 2) a power of attorney for personal health care.

Life changes can affect the integration of each of the above strategic solutions. Therefore it is important to review the above aspects of an estate plan every three to five years. For example, there may be a change in the beneficiaries, where a person needs to be added or removed during an addition to the family; or if you remarry, your existing will may automatically become nullified.

There may be significant changes in your net worth if the value of your residence or investment assets change over time; or your liabilities increase or are paid off. If you have significant assets, have your accountant make sure that the best tax arrangements are in place.

Business owners If you are the shareholder of business assets, make sure that a buy sell agreement is in place in the event of your death or disability, assuring that every owner is covered with life and disability (income replacement) insurance.

An estate plan may benefit from using formal trusts to reduce taxes and segregated funds to circumvent or minimize probate or estate administration tax and/or fees or protect assets from creditors.

Life insurance with named beneficiaries can also be solutions to transfer capital tax-free to heirs outside of probate/EAT scrutiny. For an estate plan seeking to transfer large capital assets to named heirs, it would be wise to discuss these capital-transfer techniques with an account and/or tax lawyer.

How can estate planning minimize obstacles for my heirs?

Estate planning provides some ability to minimize the obstacles that loved ones might encounter in the event of an unexpected death such as:

Fear of losing your money by erosion of capital that might come about with poor investments.
Delays during the settling an estate can be a lengthy process.
Legal and accountancy costs, probate fees, and taxes.
Potential liabilities for Executors and Trustees in Ontario re the new administration of probate/EAT in 2013.
Lost privacy due to your will becoming public during the probate process.
Ability of your beneficiaries to handle money as some children are less capable than others of handling large amounts of money

How can the use of Segregated Funds and Term Funds help?

Ability to invest in diversified funds that have professional money management to help your clients preserve their capital.
Segregated funds and Term funds with named beneficiaries can avoid probate, making payout quicker.
By avoiding probate, your wishes are kept private.
There are excellent estate planning concepts such as the Gradual Inheritance concept that can help you better plan the allocation of money to your children (eg., buying an annuity or deferring payout until the child turns a certain age)

What is the value of good financial advice?

A good financial advisor will not only assess your current fiscal resources. They will also outline a plan to achieve your goal for a sound financial future.

As time passes, so does your opportunity to build a solid financial future. Suppose you are to develop an investment portfolio and a significant net worth. Will you personally determine how to purchase stocks among the international markets, analyse investment funds, and sidestep economic pitfalls as you invest all by yourself? Will your financial stability be based on our government’s pension plan? Did you know that its maximum benefit covers only 25% of the average Canadian’s wage?

Why involve an advisor in your financial affairs?

The majority of Canadians seek specialised professional help. Their work is to guide you towards achieving financial independence. An advisor’s work is to help you systematically achieve your goals and make your life dreams come true.

• An advisor must analyse your current financial resources to define appropriate financial strategies that are best suited to your current and future personal priorities, retirement goals and risk tolerance.

• Calculating your current net worth and cash flow after taxes is also essential. With a net worth statement, a financial specialist can identify any opportunities or problems relating to capital gains, life insurance, disability, and critical illness insurance needs versus your present coverage, investment growth, income taxation, retirement income needs, employee benefits, and potential capital gains tax liabilities for your estate. Parents must also assess educational funding needs and plans for any dependent adult child and special health care such as Long Term Care (LTC) for parents.

• Establishing a written plan sets forth specific solution-oriented recommendations and will enable you to see how ordering your finances can benefit your overall lifestyle.

• To achieve your goals and objectives, acting on the plan’s recommendations will be necessary. Building a solid portfolio of investments tailored to meet your goals and risk tolerance is essential for your future financial independence.

• Appropriate life and disability insurance coverage will ensure your plan meets family income needs, business debt or buy-out payments, and any tax liabilities for your estate.

• Finally, an advisor will establish a periodic review to monitor and refine your plan to accommodate birth, marriage, illness, or retirement events.

Financial goals should include Long Term Care

How do I integrate Long-term Care Insurance into my financial goals?

When considering Long-term Care coverage, it is best to begin by formulating a long-term care plan that addresses your wishes and considers your family situation as well. Perhaps begin by making a list of care items you will want to discuss with loved ones. Who will be your care manager? What responsibilities will they have? What responsibilities will you want other service providers to consider? To what extent are family members able or willing to provide care? Long-term care, if required, will involve the help of many, and by having meaningful discussions ahead of time, you and your family will be able to address concerns such as costs.

Prepare far in advance to determine how you will pay for such care in each possible scenario. Then call to inquire about care service companies, different residence types, volunteer groups, and care equipment companies.

As you consider purchasing Long-Term Care Insurance (LTCI), ensure that you have an understanding of what care services actually cost and what is covered in the contract. Then, with the help of an insurance broker, you can begin reviewing different types of LTCI plans and determine a plan best suited for your potential needs.

The real cost The very high cost for accommodation in a long-term care facility can range from $800 to over $5,000 per month depending on the room type and the level of government funding available in your province. Private home care service costs range from $12 to $22 an hour for home-making and personal care; to between $18 and $60 an hour for nursing care.

Source: Sun Life Financial

More than one-third of Canadians aged 45-64 who provided informal care to a family member or friend incurred extra expenses as a result of their care giving duties.

Source: Statistics Canada

Long-term care expenses could easily total thousands of dollars per year.
Provincial health insurance plans provide only limited coverage for long-term care.
Long-term care insurance can fill the financial gap, and reduce the burden on loved ones while maintaining better control over your future.

Some believe that provincial health care plans fully cover long-term care, or that their employee benefit plans include long-term care coverage. Government programs are not comprehensive and Canadians have to pay for much of their care. Few employee benefit packages cover long-term care. The costs for long-term care, whether in your home or in a facility, can be high. How would you pay for the care you need?

Use your savings or retirement income?
Use what you have set aside as an inheritance for your loved ones?
Use the equity in your home?
Depend on your family?

Consider purchasing a Long-term Care Insurance plan. Your insurance specialist can help.

Source: Some of the concepts and information are used with the permission of Patty Randall who is widely considered a leading advocate on the need for care-years planning in our country. Visit her website: “Aging Successfully with Passion and Purpose and Care-Years Planning” online at www.longtermcarecanada.com for discussions, ideas and to obtain family materials on this issue

Can I mitigate risk in a diversified equity fund portfolio?

What is Diversification?

Diversification is a strategy by which you create a portfolio that includes several investments. You make investments over more stocks of different companies or securities, such as bonds or mortgages, with the objective of reducing risk.

Because of their higher risk, equity funds have historically offered the most promising growth over the long term, as compared with other funds that focus on assets such as bonds and cash. In markets that are volatile, how can we reduce the overall equity volatility over the long haul without losing the potential for gains?

In a volatile market, if you shift the asset class out of equities into bonds and/or cash prior to resurgence in the overall market, you can lose by trying to automatically time the market. Why is this? Most stocks increase in value through a new bull market period which can begin quickly over several days. By being out of the equity market (in this case at the wrong time), you could lose the gains you might have achieved by being more heavily invested in equity funds.

Understand geographic diversification.

Global equity markets are more closely correlated than they were five or ten years ago, reacting to world events in a more similar fashion. Technology has connected our world to make it a smaller place, so what happens today in China’s market can impact economies everywhere. And more importantly, global diversification offers scant protection from market crashes when correlations become indistinguishable, such as during the financial crisis of 2008–2009.

However, it is still prudent to have portfolios that offer geographic diversity, rather than focusing exclusively on a single geographic equity market.

What tax advantage does life insurance offer?

There are specific life insurance policies offered with attractive tax-planning advantages. Legal tax-exempt rights are allowed in our tax legislation with life insurers, enabling the possibility to accomplish the following.

Premiums over and above the associated costs of insurance and premium tax are invested and can accumulate tax-deferred within specific plans.
Tax-deferral of the investments continue until such time that withdrawals are taken out from the policy.
Tax is avoided on both the face amount of the insurance and any ongoing cash accumulation in the policy when paid out to the beneficiaries on the insured’s death.

Taxation details. Most of the cash received from a life insurance contract is not subject to income tax. ¹Your beneficiaries — spouse, children, grandchildren or other beneficiary allocated will not need to report life insurance benefit proceeds on their tax return as taxable income. However, if you have assigned your estate as the beneficiary, the death benefit could be subject to tax. Moreover, fiscal gifts or inheritances generally are not taxable.

Beneficiaries or heirs do not owe estate inheritance tax or death tax. It is the estate of the deceased that pays any such tax due to the government. If the policy owner’s estate is the policy’s beneficiary, the death benefit may — in some cases be subject to tax. ²

When could a taxable situation arise?

When you own a permanent life insurance policy, accumulating interest or equity investments made to a policy’s cash value, taxes will be payable on that growth gained above the cost base of money invested. ³

Upon your beneficiaries receiving any investment earnings from the policy, along with a death benefit, the increase on investments, not the death benefit, would be taxable as income.

Likewise, you will pay taxes on any increase in cash value based on the investments in the policy fund — should you surrender the policy and receive its cash value in return.

Tax Reporting Rules for Life Insurance Payouts

The Canadian Revenue Agency (CRA) makes receiving life insurance proceeds easy for beneficiaries relative to tax reporting. Unless the tax is due on the above-stated earnings, these amounts do not need reporting as taxable income on a tax return.

What if there is an increase in the cash value?

These amounts don’t need reporting as taxable income on a tax return unless some tax is due on interest earnings. If there are interest earnings, it will be reported to the beneficiary by the insurance company on a T5 slip, reportable on line 121 of the beneficiary’s return (or of the policy owner when surrendering the cash value of the policy). ⁴

Here are some uses within an estate:

Final tax liabilities in an estate such as on capital property or the remaining RRSP/RRIF value is taxed fully as income and can be pre-funded.
In some cases, tax-exempt plans are used as a pledge to secure a loan to create additional cash flow in retirement. Cash resulting from a loan is not taxable. Where the loan is later paid from the death benefit, payment can be deferred until death. Repayment of the loan is thus partly repaid using pre-taxed dollars.

Others may borrow directly from their policy subject to the policy terms.

¹ Canada.ca

² Turbo Tax

³ Turbo Tax

⁴ Canda.ca

Estate Planning empowers your heirs

Estate Planning is a financial planning process that every responsible working person with dependents should accomplish, even if it is preparing a last will and testament and living will for health purposes.

Estate planning can empower your heirs in the following ways:

Plan to reduce taxes in your estate When transferring your assets, including mutual funds, using a will, try to pass as much value as possible to your heirs. If you hold equity mutual funds that buy and hold stocks, they may have accrued capital gains. There will be a deemed disposition of all your property at fair market value at the time of your death. For some this could mean a capital gains tax liability.

By knowing your estate tax liability List each separate asset you own, the purchase price and date, as well as its current value. Include your non-registered investments in stocks, bonds, and mutual funds. Have your accountant assess what the tax liability will be.

Your spouse and deferred taxes Property willed to your spouse can be rolled over tax-free on your death. Your spouse will actually inherit the assets at the unchanged adjusted cost base (cost amount) of the property. The taxation of the asset will then occur when your spouse disposes of the property or at the death of the spouse. This tax deferral is beneficial especially if you have large holdings in equity mutual funds invested for value as in large cap or blue chip stocks. Alternatively, you can choose to transfer any asset to your spouse at fair market value on death and recognize the accrued gain or loss.

RRSPs and your children Under the rules proposed in the 1999 Federal Budget, RRSPs can be transferred tax-deferred to your dependent children or grandchildren, even if a spouse survives you. Before the 1999 Federal Budget, a transfer of RRSP funds to dependent children or grandchildren would be taxable if there was a surviving spouse.

Income splitting using a testamentary trust By establishing a testamentary trust in your will, you will be able to maintain control during your lifetime over the use of your assets such as a mutual fund investment portfolio. The trust can provide guidelines for the treatment of these assets after your death. The trust document can specify the split of income among heirs. Carefully planned income splitting may allow for significant tax savings.

Assess your tax liabilities with an estate lawyer and/or accountant and make estate plans to determine how to pay them. Consider the use of life insurance where the capital gains tax liabilities are substantial.