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.
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
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.
Estateplanning 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.
If you are a business owner, you may have an individual critical to your success. Insurance can protect you against financial loss if incapacitated in three areas.
1) Key-Person Life Insurance
2) Key-Person Critical Illness Insurance
3) Key-Person Disability Income Protection
Key-Person Life Insurance Life insurance is usually the foundation of a key-person protection strategy. It provides an immediate injection of capital into the business precisely when needed—when a key person dies. At this time, the death benefit is paid to the company tax-free.
Renewable Term Life Insurance is usually the most economical option over the short term. In certain circumstances, permanent insurance may provide better protection when coverage is needed over a long time.
Key-Person Disability Income Protection Disability insurance can be used for two purposes in a key-person context:
• The provision of a continued salary to a key person that becomes disabled, usually until the earlier of age 65 or recovery from the disability.
• Owner-managers can purchase insurance that provides continued payment of office expenses and salaries during disability, usually for a limited period.
Key-Person Critical Illness Insurance Critical illness insurance provides protection when a key person is afflicted by a specified disease or health problem that does not necessarily render them disabled but affects their desire or ability to work. Depending on the policy, this insurance coverage can pay a lump sum, or an income payable to the business, to help cover losses created by the absence of or lower productivity of the individual.
Life Insurance Plans for Individuals Life insurance is a type of coverage that pays benefits upon a person’s death to designated beneficiaries. A small premium gives you immediate coverage and provides for a significant death benefit payable upon the insured’s death to provide capitalization to pay an income for dependents. In some cases, there may be a maturity date where the insured, if still living, can receive the proceeds.
Tax deferral is allowed with some types of life insurance to offer insurance with an investment component, allowing increased funds to pass to heirs. Tax specialists can maximize an estate’s value while using life insurance. And the investment after achieving growth can enhance retirement income.
Types of Life Insurance
Life insurance has two primary classes:
1. Term Life Insurance Term Life is less expensive, but most term periods are generally temporary. Many people choose term life insurance (or term rider on a permanent plan) when beginning a family, as they try to keep costs lower while covering many liabilities.
Term Life Insurance plans include: The death benefit coverage continues for temporary terms set in 5, 10, or 20 years; or a lifetime level term to age 100.
Other periods can run to age 65, 75.
The premium remains constant for these terms.
The low cost of insurance for a certain level of death benefit is the essence of this plan, generally with less emphasis on a cash value.
You can buy more term coverage for less premium, which does increase upon each term period renewal (for example, a five-year term rises in cost in the sixth and eleventh year and so on).
Term insurance can generally be converted to Permanent Life Insurance coverage without medical underwriting, but check with your advisor about renewal and conversion options when you plan to buy a policy.
2. Permanent Life insurance The coverage continues to the time of the decease of the insured or pay one a level or an increasing lump sum at a certain age of maturity (usually age 100), or offers cash value or premium pre-payment incentives. Where there are cash values associated with a Permanent plan, the insurance cost can be lowered as the increasing cash funds accumulating in the program replace the level of insurance needed.
Permanent Life Insurance plans include:
Whole Life, can offer a level premium and a cash value table in the policy in some cases, guaranteed by the insurer;
Limited Premium Payment, is a policy that can be paid up fully in a specific period of time (such as over 10 or 20 years; or paid up at age 65).
Endowment Life is where the cash value grows to a level equal to the insurance coverage.
Life insurance premiums vary according to the policy type. In some cases, paying a little more premium offers enhanced benefits. Tax-deferral strategies may change due to legislation.
More than three million Canadian couples will pass on an average of one-quarter million dollars to the next generation over the next 30 years. Consider that 50 percent of all personal assets are owned by people of age 50 or more. A question they will ask themselves is how to transfer this wealth to their families?
Transferring property to your children. Your children will be faced with a host of new responsibilities when they inherit your wealth. They will have to ask themselves: should we sell the house; what assets should we keep or place in storage; which assets should we share and which should we sell? Canadians who own a cottage or second residence used for vacations may require special tax planning because a cottage or vacation condo is considered to be a secondary residence for tax purposes. There may be family quarrels over who will pay for a cottage’s or vacation property’s upkeep and use, once you die. Consider your estate-planning directives before you pass on. This preparation will help to prevent confusion and potential family conflicts.
Utilize legal and/or accounting help. If your estate requires special consideration, discussing estate issues with professionals will provide options and guidance for simple-to-complex estates. If you have a cottage or another secondary residence, be sure to include this in your discussions.
Consider these alternatives:
• Plan to have the cottage/second residence held in a testamentary trust after you die. A trust is a legal document that allows you to determine what property will be provided for specific beneficiaries upon your passing. You may also set certain conditions to the use of the assets by the beneficiaries.
• Maintain control. Set up a living trust, so that the property won’t form part of your estate at death. A living trust is created while you are alive, and your beneficiaries can benefit from your wishes during your lifetime.
• Or, if the children want the cottage/second residence, give or sell the real estate to them while you are alive.
Understand the result – deemed disposition. When the ownership of a cottage/second residence goes directly to beneficiaries or into a trust, a deemed disposition takes place. This means that if the value of the cottage has increased, capital gains tax may have to be paid.
Consult an accountant to help you determine what tax will have to be paid upon the disposition of the cottage. Typically, the fair market value of the property, less its total costs, will result in a capital gain (only half of the gain becomes taxable). However, this gain may result in substantial costs because you could be faced with a higher marginal tax bracket. Tax planning with your accountant is essential.
Advanced estate planning can cover your second residence’s estate tax liability.
So you may ask, how can you pass on the cottage/second residence to your children without a large tax liability? Personal life insurance, purchased with your after-tax dollars, can provide a non-taxable death benefit to pay this tax. For a minimal monthly premium payment, your potential capital gains tax liability on a family cottage/second residence can immediately be covered.
In addition, your life insurance can also pay off any unpaid portion of the mortgage. This can help equalize the estate with other siblings. The person holding the mortgage would be the beneficiary for tax reasons. A joint last-to-die life insurance policy may be the least costly method to resolve the estate inequity. Note: A capital gain is only triggered upon the death of the last spouse, or upon the disposition of the property.
Estate equalization maneuver. In some families, not all children may wish to share in the family cottage/second residence. Where there is one child, who – to the exclusion of others – will receive your cottage/second residence, an inequity may occur. Your estate will pay the applicable capital gains tax on your cottage/second residence, thus lowering the remaining assets in your estate for equal distribution among the other children. Therefore, you may want to plan for estate equalization to the other heirs using an increased amount of life insurance proceeds.
Note: Prior to February 28, 2000, the inclusion rate for tax on capital gains was 75 per cent. From February 28, 2000, to October 17, 2000, the inclusion rate was 66 2/3 per cent. Currently, and as of October 18, 2000, the inclusion rate was further reduced to 50 per cent. You may need to treat your capital gains or losses separately, on the basis of these periods and inclusion rates, relative to the time that you realized your capital gains or losses. Consider consulting an accountant when evaluating your final estate tax liability.
Mutual funds offer investors a superior means of accumulating wealth through a broad range of investment solutions based on professional investment principles in a regulated environment.
There are eight benefits of Mutual Funds which the investor appreciates:
Professional portfolio management
Manage risk through diversification
Opportunities for foreign and domestic investment
Oversight by professional managers
Low entry investment amount
Solutions meet a wide range of needs
Easy to buy and sell
Convenient administration
The rapid growth in investor confidence in using mutual funds escalated to over half a trillion dollars. This indicates the validity of using mutual funds in an investment portfolio.
Our provincial health plans do not allocate funds to help patients who face a critical illness, to recover financially. They are established, not to build or replace wealth, but to provide basic health care. If you have little or no income, these plans would pay you only a small disability benefit if you meet specific situations. 1
1. Lump-sum benefits are paid: Critical illness insurance offers a lump-sum payout of cash if you are diagnosed with a critical illness covered by the policy (such as stroke, heart attack, or cancer). Its purpose is to provide a considerable amount of money (referred to as a living benefit).
2. Allows time to convalesce: The critical illness insurance capital can help you convalesce over longer periods and in the company of loved ones, without a concern that the expenses related to a previously enjoyed lifestyle must be immediately eliminated. After all, there may be an extended time necessary to recover before you can return to work.
3. Money for exceptional health care: Critical illness insurance can fund expensive drugs or out-of-country health care. You may need to employ a private nurse to live in your home, hire a nanny, receive physical therapy and/or renovate your home to meet accessibility needs related to the illness. Critical illness insurance can help pay these bills.
4. Critical illness insurance enables a career change: Due to medical advances, many people totally recover from critical illnesses and re-enter the workforce. Unfortunately, many others live the rest of their lives partially disabled, unable to do the same work. There may be a need to finance training for a career and search for new employment. Before you establish a new source of income, where will your money come from? Critical illness insurance keeps you financially stable through a critical illness.
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.
