How market volatility can work for the investor

What is market volatility? Volatility is when prices of stocks and equity funds increasingly shift in value up or down. When a low-volatility period is followed by increases in volatility, stock markets may begin to offer lower prices, which can effectually present lower priced fund units, both offering a buying opportunity for the investor.

The stock market can both gain value in a “bull market” and can have periods of slow down referred to as a “correction” or if more prolonged, a “bear market”.

Many investors have seen their investments increase dramatically since the 2008-9 financial crisis that affected all the world’s markets. Further, since 2020 during the pandemic, the market has experienced remarkable gains as investors moved into another big opportunity after an extreme correction based on fear in mid-March 2021 occurred. Many of these investors have also witnessed a remarkable bull market taking many stocks and equity funds much higher than their previous years’ valuation. Conversely, investors who unwisely sold their holdings out of fear lost money.

The ideal strategy exercised by most successful contrarian investors like Warren Buffet is to buy investments when others are fearful, and they are selling their holdings at lowering prices.

When buying opportunities abound The market can experience increased volatility due to fears such as various wars, debt crises of countries, economic slow-downs, or the potential of rising interest rates.

Nevertheless, during periods of higher volatility, wise investors think positively, relying on the professionals managing their investment portfolios.

Predesigned investment plans are important Though periods of volatility occur, it is important to exercise patience while maintaining a balanced and well-diversified portfolio according to a prescribed investment plan.

Plan with your advisor to establish a buying plan when others may be fearful. Market cycles of volatility are normal and expected.

 

Is a Life Insurance benefit taxable?

The advantages of life insurance are well known: It is foundational to a sound financial plan to ensure peace of mind for your family if anything were to happen to you.

A policy’s death benefit, payable to your estate or beneficiary when you die, maintains financial stability. The family can pay final expenses, any debt such as credit cards or business debts, and cover ongoing costs.

Is the death benefit taxable?

Most of the cash received from a life insurance contract is not subject to income tax. Your 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).

1 Canada.ca 

2 Turbo Tax

3 Turbo Tax

4 Canda.ca

 

Long-Term Care Insurance (LTCI) 

We face a rapidly ageing population.

Since the 1920s, the ratio of seniors over the age of 85 has more than doubled. This number increases into the 2050s will be over age 85.

Who will care for you in your old age? When our health is fine, it is hard to imagine that we may, as many will, lose the ability to manage basic daily activities such as bathing, toileting, walking, dressing, feeding, or moving from our bed to a chair. Many also lose mental faculties that we often take for granted, such as memory, logical or conceptual thinking or referencing dialogue with others. Without assistance, it is near-impossible to function without these capacities.

Long-Term Care Insurance is an insurance contract with an insurer designed to provide care for our chronic illness, disability, or an accident, all of which have a higher potential of occurring as we age.

Some families are incapable of caring for a senior LTCI protects our families from the financial strain of providing long-term care, just as important as life and disability insurance protects the income of younger families. The question is, who will financially support long-term care for you? LTCI is not just for seniors but for those who become similarly incapacitated at any age.

Without a plan, your choices may be limited. It is essential to plan for our long-term care independently because our government healthcare budgets and initiatives are limited. They generally place people in government-funded facilities that have beds available. As we witnessed in the pandemic, many long-term care facilities had difficulty coping with the virus spread.

Most people entirely overlook the enormous expense of paying for a private long-term care facility (some cost up to a quarter of a million dollars for five years). Why are they so expensive? They offer 24/7 high-level nursing care in a highly secure environment. Note: Anyone can call a few private long-term care companies and inquire about their care costs.

Ageing baby boomers retiring will increasingly depend on long-term care insurance, either paid for by themselves, their children or professional health care services.

The need for Long-Term Care Insurance is increasing as medical intervention and medications keep us living longer.

  • Every year, about 50,000 strokes occur in Canada. A stroke is the leading cause of a transfer from a hospital to a long-term care facility.
  • Nearly 10% (1 in 11) of Canadians over age 65 are affected by Alzheimer’s disease or related dementia.
  • An increasing demographic (7%) of Canadians age 65 and over are residing in healthcare institutions.
  • An additional 28% of Canadians age 65 and over receive care for a long-term health problem outside of a healthcare institution.

As the populace ages, more care for the elderly, such as respite care (additional home care services), will increasingly be needed to provide family members with the medical guidance and support they need to continue caring for their loved ones. With this in mind, are our families financially prepared to deal with peripheral costs associated with providing long-term care for loved ones?

  • A study authored by Dr Marcus Hollander and Neena Chappell of the University of Victoria found that approximately $25 billion worth of unpaid care is provided willingly by family members and friends in place of paid care.

What does Long-term Care Insurance (LTC) offer? Long-term care insurance provides money to pay for the care that you both desire and need. With LTC insurance, you have:

  • Broader choices about the quality and amount of care you receive.
  • An increase of options when determining where you receive care and by whom.

Source: Statistics Canada, pre-baby boomer info

Sources: Canadian Institute for Health Information, Alzheimer Society website, Statistics Canada

 

7 ways life insurance protects your financial foundation

Life insurance has been called the foundational strategy of building and protecting your net worth. The initial stages of your financial strategy should include adequate life insurance coverage.

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The following 7 tips will give you a template for your life insurance planning for a lifetime.

  1. Term life insurance is affordable protection when you are young When young, term insurance coverage offers the lowest cost per thousand dollars of coverage. It comes in various renewable periods of time, for example, 5-,10-, 20-year term and term to age 100.
    • Upon each renewal of term insurance, the cost can increase and may have a final term period ending at a certain age such as age 65, 75 or age 100.
    • Many term plans can be converted to lifetime insurance coverage without medical evidence, that will continue to cover you for the duration of your life.
  2. Life insurance can pay off large accumulations of debt  Many owe thousands of dollars on their credit cards or a large amount of business debt.
    • Replace the debt monkey with cash money Term life insurance often solves debt concerns. It can offer you the peace of mind that you will not be saddling your family with ongoing debt.
    • If you own a business You and your partners can enter agreements to redeem debt or buy business interests providing cash to your heirs.
    • Debt-free succession plans work better Infusions of cash into a business can help a succession plan to work well.
  3. Your life insurance plan can change to adapt to your needs Review your life insurance during each of life’s stages. Our circumstances change dramatically and so do our needs for life insurance. It may be time to review your life insurance and verify beneficiaries, policy amounts and any riders associated with the plans. As you evolve financially, so do your life insurance needs.
  4. You can protect your family when you have young children When you are newly married and starting a family, life insurance is purchased to provide tax-free capital in case one of the parents should die.
  5. When your children are going to college protect your liabilities Many of us tap into our savings to help meet their children’s tuition and housing expenses. We may purchase a child’s first car, or pay him/her 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 to pay for tuition and expenses.
  6. Special Estate Planning solutions When your estate will face a large tax bill, or you desire to leave a large sum of money to an heir or a charity, there are life insurance solutions. The proceeds of a death benefit can solve estate-related problems such as paying an estate’s tax liability on capital gains.
    • As you approach retirement, you may have accumulated assets that will be taxed as capital gains: such as a cottage, business, equity fund holdings, or a stock portfolio. Life insurance that continues for a lifetime, such as Term to age 100 or Whole Life (or Permanent Life)—can help pay the income tax due in your estate.
    • This can also replace an estate’s money used for paying taxes on remaining Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings, as these funds are fully taxable to the estate where there is no surviving spouse or dependent child.
    • It can also pay off large business debts that may be left as an ongoing liability, weighing on a surviving spouse’s financial security.
    • You may have an heir who will need a large sum of capital invested to provide a lifetime income from a trust fund. This is often the case with disabled children who may have special needs which can be expensive over a lifetime.
    • You may want to leave a significant sum of money to a charity of your choice.
    • You may want to transfer large sums of wealth in a controlled manner using life insurance beneficiary directives which may in some cases circumvent probate and notification to others when you desire privacy in your estate outside of your will.
  7. Your exact life insurance needs can be calculated Life insurance specialists use a calculating system referred to as “capital needs analysis”. Consider insuring the adults in your family. The breadwinner’s income can be replaced to protect your family’s financial security. You may have debts that you’d like redeemed. Final expenses can be paid. A mortgage can be paid off. Retirement money can be generated. There are many good reasons to strengthen your financial security with life insurance.

It is necessary to calculate the capital needed over any short or long period to meet any financial situation. Call for an appointment to have us review your life insurance.

Note: Talk to your advisor about potential tax exemption changes to investment components of life insurance.

Copyright by Adviceon.com

Life Insurance can solve the final RRSP/RRIF tax bite

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Did you know that you cannot pass on your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings tax-free to your heirs? Once the second spouse dies, all monies in an RRSP or RRIF are taxable as income in your final tax return unless there are dependent children.

An eligible individual is a child or grandchild of a deceased annuitant under an RRSP or RRIF, or of a deceased member of a Registered Pension Plan (RPP) or a Specified Pension Plan (SPP) or Pooled Registered Pension Plan (PRPP), who was financially dependent on the deceased for support, at the time of the deceased’s death, because of an impairment in physical or mental functions. The eligible individual must also be the beneficiary under the Register Disability Savings Plan (RDSP), into which the eligible proceeds will be paid. 1

In most cases, significant tax may be due, depending on your marginal tax rate and final calculations in your estate. Consider talking to your advisor about buying a joint last-to-die life insurance policy timed to pay after you and your spouse die. It can equate to a small percentage of your RRSP/RRIF holdings per year to make up for the taxes due on what has become, for some, a small fortune.

1 RDSP – Canada.ca

Can life insurance fund RRSP estate tax erosion?

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When planning your estate. It is important to consider how taxation will affect the future distribution of your estate.  For individuals that are married, when the first spouse passes away, the assets generally are able to achieve a rollover free from taxation to the surviving spouse. However, when the last surviving spouse passes away, all assets are deemed to have been sold at the time of passing, and this includes your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings. 

Concerns leaving wealth to the next generation. Registered assets are taken into income in the year of the surviving spouse’s death, and taxes must be paid.  These taxes will be due after the death of the second spouse where there are no dependent children. An eligible individual is a child or grandchild of a deceased annuitant under an RRSP or RRIF, or of a deceased member of a Registered Pension Plan (RPP) or a Specified Pension Plan (SPP) or Pooled Registered Pension Plan (PRPP), who was financially dependent on the deceased for support, at the time of the deceased’s death, because of an impairment in physical or mental functions. The eligible individual must also be the beneficiary under the Register Disability Savings Plan (RDSP), into which the eligible proceeds will be paid. 1

Without an eligible dependent, a $500,000 RRSP or RRIF could be reduced to about half the sum after the death of the second spouse (assuming the highest tax rate).  How can this be avoided? How can you leave more of your wealth to the next generations?

A joint last-to-die life insurance policy may be a solution. A joint last-to-die policy insures two lives, usually two spouses for the purpose of paying for an estate’s tax liabilities such as capital gains on a cottage or business. In most cases where there also exists significant family wealth in RRSPs or RRIFs, taxes will eventually be due upon the second spouse’s death.  At that time, the entire remaining RRSP or RRIF funds are brought into income. Though this is not creating a liability as such, the taxation of large holdings of registered monies can deplete a family’s overall wealth.

By purchasing a joint last-to-die life insurance policy, the taxation of assets in a family’s estate plan can be offset by the significant life insurance proceeds.2 In the above example, a joint last-to-die life insurance policy for $250,000 would replace the estate value lost to taxation, therefore helping to preserve the estate’s net worth more fully for the family. This is especially true if the RRSP or RRIF owner is expecting to leave the entire amount to his or her heirs.

What about the life insurance premiums?  The premium for the life insurance policy to pay for the estate’s tax loss through RRSP or RRIF final estate taxation is usually a small percentage of a significant registered investment portfolio compared to the much larger tax bite. The death benefit may be partially tax-free. 2 A joint last-to-die policy can also be structured to pay back all of the premiums that have been paid into the policy, thereby minimizing the cost to the estate for a strategy designed to save money.

1 RDSP – Canada.ca

2 Note: It is recommended that you get qualified tax advice concerning the taxation of your registered retirement plans if you consider this strategy.

Can life insurance offer my heirs capital security?

Life insurance has provided families with basic financial security for well over 100 years. For example, a healthy, non-smoking 40-year-old male can purchase up to $500,000 worth of insurance for approximately $50 per month. That life insurance policy would pay out a death benefit, the equivalent of up to 10,000 times the amount of one monthly premium payment.

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In this case, the $500,000 could provide necessities such as groceries, shelter, home repairs, means of transportation, and education for dependents. In this sense, the value of life insurance is tangible. Contrasted against the assets and services such a large death benefit can purchase, we realize how small the premium cost really is.

When does life insurance begin covering my family’s financial risk?

Even if death occurs one day after the initial premium payment, the full benefit is payable tax-free, thus instantly creating new capital, sometimes far exceeding the insured individual’s net worth. Most accountants and financial advisors agree that life insurance is foundational for families with dependents to build financial security.

An immediate foundation of financial security. In addition to savings, life insurance is designed to immediately provide the capital necessary to create ongoing investment income for dependents after income taxes and other liabilities are paid.

When you are not financially independent Life insurance can make up the shortfall when investments assets have not yet grown to the extent that your net worth enables you or your heirs to live in total financial independence.

When your health is not the best Many people who are not in perfect health are surprised to find that they can also purchase life insurance to ensure their financial security.

Note: Life insurance premiums vary according to the policy type. In some cases, paying a little more premium offers enhanced benefits Be aware that tax-deferral strategies may change due to legislation.

What evidence proves that life insurance is worthwhile?

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Life insurance has unlimited tactical financial uses.

Life Insurance includes cash benefit payouts arising from personal life insurance, disability insurance, group life and group disability insurance; and income from annuity payments, which together have risen to approximately 40 billion dollars per year in the first decade of the new millennium.

For a person running a business, a disability insurance policy can replace up to 75% or more of the value of a disabled person’s normal working paycheque.

“Life insurance is the first foundation of wealth preservation.”

Personally owned individual life and/or disability insurance can:

  1. Pay off a home mortgage if the family breadwinner dies.
  2. Pay debts and taxes accrued in larger estates leaving heirs with financial stability.
  3. Help small businesses using agreements pass the baton to new leaders.
  4. Fund key-man insurance to replace a leader in a small business.
  5. Help family businesses and farms stay in the family through succession planning while passing wealth (and paying off liabilities) to the next generation.
  6. Pay off capital gains taxes on second properties such as a cottage.
  7. Cover taxes due when remaining Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings.
  8. Pay off large capital gains on investments at home and abroad.
  9. Equalize estates divided amongst siblings whose parents own significant business assets, where some work outside the firm.

The use of life insurance is increasingly creative the more wealth preservation becomes necessary and can assist in this important strategic area of fiscal protection. It can pass substantial sums of cash to future generations using techniques such as estate bonds.

When should you review your Life Insurance planning?

You may want to replace the income of the life insured—either you or your spouse. Ask your advisor to do a capital needs analysis. It is easy to calculate the capital needed over any short or long period of time in any situation if the life insured were to die. Many professional calculators allow advisors to prepare accurate life insurance assessments.

It may be time to review your Life Insurance at these life junctures:

  • After you have finished your career training and begin a new job, you will want to buy life insurance as you start the foundation of your goal-setting strategy to gain financial independence. Life Insurance proceeds can pay off any OSAP or car loans so that the family has no financial burden should you predecease them.
  • If you have recently married or are engaged, your finances take on a new scope of responsibility for spouses jointly planning to protect one another’s financial security. Also, review your Life Insurance needs together to protect your income if one of you die or become disabled. This is a key foundation for developing a sound financial strategy when you are young and newly married.
    • If either of you had a will, it might be revoked upon marriage unless it specifically states it was created in contemplation of marriage. When planning your Life Insurance together, consider how to set up your beneficiaries carefully. Often it is best to do so outside of a will.
  • If you work at a trade, make sure that you have Disability Insurance. This insurance is also called Income Replacement Insurance because it provides a paycheque if you become disabled. Your children and spouse are dependent upon your income. What if you became disabled – will that source of income dry up or become minimal?
  • When you have children, Life insurance is purchased to provide capital if one of the parents should die. A young mother would not be forced to work, reduce her lifestyle, or leave her children cared for by others.
  • 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.
  • Suppose you have a change of executor, lawyer, accountant, or guardian. If one of these key people dies or becomes incapacitated, or is replaced regarding your estate plan, it is wise to review that aspect of your plan, which may include an entire rewriting of your will as you appoint new people.
  • If you want to establish planned giving, Life Insurance works well. If you desire to leave money, for example, to a charity, church or religious organization, an art gallery, or a school, you will need to do some estate planning. Consider using advanced life insurance planning. Life insurance can assign a beneficiary, allowing the monies to go directly to the charity or foundation. Consider that your will may need to be changed if you use Life Insurance to circumvent your will.
  • If you have grandchildren, you may want to ensure that they are provided for, perhaps through life insurance planning.
  • If you have experienced a significant change in your level of wealth, replanning may be important. If you inherit money or inherit Life Insurance proceeds, you may want to talk to your advisor about implementing Life Insurance in your own estate planning. Also, look at Disability Insurance and Long-term Care Insurance to see if financial risks can be insured to protect or enhance your wealth. If your assets decline, consider altering your bequests and newly establish this in your will.
  • If special care is needed for a loved one, make sure to plan. When a spouse, parent, or child has become disabled and needs future care, consider: Long-term Care costs are very high if you want a private room or special personal attention (such as defining when you want to take a nap or go to the washroom or bath, versus a strict schedule), for yourself, your parent, or another.
  • If you personally anticipate requiring costly long-term health care, you may want to alter the specific bequests in your will to reflect this new reality.
  • If you appoint a new or revoke a previous beneficiary, review your beneficiary designations with your Life Insurance representative and your beneficiaries.
  • If you have sold or will sell a business, your Life Insurance will need a review. If your assets become more liquid upon the sale of a business, you may want to pass that benefit along to beneficiaries or charities; or enhance your retirement. If a partner has bought or is buying your business previously bequeathed in your will, you may need to adjust your estate planning while using advanced life insurance planning for business-related solutions.
  • Replanning your Life Insurance may be necessary when you want to use or change a trustee or trust institution. You may, at some point, want to assign others to be in charge of investments within a testamentary trust directive.
  • A change of legislation can affect your plan. Changed government legislation can affect your estate planning. The validity of your will may be affected by changes such as estate taxation or probate laws.
  • Capital gains taxation on a major asset will eventually come due. When you own an asset that has appreciated, such as a cottage or business, or equity investment, make sure the tax payable will not harm the estate. Affordable Life Insurance solutions can pay off your estate liabilities after death.

How much life insurance should I purchase?

Determining, how much life insurance is necessary for your family’s financial security will require an objective viewpoint as you assess the following:

Evaluate the death benefit that you need.

Your advisor can assess the death benefit you need, by using a mathematical calculation that is referred to as a “capital needs analysis”. You may want to have enough capital to pay for your funeral, final taxes in your estate, outstanding loans or a remaining mortgage, and/or your credit card debt.

If you earn an income and support dependents, you may need to provide a significant amount of money to invest, from which your family can earn an investment income to provide a quality lifestyle. Life insurance can also provide enough money to cover a child’s education or top up the potential retirement income needs of a spouse if a breadwinner dies.

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Where there are two spouses providing an income for the family, many couples purchase enough life insurance to reciprocally protect the potential income loss of one or both income sources, by covering both spouses appropriately.

Business Owners have special insurance needs

In many families, one spouse is employed, and another is self-employed. If one spouse owns a sole proprietorship business, he or she may need to consider income replacement insurance which can create a replacement paycheck in case you become disabled. There may be business-related debts and expenses, which if not paid, can create liabilities for the family.

If you are in a business partnership, you may want to look at establishing a buy-sell agreement, and/or succession planning facilitated by life insurance capital if you or a partner die; or income replacement insurance if you or a partner are disabled and can no longer work at your business.

Critical Illness Insurance

Many are also using Critical Illness insurance for personal or business planning, which can offer capital solutions if one becomes critically disabled. Once you are certain how much you need, your advisor can offer quotes and several plans most suited to your circumstance.