Sure-Fire ways to invest for a rewarding life

Here are several tips to contemplate before investing in a mutual fund:

1. Eliminate the unreasonable desire for get-rich-quick profits. No one gets rich overnight after purchasing mutual funds. However, many people may get rich investing in them over the long term (at least 5-10 years). Equity funds (those holding stocks) are affected by the stock market when the market is gaining and when it is depreciating.

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2. Identify your investment goals. Will you be saving for your child’s education over 15 years, or investing for retirement over 5, 10 or 20 years? Don’t buy a fund just because it has skyrocketed in value during any one period. Instead, choose the fund most suitable for your investment purpose. For example, keep short-term investments liquid if you put money away for an emergency (it is advised to save three months of income for costly emergencies). You can use a money market fund for this saving, not an equity fund. Consider using equity funds for a more extended investment period of 5-10 years. 

3. Invest in several types of funds. Don’t put all your money in one fund basket. A well-rounded fund portfolio utilizes several investment types of securities: equity, balanced, bond, and money market funds, for example.

4. Maximize your tax savings. Register a mutual fund investment (to create an RRSP) if you do not yet own an RRSP. Contributions are tax-deductible in relation to your taxable income, and the investments grow tax-deferred.

5. Position your fund investments. The best place for retirement investments that accrue interest or generate high returns is inside your RRSP because the income on these investments won’t be taxed year by year. Thus, you will gain the advantage of the total yield without the tax on interest-as-income. If you earn 5% and pay 40% in tax, you’ll only get 3.0% in a non-sheltered, non-registered investment (in the RRSP, you’ll get the full 5%). Consider placing mutual funds that accrue capital gains and pay dividends over fewer taxable distributions in a non-registered vehicle or a Tax-Free Savings Account (TFSA).

6. Invest in yourself first. The advantage of owning mutual funds is that you can establish a plan where the money is automatically taken out of your bank every week or month and invested (by purchasing fund units). You probably won’t miss this portion of your pay; try to invest 10-20% of your paycheck using this method.

7. Take investing seriously. Investing is that act of life whereby you put away today what you will need tomorrow.

How can mutual funds help manage financial risk?

How can mutual funds help manage financial risk?

In business and investment, more significant gains are associated with both business success and variable risk. Six risk factors are examined below, along with constructive ways to deal with them.

Risk increases with the potential for gaining wealth in the markets

There is no such thing as gaining wealth without risk. Risk generally increases within any business or investment when the potential for gain is greater. Mutual funds diversly invest in the stocks of many companies. If a business succeeds, its stock price (and dividends) can increase in value and pass that worth on to the fund unitholders.

If many companies’ stocks increase in value in a mutual fund, the investor’s wealth can increase relative to the resulting total net increase in all of the fund unit’s value. In the short term, a mutual fund, like any business, can fluctuate in value, so the risk of losing money in the stock market increases if equity fund investments are held for only a short period.

Defining Investment Risk

The potential for gain generally increases the longer you hold equity fund investments. Because economic performance is uncertain, an investor who seeks growth by investing in the ownership of companies via equity mutual funds cannot have zero risk. Most successful investors realize that the following risks exist yet invest despite these:

• Interest rate risk when increasing could negate gains of certain income funds investing in bonds.
Solution: Maintain a balanced portfolio including equity funds and different types of income funds: money market, short-term bond, and long-term bond funds.

• Business failure risk could deplete the value of any one company’s stock.
Solution: Consider investing in equity mutual funds because they hold many different stocks.

• Purchasing power risk is an alarming reality faced by everyone due to inflation’s historical average, which has been between 3% and 4%.
Solution: Calculate inflation into your retirement planning and consider investing in equity mutual funds over the long term, with the potential to build sufficient wealth to meet increased future budget demands due to inflation.

• Market risk occurs because markets are cyclic, rising, correcting, and occasionally declining.
Solution: Diversify your funds, investing in a family of domestic mutual funds and internationally among foreign mutual funds as not all markets move together.

• Opportunity risk occurs when you cannot invest your money for a potentially better return, such as when you are invested in a locked-in type of investment, such as term deposits, or have tied up your income in monthly payments.

Solution: Try not to lock up all of your money, keeping some in money market funds over any given period.

• Liquidity risk occurs when you cannot quickly sell a given investment, such as an extensive real estate portfolio.
Solution: Invest in mutual funds. If money is urgently needed, funds can be sold and money accessed on any business day with possible costs.

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.

How can I minimize the need for estate probate?

There are a few tactics whereby you can reduce the need for an estate to be probated by the government:

• Defer possible probate by holding assets jointly. Probate fees may be charged when that asset is transferred later through the will of the second spouse.
• Establish a person as a beneficiary on your life insurance policies independent of the estate. This way, all monies pass to the heirs tax-free. If the estate needs probating, this portion of the assets will not be included in the estate, as the death benefit will flow directly to the heirs circumventing scrutiny. Life insurance strategies are excellent financial tools to circumvent probate on larger wealth transfers to heirs. Family wealth can be positioned to pass through life insurance policies, delivering tax-free benefits without probate. Any tax due on policy investments will be taxed to the estate of the deceased policy owner. This method has frequently been used to transfer inter-generational estate wealth in the millions. Your advisor can keep you up to date on potential taxes in the estate.
• Name your beneficiaries on your registered investments such as RRSPs and RRIFs. Insurance products may allow you to side-step probate in this way. To protect themselves, banks and trust companies will probably require probate or a letter of indemnity from the estate’s lawyer if the assets are significant. If your spouse is your beneficiary, consider a secondary beneficiary should your spouse die at the same time you do.
• Consider setting up a spousal testamentary trust in your will to avoid double probate. When the second spouse dies, the assets can be distributed via the trust directives as opposed to a will.
• With your spouse, set up mutually-owned property as ‘joint tenants with rights of survivorship’ to transfer these assets automatically outside of the will.

Once a will has been probated paid the estate administrative tax (EAT), the executor can start transferring assets as directed by the will. Some assets can be transferred easily within a short period of time. Others have to wait until the estate expenses have been paid, including any final income taxes due to Canada Revenue Agency (CRA), after which they will issue a tax clearance certificate.

Understanding Fixed versus Variable Mortgages

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Fixed Mortgage Rate: A fixed mortgage rate allows the home buyer to lock in a rate for the duration of the mortgage term, for example, over five years. The advantage of the fixed rate is that your rate will not fluctuate, and you can count on planning how much your mortgage payment will be for the term.

Variable Mortgage Rate: A variable mortgage rate means that the interest rate will change depending on the lender’s prime rate. For example, if your lender’s prime rate goes up or down, your mortgage payment will reflect that difference in interest during your mortgage term, which will affect your mortgage payment amount.

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.

How to prepare to qualify for a mortgage

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When you apply for a mortgage, there are several questions that a lender may ask, for which you can prepare. They will want information relating to:

The primary information they will need.

1. Employment and income

2. A summary of your outstanding debts

3. Cash reserves, bank account cash, investments, and other assets

4. The down payment that you have on the property you are purchasing, and is it your own money

5. Will the loan also be to consolidate any debts

6. What will be the use of the property

7. What is the equity you now have in your current home, if applicable

Employment and income.

  • Who is your employer?
  • How much income do you make, and can you provide payment receipts/stubs?
  • How long have you been working at your job?
  • Is your income a salary or other income such as sales commission?

Your liabilities.

  • What are your outstanding debts?
  • What commitment level per month do you have to pay debts?
  • What is the cost per month for auto loans?
  • How much of your income goes to pay off credit cards, and what is the gross credit card debt?
  • How much money will be left after you pay for your down payment and closing costs?
    • If you are refinancing debt, how much debt will your mortgage cover and reduce your equity?

What you will use the real estate for:

  • Will this be your residence?
  • Will you rent a portion of the home out?
  • Is it an investment property?

Property type

  • A condominium?
  • A duplex?
  • A single dwelling?

Replies which can work in your favour:

  • I have steady employment with the same employer for two-plus years.
  • I carry little debt with a debt-to-income ratio of 25% or less.
  • The mortgage is only for a home purchase.
  • My down payment of at least 30% of the purchase price with my own money.
  • The cash reserves will pay several months of the mortgage payments once the property closes.

Replies which can work against you:

  • Self-employed or contract worker.
  • High debt with credit cards maxed out, with a total debt-to-income ratio of more than 30%.
  • We intend to renovate the property for rental use.
  • The liquid cash situation will be tight once all expenses are paid after we close the deal.

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.

What is an investor risk/reward trade-off?

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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.

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. 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).

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