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

What is Guaranteed Life Insurance?

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For some people, one of the greatest obstacles to obtaining life insurance is the medical evidence needed prior to the issue of a policy. Traditional life insurance policies require the applicant to complete medical questionnaires, and could also require physician reports, paramedical exams, blood and urine tests.  With this information, the life insurance company determines whether or not they will offer the applicant coverage and if so determine the appropriate premium. Guaranteed issue life insurance does not require medical exam let’s explore the pros and cons of this type of product. 

Pros:

  • Only a few questions to be answered to qualify
  • No medical exam required, no blood or urine samples
  • Immediately issued
  • Can be a term or permanent coverage

Cons:

  • The life insurance company can offer graded benefits: Meaning if the person dies within a specified period of time the beneficiaries will see a portion of the death benefit or portion of their premiums will be returned.
  • The premium cost is higher versus traditional life insurance. 

Guaranteed life insurance is typically a last resort life insurance policy because you can’t obtain life insurance through the normal underwriting process. If you have prior health issues but you are unsure if you could qualify for traditional life insurance speak to an advisor. Based on your medical history they will let you know if guaranteed issued life insurance is the right choice for you. Coverage amounts can range up to $500,000 in certain circumstances.  It is a good idea to speak to a professional adviser to get advice and answer your questions to make sure you understand the terms of the policy before you sign.

Purchasing your First House

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Looking at purchasing your first house is an exciting time; there are so many thoughts running through your head such as what location, size of the rooms and the interior finishes, yard size and potential upgrades. Even the joy of looking online and through magazines for potential ideas for your dream bathroom or kitchen can take priority. There are certain financial items that need to be considered prior to taking those first steps, and each has an impact on what you can afford. 

Financing

One of the first things many people do when considering purchasing a house is finding out how much they can afford. Finance calculators online can help give you a rough idea of your maximum purchase price. These calculators look at your gross annual income and debt to determine the maximum amount you can afford. There are two key items to consider when looking at what you can afford: that you are using gross income and the calculator provides the maximum amount you can afford. The calculator is calculating what you can spend based on your gross income; however, you actually take home less money due to taxes and possible benefit deductions. Instead of looking at your gross income, look at your actual net pay per month and ask yourself if you can afford the monthly expense. The calculator will tell you the highest-priced house that you can afford, but even if you can afford it, do you need it?

Comfort Level

This should be one of the top priorities when looking at purchasing your first house: how comfortable are you with paying that much per month for your mortgage, utilities, etc. and maintaining your current lifestyle? This is where having a budget and knowing what you feel comfortable spending is important. Having your budget made before purchasing a house and knowing what you want to spend goes a long way towards successful homeownership. The last thing you want is to over-stretch yourself and end up in debt or unable to do the things you love because you bought a house. Also, if you are planning to start a family in the future, remember that your income will drop while maternity leave, so having a budget set up where you can afford the house on one income could be beneficial.

Life Insurance

A mortgage is a large debt that has to be repaid to the lender, regardless of if something happens to you or your spouse. The smartest move is to purchase personally owned life insurance on yourself and your spouse to cover off the debt in case of death. This is different than the mortgage protection offered by your lender. Personally owned life insurance is owned by you, meaning you have control over it and the money goes to your named beneficiaries. Mortgage insurance is owned by the lender, so you have no control over it and all the money goes to the lender. You should consider personally owned life insurance when purchasing your first house to make sure if something happens to you, the house will be paid off in full. 

Repayment of HBP/Savings

If you are taking money from your RRSP for the Home Buyers Plan (HBP) or even money from your savings, you should consider how are you going to pay it back. The HBP has a set schedule of 15 years to repay the money back; otherwise, the annual repayment amount will be added to your income and be taxed each year afterwards. There needs to be a plan in place to pay this money back each year or, better yet, automatically each month. If you took the money from your savings account, although you do not technically need to repay it, you should consider what you want to save for retirement. You should still be able to put away up to 10% of your pay monthly into your investments for long-term savings. 

Emergencies

A house has lots of pieces that need to be in good working order to ensure that it lasts a long time, including the foundation, roof, windows, furnace and AC unit. Although most of these items should last a few years or longer, there is no guarantee that they will last that long and the unexpected can happen. Planning ahead for these unexpected expenses can save you from having to borrow additional funds through bank loans or credit cards. Plan to have upwards of $10,000 available in a high-interest savings account that you can access when needed. Having this money readily available will ensure that your unexpected expenses can be taken care of right away without falling into debt. When purchasing your house it would be wise to not use all of your savings, as repairs can happen sooner than later. 

Renovations/Upgrades

When you start to look at houses, it’s easy to start envisioning what you would change, whether it be the flooring, the wall colour, or the curtains. When you purchase your first house, you will spend time and effort to upgrade everything to fit your style and needs. Small changes such as painting can add up by the time you purchase paint, brushes, rollers, drop cloths, rags, and pans, you can easily end up spending $100. If you are looking at full renovations, such as taking walls down or installing new flooring or windows, the cost can end up being thousands of dollars. To prepare yourself and your budget for what is to come, take notes when looking at potential houses and write down what upgrades or renovations you would want to do. This will give you an idea of which ones are the most important and what the full cost of the house could be.

Each of these items should be considered when you are looking for a house. There is nothing wrong with purchasing a starter home for what you need today and moving to a larger one that fits your needs as they change. Take the first step of creating a budget and looking at what you are comfortable with spending, not what is the maximum that you can spend. A house is one of the biggest purchases you will make and knowing that you can comfortably afford it, even with renovations or unexpected expenses.

Grandparents Gifting Money to RRSP

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Many young people spend their hard-earned money on the usual things that young adults enjoy, not giving much thought to a retirement 45-50 years away. Canadian income tax rules allow for an indefinite carry-forward of unused RRSP deductions. Gifting money to make a contribution to your grandchild’s RRSP is a gift that keeps on giving. The combination of compound growth or accumulation of money over time can create substantial savings inside an RRSP.

To make an RRSP worthwhile, a minor RRSP holder should have earned money enough to allow for an RRSP contribution, based on 18% of income earned in the previous year and must have filed a tax return with Canada Revenue Agency (CCRA). An RRSP can be opened for a minor at any age, provided the minor has a social insurance number. Many financial institutions require a parent or legal guardian to the sign the RRSP account documents as the signature of a child is not legally binding. The minor can postpone claiming the tax deduction until a later date as there is no time limit and it may be prudent to wait until the grandchild is in a higher income tax bracket before using the deduction.

There are many ways children can earn income- any amount under the basic personal amount will not attract income tax. Income must be legitimately earned and not an allowance. If the grandparent or parent owns a business, the grandchild can earn a salary/income from the business. The salary or wages paid must be equivalent to what a stranger would be paid for doing the same work. There are many jobs a child or grandchild can perform.

It is important to help children or grandchildren understand that a contribution to an RRSP builds money for retirement, the children or grandchildren are building funds for their own future use. RRSP contributions can be withdrawn without income tax if the proceeds are going to towards the purchase of a first home or their education. Contributing to your child or grandchild’s RRSP is a great way to transfer wealth from one generation to the next. This is as an efficient estate planning tool which creates a win-win scenario of all concerned. If you are in a position to help your child or grandchild save for their future, consider a contribution to the child’s Registered Retirement Savings Plan (RRSP).

Pension Splitting and Savings Opportunities

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Pension income splitting is a tax savings strategy designed to lower a couple’s income tax bill. The intent is to provide a couple with more disposable income. When a couple files their annual income tax returns, they can jointly elect to shift up to 50% of eligible pension income from the spouse in a higher tax bracket to the spouse in a lower tax bracket. Income tax savings are created from the difference in a couple’s tax brackets multiplied by the amount of income shifted. Often the splitting of pension income enables the lower-income spouse to claim the Pension Income Tax Credit.

How do you qualify

To qualify for pension income splitting, a couple is defined as two individuals who are married or in a common-law relationship. Relationship breakdowns will prevent the couple from using this strategy. This assumes the members are living separate and apart from each other at the end of the year period of 90 days or more. Couples living apart at the end of the year because of medical, business or educational reasons would not be disqualified. The couple must be residents of Canada on December 31st.

The definition of elidible pension income

Those Canadians, age 65 or older by December 31st of the year, eligible pension income consists of:

  1. Payments from a Registered Pension Plan (RPP), Registered Retirement Income Fund(RRIF), Life Income Fund (LIF), and/or Locked-in Retirement Income Fund (LRIF)
  2. Lifetime Annuities from registered funds
  3. Interest portion of non registered annuities and prescribed annuities

GIC Interest Income issued by a Canadian life insurance company for those over age 65 qualifies for the Pension Income Tax Credit. This is not the case with GIC’s issued by a bank, trust company or credit union.  Pension Income splitting is a great tax planning opportunity for Canadians. The ability to lower couples combined income tax liability thus resulting in more after-tax disposable income.  For more information on this and other tax and estate planning information make a plan to meet with your financial advisor.

Stay the Course Through Market Corrections

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The stock market is similar to the weather in that both are increasingly prone to widening extremes. Investors should be reminded that stock market corrections are a fact of investment life. Historically, it is not uncommon to experience the stock markets pulling back 10 to 15 percent from previous highs.

What causes corrections

Warren Buffet contends that successful investing doesn’t require extraordinary intelligence, but rather an extraordinary discipline. It helps to understand that stock market corrections are part of a never-ending adjustment between a number of variables. These variables include interest rates and earnings, GDP growth, underlying economic patterns, currency shifts, world trade agreements and political relationships between world powers. Investors who switch their holdings into GIC’s when markets are down are locking in their investment and will be unable to respond to an upward shift.

What to do

Buying high and selling low is one of the most common mistakes investors make. Markets can and will over-react at times. Investors need to diversify to better protect their portfolios against market fluctuations. A balanced portfolio with a combination of asset classes- GIC’S, fixed income, real estate funds, Canadian equity and foreign equity provides a cushion to market volatility. Invest in evenly balanced packages in the equity of great ranking Canadian and foreign corporations. Stick to a personalized and well-structured investment strategy that matches your financial needs, goals, cash flow and long term objectives.

Investing without emotion is easier said than done. There are some important considerations that can keep an individual investor from overselling in a panic. Understand your own risk tolerance and understand the element of risk in the investments. Data shows that an investing strategy and staying the course often results in the best performance returns. Do not get caught up in media hype or fear and buy or sell investments at the peaks and valleys of the cycle. Stay the course and seek advice from a financial advisor before making any decisions regarding your investments.

Benefits of an Estate Freeze

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With good planning with your accountant, lawyer and financial advisor, an estate freeze can help reduce taxes on your assets, while maintaining control and access. Many business owners have seen substantial growth in their corporate assets and are approaching retirement age. As their assets continue to grow in value, the income tax bill that will be owed continues to grow as well. Currently, the amount of annual income tax paid is significant.

What is an Estate Freeze

An estate freeze is a process which takes certain assets that you own today and freezing them at today’s value. Any future growth in the value of those assets will be attributed to other persons i.e. your heirs (children, family, trust, etc.) The assets are transferred to a new company under section 85 of the Income Tax Act which allows them to transfer these assets in exchange for preferred shares of the company that will be frozen in value. The transfer will take place on a tax-deferred basis thus there will be no tax paid at the time of transfer. Common (growth) shares in the company to which all the future growth in value will be credited to will be issued to your heirs or possibly a family trust. 

There is the option to trigger the capital gain on private company shares when making the transfer to the new (holding) company. By using the lifetime capital gains exemption each shareholder is entitled to an exemption of $824,176.00 in 2016. This process will reduce taxes later when the shareholders sell the shares, transfer them to another owner or pass away. There are numerous advantages to considering an estate freeze. In most cases, the fees spent on legal and accounting advice now are much less than the income tax consequences of poor planning.

The benefits
  1. Reduces taxes at death – future growth of the shares in the company accrue to the common shareholder or family trust.
  2. Using the Lifetime Capital Gains Exemption which is available on certain private company shares and qualified farm and fishing property.
  3. Splitting income with family through the use of a family trust.
  4. Protecting assets when the future growth of a company will be held in the trust and will be protected from creditors.
  5. Reducing probate fees as a result of freezing the value of the shares, any future growth will not be part of the shareholders’ estate and thus not subject to probate fees.
  6. Maintaining control while holding preferred shares which were exchanged for the common (growth) shares. The senior shareholders will continue to have control and access to the assets in the private corporation.

Life insurance owned by the corporation is often a less expensive way of funding after implementing an estate freeze. The income tax rules are changing effective January 1, 2017, a discussion of how life insurance can be incorporated is recommended. New life insurance policies issued, in force prior to January 1, 2017, will be grandfathered under the current income tax rules. Life insurance policies issued, changed or converted after January 1, 2017, will have less tax sheltering room for investments, reduced tax-free flow of proceeds through the capital dividend account and possibly higher cost for actual life insurance. Consult your financial advisers to see if either the estate freeze or the positioning of additional corporate-owned life insurance plan makes sense.

Retirement Planning with Segregated Funds

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At a time when Canadians are planning their retirement, they are faced with challenges such as low-interest rates, fluctuating stock markets and unfavourable demographics. The Canadian life insurance industry has created a large toolbox of solutions to assist with these challenges with segregated funds. When planning for your retirement segregated funds can reduce some risks you can face such as named beneficiaries and death benefit resets. 

The Facts

By the year 2031, 9.6 million baby boomers will be age 65 or older.  This creates pressure on the government and corporate pension funds, individual savings and provincial health care budgets and services. A recent study by the Canadian Life and Health Insurance Association revealed that “government programs will pay only about half of the expected 1.2 trillion in long term care costs over the next 35 years. The gap in payments will add significantly to the demands upon retirement income”.

Years ago, we had 8 workers in Canada for every retiree. In the not too distant future, we will have 4 workers in Canada for every retiree. With increased life expectancy there will be continued demand on pension income sources and clients will need to plan for income beyond age 100. Canadians must accumulate larger retirement nest eggs while dealing with the uncertainty of fluctuating markets and low-interest rates.

The Benefits

Segregated funds are a combination of mutual funds with insurance products that guarantee all or part of your capital investment. Mutual funds are an important tool for retirement savings, but for those who have a low-risk tolerance, segregated funds provide a valuable addition to the portfolio mix. Segregated funds provide a few important protection features such as:

1) Creditor protection

 2) The opportunity to name a direct beneficiary(ies) and bypass the probate process and fees

3) Death benefit guarantees

4) Maturity guarantees

5) Reset options

A death benefit guarantee ensures that at death the beneficiary receives 100% of the original investment and growth. Any withdrawals will reduce the death benefit guarantee. If the equity markets drop and a client dies, the segregated fund tops up the fair market value of the investment to 100% of the deposit or the last reset value. If the markets are up when the client dies, your beneficiaries will receive the higher market value. Depending on the individual contract some death benefit guarantees can be reset optionally up to two times a year,  or automatic reset options to include the growth in the investment. Discuss what your options for resetting your death benefit guarantee are at your next meeting with your financial advisor.

Segregated funds create a “Win/Win” scenario for those saving for retirement as well as those individuals receiving retirement income now.

Distracted by Market Volatility

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Trade wars, Brexit, NAFTA – all of these bring volatility and the fear of losing money to mind.

A client recently emailed me the following. “I’m becoming increasingly concerned about the volatility in the stock market. Would it benefit us to move to a money market fund in the short term in order to wait out the crazy market?”

Understand what your risks are

Depending on your portfolio, the fear of volatility may not equal the market risk based on the probability of capital loss. If you are saving for a short term goal, then investing in the stock market increases your risk. Whereas, investing for the long term, such as retirement, is less exposure to market volatility if you are properly diversified. 

Many investors believe that pulling money out of stocks and into safe money market or cash is the safe move. Wrong. Derailing a long term plan by timing the market is one of the riskiest moves an investor can make.

Know the facts

A recent study done by J.P Morgan analyzed the S&P 500 index over a 20 year period, ending on December 31, 2018. If you had invested $10,000 at the beginning and stayed fully invested, the account would have grown to $29,845, or 5.62% annualized performance. Missing 10 of the best days over the same time period, the overall return is cut in half. If you missed 40 of the best days, the investment would have a return of -4.2%. With 5,000 trading days, less than 1% of the time is responsible for the change in returns. 

What should you do?

Over those 20 years, there was the tech bubble (2000’s), the financial crisis (2008) and the worst December returns in 2018. The markets have experienced a correction on average once every two years, yet people are always in fear of ‘the next one.’ You increase your odds of investment success and decrease your risk by staying invested, re-balancing periodically and avoiding distractions. Do not get distracted by the latest trade price or make emotional decisions on a fear of what could be. Talk to me to review your investments and make sure they are in line with your financial goals.

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Location

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

Phone

Tel. 613.384.1880
Fax. 613.384.4679

Business Hours

Mon – Thurs : 9 a.m. - 5 p.m.
Fri : 9 a.m. - 4:30 p.m.

Evenings and weekend
by appointment only