Susan Creasy Financial Inc.Susan Creasy Financial Inc.
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Archives for October 2019

How much life insurance do you need?

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Life insurance is an important part of any financial plan, providing reassurance that in the case of death, your debts, family and loved ones are taken care of. The benefit from a life insurance product is paid directly to your beneficiaries tax-free, providing them with financial security during a difficult time. Deciding how much life insurance you need can depend on many factors in your life.

Debt amount

The amount of debt you owe is one of the first things you will want to cover when looking at life insurance. Your mortgage, student loans, credit cards, car loans, and lines of credit should all be fully covered with the value of your life insurance policy. When looking at life insurance, you should purchase enough to pay off the full amount of debt you have today. 

Financial Security

If you have a partner, child(ren) or others who depend on your income for financial security, you will want to look at a life insurance policy that can provide them with monthly income in the event of your death.  Knowing how long you intend to provide financial security for is also important here; are you planning on providing enough income from today until retirement (age 65), or just for a period of time (e.g. 10 years). 

Budget 

Your budget will play a key part in how much insurance you can actually purchase to fulfil your needs. For a male aged 25, a $1,000,000 life insurance policy can cost between $40 to $120 a month, and for a female age 34, the cost is $30 to $85 a month. Depending on your budget, there may be some compromises initially, and you can purchase additional insurance in the future. 

Time Frame

The time frame will also play into which type of insurance you will need. With a mortgage, you will be looking at a 20 to 25-year time frame. With a car loan, you will be looking at a shorter time frame (less than 10 years). If you are looking at costs for funeral services, you would be looking at a lifelong product with a constant price over your lifetime. 

These four factors all play an equal part in determining the type and amount of insurance you will need to give yourself peace of mind as well as provide support for your family. Most life insurance products have guaranteed premiums and conversion opportunities. If budget is a major factor in determining how much insurance you can purchase, you can look at a lower cost for a short term product that has the ability to convert without having to take any additional medical exams. 

Charitable Giving

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What if the old adage is wrong, and you can take it with you? After 39 years as a Financial Advisor, I’ve wondered about this assumption, as have many of my clients. Knowledge and experience have taught me that we may not be able to take our money and our possessions with us into the next life, but what we can take is peace of mind, which is a pretty valuable commodity. At the very least, our final steps of this earthly journey can include feeling reassured that we have taken care of our loved ones, and our community, to the fullest extent possible.

Of course, this doesn’t happen by accident. It takes planning. We must put smart strategies in place that allow us to grow a legacy of generosity while simultaneously reducing the tax burden on our loved ones. There are many ways to lessen the tax burden of an estate and one of the simplest and soundest is charitable giving. A particularly tax-smart gift is designating a registered charity-in whole or in part-as the beneficiary of a Registered Savings Plan, an RRSP, RRIF or TFSA. Among the most significant benefits to the donor is the ability to retain ownership of the Registered Account until the time of death, and then giving a much larger gift than might be possible from current assets. Additionally, the resulting tax credit to the estate can be used to offset the deceased’s tax.

Charitable giving is a deeply personal choice-you know the causes that are most meaningful to you. I have served many not-for-profit organizations in Kingston, as a volunteer, and believe the biggest impacts are made locally. Do your research, and then ask your financial advisor for guidance in developing a strategy that brings all the pieces together.  As I have said before, unless you like paying more taxes, you should seek advice on how you can make a tax-smart gift now, from your current assets, or down the road, within your estate or will.

Disability Insurance: Group or Individual

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Are you confident that your group disability insurance will pay out if you are injured and unable to work? Most companies offer some form of group disability insurance plan to provide some value or benefit to its employees. These plans can provide a level of protection, generally 60% of salary, should you become unable to work due to sickness or injury.

Downside of Group benefits

Do you know the full details of your group plan? There are drawbacks to group plans, and in many circumstances the policy will not pay.  This is where an individual disability insurance plan can provide the needed coverage to ensure you have an income to pay your bills and families needs.

Disability definition

It is important to understand the term “disabled” when looking at your group plan. Many times you must be 100% disabled and unable to perform the duties of your specific occupation for a group plan to payout. Personal insurance will have a payout on a percentage of a disability.

Partial disability

This is one of the key differences between a group plan and personal plan. Many people are only partially disabled, meaning they can work but only for a shortened period of time or can only perform some aspects of their occupation.

An individual plan can pay out a percentage of the maximum payout when partially disabled. As an example, if your monthly maximum payout is $5,000 and you are 60% disabled. Individual plans will pay out $3,000 a month, or 60% of the max amount. Most group plans will not pay out on a partial disability.

Timeframe

Group plans generally change the disability term after 2 or 5 years of coverage, which can result in payments stopping. If after the timeframe you can’t work your regular occupation but can work any occupation even at a lower salary your payments will stop.   Individual plans can still pay out a benefit even if you are working in another occupation.

In addition, group plans can be cancelled by your employer at any time, the cost could increase over the years, and if you leave the position your coverage ends. Individual plans do not have these limitations. Yes, it will cost more but you get what you pay for when it comes to disability insurance. If you are disabled due to sickness or injury, that inhibits your ability to keep the roof over your head or food on the table, your thoughts will not be on the higher premium payment. It will be on ensuring you get that cheque each month.

Build a Budget, Take the First Steps

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It’s a new year and a new adventurous year is ahead for all of us. This might be the year you purchase a new house, a new car, take that dream vacation, welcome your first child, or take the plunge into entrepreneurship. There are countless opportunities, many roads to travel and so many memories to make. To make the most of the year and the goals you want to achieve, you should take note of what will need to be done, track your progress and adjust course if things change – in other words, have a plan and stick to it.

A budget is simply putting together a plan and being committed enough to stick with it, making adjustments as needed, to reach your end goal. Budgeting has gotten a bad rap over the years, with people assuming that you have lived a restricted lifestyle to save any cash. A budget helps you prioritize your wants and needs, focusing your spending habits on achieving the lifestyle you want without the burden of unnecessary debt.

Creating a budget is as simple as tracking your expenses, determining where you want to spend your money and adjust your spending accordingly. This does not need to be complicated – a simple spreadsheet will do.

Step 1: Identify your average monthly expenses:

Record your monthly income and your fixed expenses per month. Fixed expenses can include items like your mortgage or rent, utility costs (such as water, electricity, heating bills), car loans, monthly insurance premiums, car loans, phone/cable/internet plans, etc. These are all items that you pay each month and are fixed, meaning the amounts rarely change.

Next, record your variable expenses, such as entertainment, restaurants and take-out, groceries, gas, liqueur, your morning coffee, etc. These are the items that can change month to month.

Lastly, record any savings and/or debt repayments, such as any contributions to other accounts, such as RRSPs, TFSAs, OSAP repayment, average credit card debt, personal loans, etc.

Step 2: Identify whether you break even, have a surplus or a deficit and adjust your spending or saving as necessary:

Add all of your expenses, savings and debt repayment values together. Subtract that value from your monthly income; this may result in a break-even, a surplus or a deficit. If you have a surplus, determine where to channel that money, such as savings or debt repayment.

If you have a deficit, take a look at your variable expenses and prioritize them to see where you can save money. This might mean cutting the cable or eating out only once a month instead of every week. If you really want to live within your means with the budget you create, then you will find a way to make the necessary adjustments, even if it means a lifestyle change.

Take your time to create your personal budget and ensure it is the right fit for yourself. Don’t run into this and make quick decisions that you may not stick to. Make it a priority to track your spending and make plans to ensure your success for the new year.

Life Insurance Versus the Lottery

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Playing the lottery can be enticing. Each week there are countless advertisements for the ability to win millions in an instant. The emotions and thoughts of winning can become habit-forming putting down money each week to win. I too play the lottery at times, when the winnings are just too good to pass up. Who would not want to win millions of dollars by just putting down a few bucks? What about life insurance, the probability of it paying out is far greater than the lottery. 

Odds of Winning

When you start breaking down the odds of winning each week, is the lottery the best option? The chances of winning the lottery jackpot can be 0.000007%, that’s about 1 in 14 million. These odds never improve each week or each year. Yet, people are continuously willing to put money down each week believing this is their week to win. With such low odds, would it not be a smarter decision to put your money towards a product with higher odds of paying out? Life insurance is one of those products and it can cost even less than your monthly lottery ticket. The odds of a life insurance policy to pay out the death benefit for a 20-year-old is .05% or about 1 in 2000. In addition to that, your odds increase, that at age 40 you are 3 times more likely to receive the death benefit. 

Life Insurance Benefits

Compared to winning the lottery you are 10,000 times more likely to receive a life insurance death benefit at the age of 20.  As long as you continue to pay your monthly premiums life insurance will guarantee a tax-free lump sum payout and to your family. The amount of payout can be in the millions of dollars as well, allowing your family to pay off debt, the mortgage, time off work, or anything else they may need. Does it not make more sense to put your weekly lottery ticket money towards the smarter option of life insurance?

Final Thoughts

With a life insurance policy, you as the life insured will not be able to enjoy the money, but if you don’t win the lottery nor have life insurance your family never will either. Take a portion of your monthly lottery tickets and put it towards a better cause, with better chances, and a way to protect your family at the same time. Talk to me today to learn more about your options and how to protect your family and improve your odds.

Is a Group RRSP Enough

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Upon entering the workforce, one of the first things you are informed about is the amazing group RRSP or pension plan that your company has. If you put X dollars away each month, the company will match it, or you can receive a set pension for life.  Everyone looks at this as an amazing deal. You can get a 100% return on your investment or money for life in retirement. Why would you not take it? What they don’t tell you is that the group RRSP really has no guarantees and the company owns the policy.

My Experience

When I entered the workforce after university, I too took advantage of the amazing group plan. I put the maximum amount away, received the company match, and invested everything to start saving for my retirement. I thought this was guaranteed money and things could not get any better. However, after 3 years of working for this company, they changed their group plan without notice. The company match was lowered and the number of investment funds was decreased, which resulted in those amazing returns that I thought would continue long into the future to drop drastically. This is when I learned that I had to take my retirement plans into my own hands.

Real Life

The downfall of Sears Canada has recently brought this issue to light, with pension plans being frozen for many retirees as the company has fallen into financial disrepair. Now, with Sears Canada closing all of their remaining stores for liquidation, the pension plans are in limbo. Pensioners are not considered primary lenders and therefore, there is no obligation for Sears Canada to pay out any pension to them. All of the current pensioners and employees could lose all of their retirement savings and pension plans. All of their hard work and savings are now gone due to the company’s inability to succeed.

Group plans can be an amazing feature with company matches and can help you invest for your retirement. However, they should not be the primary or sole source of income for your retirement. Utilize personal RRSPs and TFSA to take personal responsibility and control over your money. Be smart with your money and have all of the angles covered to ensure your future is successful.

Is your retirement income at risk

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Throughout your career,  you have been investing your money on a regular basis into your retirement savings plan (RRSP), and think you have saved enough income to last your entire retirement. If you have planned properly, your RRSP, group plan, old age security (OAS), and Canadian Pension Plan (CPP) should meet your personal income requirements. Yet, there are many factors that can erode your retirement income faster than expected. 

What risks

Market risk can have a large impact on your RRSP or Retirement Income Fund (RIF). Poor performing stock market returns can impact your savings, amounts regardless of long-term rates of return. For example, losses in the first few years of retirement will have a larger impact on your retirement income than losses later on. 

Inflation risk will erode away your purchasing power as time goes on. This is a major concern for anyone on a fixed income, as a period of high inflation can be devastating. Relying on guaranteed income certificates (GIC) alone will not keep up with inflation with interest rates as low as they are now. A balanced portfolio with GIC’s as well as fixed-income funds is important to keep up with inflation at the least.

Longevity risk or outliving your money is a growing concern for many people. As life expectancy continues to increase, retirement income will need to last longer and longer. This means that planning for retirement needs to go beyond the typical life expectancy timeline; otherwise, there is a high chance your income will run out by age 90.

Withdrawal rate risk and spending too much income can limit your lifestyle later in life. Striking that perfect balance between over limiting your income and overspending is a delicate act. 

Investment behaviour risk related to making quick decisions emotionally can derail any retirement plan. Emotions play a large part when talking about finances; fear or greed can each have impacts on your savings and the end goal.

Final thoughts

These are just some of the risks that need to be addressed with building a financial plan for retirement. Working with a financial advisor can help find the correct investment strategy, support you through the financial roller coaster ride, and work to ensure your money can last. Book an appointment with us to review your current retirement plan, or help build one for you. 

Is mortgage insurance the right choice

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You have decided to purchase your first house or you are re financing your mortgage. Financial institutions will usually offer you mortgage insurance when selling you the mortgage. Mortgage insurance ensures that in the event of your death your mortgage will be paid off. Sounds great right – what is left owing on your house is paid and your partner will not have to worry about a mortgage. However, there are drawbacks with the product; a personally owned life insurance policy can be a better fit for your needs. Here are some key points to think about before signing up for the banks mortgage insurance.

Ownership

Mortgage insurance is owned by the bank and they are the beneficiary.  This means that you have no control over the policy and if there is a payout, the bank receives the funds. While this would pay off our mortgage, it does not leave your family with any funds. With a personally owned life insurance product, you own the product and you can name the beneficiary. If there is a payout, your beneficiary receives the funds and can decide what to do with them.

Coverage Amount

Mortgage insurance is tied to the value of your mortgage and will only pay out the balance owing. Your rates stay the same as your coverage amount decreases. This means that as time moves forward, your cost per $1000 of coverage is increasing. With personally owned life insurance, your coverage amount is not tied to the mortgage value so it remains constant for the duration of the policy. Your rates stay the same for the period selected, meaning your cost per $1000 of coverage stays the same. The bonus is that generally speaking, the cost of personally owned life insurance is less than mortgage insurance. Also, if you purchase $400,000 of life insurance and your mortgage has decreased to $200,000 at time of death, your beneficiaries receive the full $400,000, at which point they can choose to pay off the mortgage and have $200,000 tax-free in their pocket for whatever else is needed.

Guarantees

Mortgage insurance has no guarantees built into it, meaning that the rate you pay now may increase in the future. Also, each time you refinance your mortgage, you have to re-apply for mortgage insurance. If your health changes when re-applying, you may not qualify for the insurance when you refinance your mortgage. With personally life insurance, your rates are contractually guaranteed and therefore cannot change; the policy is also guaranteed to renew, regardless of your health and will stay in force as long as you continue to pay the premium.

Underwriting

Financial institutions do all their underwriting for mortgage insurance at the time of a claim. Meaning if you submit a claim, there could be months before a payout could happen. Secondly, if there is a discrepancy at the time of claim in terms of your current health and what you stated on the form, there may not be a payout at all. Personal life insurance does all of the medical underwriting at the time of application. Once you are approved any changes in your health will not affect the payout. As long as you are truthful in all your answers and do not omit any health concerns when completing the application, the policy will pay out some time in as little as two weeks.

The last thing to consider is with mortgage insurance, the people selling it are generally not life insurance agents by trade; they are mortgage brokers and not subject matter experts on life insurance products. By comparison, when you purchase personally owned life insurance, you are working with a life insurance agent who will walk you through the full application process and do their best to make sure that you fully understand the benefits and costs associated with each product. Properly protect yourself and get the coverage that will provide security when you need it the most. 

Account Options when Saving for a House

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Saving money for the purchase of your first house can be an exciting time.  Setting a goal and putting a plan together can have a positive impact but, at the same time, it can be a scary time with numerous choices on how to tuck your money away.  There are three types of saving vehicles available, and each account has advantages and disadvantages. There is not a ‘one size fits all’ product – what will be best for you depends on your personal situation.

Registered Retirement Savings Plans (RRSP)

They have been around for a while and is most people start out with, especially when entering the workforce.  Investing in an RRSP has the added benefit of giving you a tax-break on your income as well as saving for the future.  The RRSP can also help with saving for a house with the first time home buyers program (HBP). This program allows you to withdraw up to $20,000 tax-free that is put towards the down payment on a house, with repayment starting the second year after withdrawal and 15 equal payments over 15 years.  Repayment is something many people overlook, so make sure to plan for it in your household budget. 

Tax-Free Savings Account (TFSA)

This relatively new option was introduced in 2009 and is available to all Canadians.  The TFSA allows you to invest $5,500 annually plus any unused contribution room. The TFSA is an investment account, where you can select funds of various risk levels. Any deposits and withdrawals are tax-free, meaning you can withdraw the money at any time without worrying about tax implications. Any withdrawal is not tied to the HBP, so there is no repayment schedule to worry about.  

High-Interest Savings Account (HISA)

This option is similar to a basic savings account but gives you a higher annual rate of return.  Do keep in mind that any interest earned is taxable and there can be fees associated with high-interest savings accounts, so be sure to shop around for what suits your needs.  The advantage of this type of account is the guaranteed annual rate of return and the ability to access the money whenever you need it. 

Regardless of which option you choose, the key factors to remember are: 

  1. Timeframe – is there a repayment schedule, how quickly do you need to access the funds?
  2. Risk tolerance – what is your comfort with investing and your risk tolerance level?
  3. Monthly contributions – any interest earned should be considered icing on the cake, not a necessity to reach your goals.

Dual Wills Can Reduce Probate Fees

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While it is not uncommon for the executor of an estate to apply for a certificate of appointment of estate trustee of a will, all cases don’t warrant probate. Certain assets such as personal property including jewellery, cars, paintings, furniture and privately held shares can be transferred to beneficiaries without the necessity of probate. Named beneficiaries on investments or life insurance with a life insurance company do not usually require probate. Other types of property including land, mineral rights and real estate, often do not require probate for the title to be transferred to another person. Probate is also required in situations where the estate is engaged in litigation or third parties such as banks or other financial institutions refuse to transfer title of an asset to a beneficiary.

When engaging in estate planning, the goal is to use strategies that will reduce the value of the deceased’s estate which in turn will reduce the estate administration tax or probate fee. A few common strategies for minimizing probate fees include:

  1. joint ownership of assets with right of survivorship
  2. naming beneficiaries for RRSP/RRIF, life insurance and investments held with a life insurance company.

More recently since 1998, the use of dual wills has been approved as a tool to reduce probate fees in Ontario. Other provinces have not approved this practice. Dual will strategy has been approved in the Province of Ontario to reduce probate fees and allow a testator desiring to transfer certain kinds of assets to minimize the delay in processing the estate and to reduce the estate fees at death. Probate fees in Ontario are 1.5% of the estate value in excess of $50,000.00. The probate fee is payable to the Province of Ontario at the time of application for probate. Legal and accounting fees required to document the probate process are in addition to the probate fee and can often cost another 2-3% of the estate. An estate in Ontario with a value of $1 million would have Estate Administration Tax of approximately $14,500.00. Seeking quality advice from legal, accounting and investment professionals is critical. A team approach to your financial planning is the best way to solve your will and estate planning needs.

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Location

621 Norris Court, Unit 5
Kingston, Ontario, Canada
K7P 2R9

Phone

Tel. 613.384.1880
Fax. 613.384.4679

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Evenings and weekend
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