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Budget 2015 Highlights

FB Financial Apr 30, 2015

On April 21, 2015, Finance Minister Joe Oliver tabled his first federal budget. The provisions of the budget will be of particular interest to owners of small and medium sized businesses, seniors and families with children. As well, those looking to make certain charitable donations will be encouraged by Oliver’s budget.

Below is a brief commentary on each of the key budget proposals.

For Seniors and Savers

Increase in Tax Free Savings Account (TFSA) Limit

Effective immediately, you can deposit more into your TFSA as shown below:

	Prior to Budget 2015	Budget Changes
Maximum contribution	$5,500	$10,000
Future limits indexed	Yes	No

Reduction in RRIF Minimum Withdrawals

Under the new guidelines proposed by the April Budget, individuals turning age 71 will see the required minimum withdrawals lowered according to the following table:

Age	Existing	New
	Factor (%)	Factor (%)
71	7.38	5.28
72	7.48	5.40
73	7.59	5.53
74	7.71	5.67
75	7.85	5.82
76	7.99	5.98
77	8.15	6.17
78	8.33	6.36
79	8.53	6.58
80	8.75	6.82
81	8.99	7.08
82	9.27	7.38
83	9.58	7.71
84	9.93	8.08
85	10.33	8.51
86	10.79	8.99
87	11.33	9.55
88	11.96	10.21
89	12.71	10.99
90	13.62	11.92
91	14.73	13.06
92	16.12	14.49
93	17.92	16.34
94	20.00	18.79
95 & over	20.00	20.00

As a result of these changes, individuals taking the minimum required withdrawal at 71 and beyond will see greater capital preservation in their RRIF. This is illustrated in the following table:

Capital Preserved Under New RRIF Factors

Age 71 Capital Preserved ($)

Age	Existing RRIF Factors	New RRIF Factors	Difference % more remaining
71	$100,000	$100,000
80	64,000	77,000	20
85	47,000	62,000	32
90	30,000	44,000	47
95	15,000	24,000	60
100	6,000	24,000	67

Notes:

For an individual 71 years of age at the start of 2015 with $100,000 in RRIF capital making the required minimum RRIF withdrawal each year.
Age 71 capital preserved at older ages is expressed in terms of the real (or constant) dollar value of the capital (i.e. the value of the capital adjusted for inflation after age 71). The calculations assume a 5% nominal rate of return on RRIF assets and 2% inflation.

Source – Conference of Advanced Life Underwriters (CALU) Special Report, April 2015.

Home Accessibility Tax Credit

Once implemented, will provide up to $1,500 in tax relief for qualifying individuals (mainly seniors and disabled persons) making accessibility and safety related home improvements to their principal residence.

For Business Owners

Small Business Tax Rate

Proposed changes to the Small Business Tax Rate for Canadian Controlled Private Corporations will reduce the income tax rate for the first $500,000 of qualifying active business income as follows:

Effective	Tax Rate
Pre-Budget	11.0%
As of January 1, 2016	10.5%
As of January1, 2017	10.0%
As of January 1, 2018	9.5%
As of January 1, 2019	9.0 %

Dividend Tax Credit for Non-eligible Dividends

Under Budget 2015, proposals call for a change in the gross up and dividend tax credit rate in conjunction with the proposed reduction in the small business rate as follows;

Effective	Gross up Factor for Non-eligible dividends	Effective rate of Dividend Tax Credit
Pre-Budget	18%	11.017%
January 1, 2016	17%	10.50%
January 1, 2017	17%	10.00%
January 1, 2018	16%	9.5%
January 1, 2019	15%	9.00%

Increase in Lifetime Capital Gains Exemption for Qualified Farming or Fishing Property

The Budget proposes that on or after April 21, 2015, the LCGE for capital gains realized on qualified farm or fish property is increased to $1,000,000 (currently $813,000).

For Families

Included in the Budget but previously announced:

The Family Tax Cut will allow couples with children under the age of 18 to split their incomes for a tax credit of up to $2,000;
The Universal Child Care Benefit proposal increases the benefit to $160 per month (currently $100 per month) for children under the age of six and provides a new benefit of $60 per month for children ages 6 to 17:
The children’s fitness tax credit has been doubled from $500 to $1,000.

Other Proposed Measures

Donations involving Private Shares or Real Estate

In the past, CRA has had concerns with donations involving private company shares and property being valued appropriately.

Budget 2015 proposes to exempt individual and corporate donors from tax on the sale of private shares or real estate to an arm’s length party, provided the cash proceeds are donated to a registered charity within 30 days.
If implemented, this will take effect in 2016.

Simplification of Form T1135 Reporting

This form which deals with the reporting of foreign property has proven to be extremely onerous for the individuals, corporations and trusts who are obligated to file it.

For taxation years that begin after 2014 the form will be significantly simplified.

Registered Disability Savings Plan

In 2012, the government had announced that for those individuals who did not have the capacity to enter into such arrangements, a qualifying family member could temporarily become a planholder.

Budget 2015 extends the temporary period from December 31, 2016 until December 31, 2018.

New Anti-Avoidance Rules – Tax Avoidance of Corporate Capital Gains

Budget 2015 contains proposed amendments to Section 55 of the Act, which exists to prevent conversion of corporate capital gains to tax-free intercorporate dividends.
These new amendments will be applicable to dividends paid after April 20, 2015.

Budget 2015 is a document consisting of over 500 pages, so there are many more elements than what is discussed here. The budget proposals included here are the main ones that may have the most impact on your planning.

If you require assistance in determining if your personal or corporate planning will be affected, please call me and I will be happy to assist.

Also, please feel free to use the sharing buttons to forward this article to anyone you feel would benefit.

Sources cited in this article:

CPA Canada Federal Budget Commentary – 2015
CALU Special Report – April 2015
Canada Revenue Agency – Website News

Insuring seniors is costly!!

Firth Bateman Mar 14, 2012

INSURING SENIORS IS COSTLY, BUT IT’S WORTH IT!

It’s a well understood truth that the best deal on life insurance can be had when the client is young and in relatively good health. But just because the premiums on seniors are much higher, the need for insurance in your golden years may still be a good deal.

There’s no shortage of worst case scenarios, ranging from larger-than-expected tax liabilities to the failure of a pension plan.

Adapted from an article written by Al Emid that appeared in ADVISOR.CA on March 14, 2011. This discussion has been modified and amended to address a public audience.

Even good news can conspire against the client: with longer life expectancies and earlier retirements, there is a higher likelihood that medical and living expenses will consume retirement assets.

At the same time, it has become more common – even socially acceptable – to carry debt into retirement. A Harris-Decima poll last August for CIBC found that only 35% of Canadians in the 55 to 64 year age group are debt-free and that 8% of respondents believe they will be in their 70’s before clearing their debts. Another 10% have no hope of ever becoming debt free.

In today’s environment – not like our parents‘ environment – there are a lot of people retiring with a mortgage or perhaps a long line of credit or they’ve signed for their kids to get their houses. There are a lot of reasons for seniors to be worried. They don’t have a debt free environment anymore.

Another common problem is that estates of baby boomers may face unexpectedly high tax bills. In the stereotypical scenario, parents bequeath the family cottage to their children, along with a massive capital gain, thanks to soaring vacation property values.

Some aim to shield beneficiaries from their debt. They want to make sure that debt is paid off when they pass away.

Carrying debt to the grave and unexpected tax bills illustrate the importance of term and permanent insurance in a senior’s protection portfolio.

Not all insurers provide coverage at the top of the age brackets, however. This can affect the availability of insurers with whom to write contracts.

Tracking differences can be a challenge, as well, since there are over 2,400 life insurance products and variations available in the Canadian market.

In the term insurance category, some insurers will not underwrite policies after the individual turns 65. Many will, however, renew term coverage up to 85 years of age when the policy ends, and a rare few will renew term coverage up to age 100.

Renewal costs on a term policy average four times the original premium – for those with additional risk factors, like tobacco use, that can rise to six times the original premium.

If the insured individual has remained in good health, a broker may be able to get an entirely new policy for a client at a lower cost than the renewal cost.

Applicants that are still in good health can look at applying for a new term 10 (T10) with medical evidence, rather than just letting the (existing) policy renew on its own, but this process should be concluded before the old policy lapses.

Changing policies, however, means exposure to a new two-year term of incontestability and the suicide exclusion.

In the permanent insurance category, underwriting age limits vary between companies and product lines.

The number of companies providing term 100 (T100) coverage has decreased in recent years and some companies that currently offer it are expected to drop it from their line-up, since underlying costs have proven higher than originally calculated.

To a senior who is already concerned about his/her debt purchasing life insurance coverage might be a difficult concept to come to terms with, but when the effect that debt and taxes can have on an estate is considered it can be a welcome strategy to consider.

People should also be reminded that survivor benefits on some pension plans provide only 60% of the original payment to the surviving spouse after the plan-holder deceases.

Given that the end beneficiaries of the life insurance policy are often the senior insured’s adult children, it might make sense for them (the children) to purchase the policy on the lives of their parents, to shield their inheritances on their parents’ deaths. In this fashion the children would own the policy. They would have the ability to use it to pay the taxes or keep the cottage.

THE CASE FOR “LONG TERM CARE” INSURANCE

Firth Bateman Feb 27, 2012

THE CASE FOR LONG-TERM CARE

A personal story . . .

Ten years ago, at the age of 75, D.B’s. mother-in-law was diagnosed with Alzheimer’s and has since lost her ability to speak. For the past seven years she has lived in a chronic long-term care facility in Toronto. She is in a semi-private room and has a special attendant who visits her daily to help her dress and eat. When D.B. and his wife go out of town they arrange for additional medical professionals to be on call in case she has to be taken to the hospital. This care and attention provides his mother-in-law with the dignity she deserves and us with peace of mind.

This care costs D.B’s. mother-in-law $50,000 a year. She and D.B’s. late father-in-law did save for their old age—but they didn’t invest in long-term care insurance (LTC) simply because it was not available and even if it were, she would not have qualified.

Because people in long-term care facilities live longer, they face a higher chance of outliving their money. Even if D.B’s. mother-in-law’s savings do run out, D.B’s. family will continue to provide financially so that she will always receive the same level of care. But not all families are in the financial position to cover such costs. That is where LTC comes in. LTC provides an option to those who do not have savings and the financial ability to provide care at a level that is appropriate. The government funds basic long-term care but LTC allows people to upgrade their service beyond the government minimum levels.

All for LTC and LTC for all
The fact is people are living longer. Whether at home or in an institution, many of us will someday need help with the ordinary, daily tasks for an extended period of time. The bigger point, though, is LTC is not just an issue for the old and frail. Head injuries, strokes, paralysis from accidents and spinal injuries can occur at any age and no one is immune.

People are not rushing to buy LTC, however, because they are understandably in denial. They feel they are too young, too old, too healthy or too unhealthy to need LTC. They believe the government will provide adequate funding. They do not understand what is at stake. LTC should be considered by anyone who wants to protect his or her assets, avoid relying on government-funded facilities or choose their preferred form of healthcare assistance.

LTC is a tough sell in the financial planning business. It is both an expensive product and a disturbing topic. It is, in fact, a product that is still purchased infrequently. Ask yourself, though, if you know of a relative or friend living in a care facility or receiving care at home – and you probably do.

We recommend people consider the cost for long-term care, because it varies widely. People can easily face monthly costs ranging from $3,000 to $7,000, just for facility charges. Costs can double if a parent or spouse still lives at home while his or her spouse is in a facility.

Throughout her life, B.D’s. mother-in-law supported and tended to her family. Now in her time of need, B.D. and his wife will spare no expense to ensure she has excellent care and dignity. Long-term care insurance is not available, simply because we may wish it. We have to qualify to have contracts issued. It should be considered as an integral feature of our comprehensive planning.

A research story . . .
(May 31, 2005) Changing demographics will have a long-term effect on societal practices, experts say, and must be properly understood.
Demographics are “…one of the more important aspects of retirement planning,” argued Carl Haub, senior demographer at the Washington, D.C.-based Population Research Bureau during a recent National Press Foundation meeting, also held in Washington.
Haub defined demographics as the study of a population’s age structure, especially the relationship between age groups and their growth or shrinkage. A constant structure of young, middle-aged and senior citizens ensures that needs remain constant as long as the number of individuals also remains unchanged.
In a retirement planning context, constant structure means that the proportion of income-earning individuals “paying into the system” relative to youths and seniors remains steady and predictable. A bulge in the age structure produces increased tax money coming into government coffers — with an accompanying increase in services demanded while a contraction causes a decrease in incoming funds.
Currently, the most important demographic issue centers, perhaps not surprisingly, around baby boomers. “Every trend you can imagine is ascribed to the baby boom,” Haub said, defining it as a post-depression boom instead of the more frequent characterization as a post Second World War boom.
Haub believes the boomer trend peaked in the early 1960s. The fertility rate declined in the next decade, with many couples concluding that two incomes were necessary, he said. The American fertility rate fell to 1.7 children per couple but then stabilized at two by 1990, meaning that population stays constant except for the effects of immigration and longer life expectancies. The Canadian rate is estimated at around 1.5.
That equation, when combined with other projections, leads to the bureau’s estimate of an older and expanding Canadian population in the future, bringing with it many implications.
As the population ages, we will increasingly face problems that accompany advancing years, suggests Nathalie Tremblay, health products manager at Desjardins Financial Security. For example, a recent Desjardins-sponsored study undertaken by Toronto-based Baycrest Centre for Geriatric Care indicates that one in three individuals over 85 years of age suffers from dementia.
Increasing life expectancy and the prospect of dementia and other infirmities will become problematic given the shrinking family support systems triggered by the declining birth rate, she says. “Who will take care of them (when) you have 1.5 children per woman?”
That equation provides a compelling case for long-term care insurance. A long-term care insurance policy provides benefits for services needed when the insured individual is diagnosed with a debilitating illness or injury and can’t perform at least two activities of daily living, such as eating, bathing or dressing.
Eligible services can include health aid fees, home management, home-based hospice/palliative care, services of a nurse and nursing-home care.

Addendum . . .
Long-term care insurance contracts can be designed to make “return of premium” benefits available, and, in this fashion, be structured to comprise an integral element in a person’s investment portfolio.

This report is abridged and modified from a variety of original discussions published in the “ADVISORGROUP” series of publications, read by the associates at FB FINANCIAL & Associates.

What is “critical illness” insurance?

Firth Bateman Feb 27, 2012

This report is abridged and modified from a variety of original discussions that appeared in professional journals read by FB FINANCIAL & Associates.

CRITICAL ILLNESS INSURANCE

Introduction . . .

The concept of life insurance is fairly straightforward: your loved ones and/or business partners would suffer financially as a result of your premature death, so you take out insurance that will provide for them in your stead.
Critical illness insurance (or “CI” for short) takes the idea of personal risk management one step further — instead of paying if you die, this kind of insurance policy pays so that you can live — offering protection should you fall victim to a serious illness.

How it works . . .

Instead of having to take out a bank loan, drain your retirement savings, or rely on family members while you recuperate from a disease, critical illness insurance will pay you a lump sum benefit to help speed your recovery.
For example, a critical illness insurance policy might pay you $100,000 should you be diagnosed with cancer or have a heart attack.

History of the product . . .

In the 1980s, a doctor in South Africa named Marius Barnard noticed that although many of his patients were able to physically recover from surgery, their bank accounts never returned to normal. Working with an insurance company, Barnard helped to create the world’s first critical illness policy.
The idea spread first to the United Kingdom, where people were anxious to find a way to pay for private care rather than going through the under funded National Health Service. It soon became one of the most popular types of insurance coverage in Britain. The product is now gaining ground in North America.

CI’s place in your circumstances . . .

Critical illness insurance is not a replacement for adequate life insurance or disability insurance coverage. Life insurance protects against your untimely death and disability insurance provides a regular income should you become unable to work.
Critical illness insurance is a complementary product that is meant to help you overcome the large, one-time expenses that may be associated with a significant illness.

Uses . . .

You are free to use the lump sum, cash benefit from a critical illness policy in any way you see fit. You could, for example, use the money to pay off your mortgage, renovate your home to make it wheelchair-accessible, fund a business buy-sell agreement, take a vacation, or even jump the medical waiting list in Canada and pay for private care in the United States. It’s up to you.

Types of coverage . . .

There are a wide variety of critical illness insurance products on the market, covering a range of illnesses. Most policies will pay should you be diagnosed with cancer or suffer from a heart attack, blindness, kidney failure, or a stroke. Some offer protection for more obscure diseases, such as the West Nile virus, E. coli bacteria, and meningitis.
The definitions of what constitutes a “critical illness,” however, can vary from insurer to insurer — so it may take some research to determine which product is best in your situation.

Refund of Premium . . .

Many critical illness insurance policies offer a return of premium or “ROP” feature. This means that if you don’t make a claim, you will receive some or all of your money back upon reaching a certain age — usually age 65 or 75.
Adding this feature will increase the monthly cost of your insurance, but it does appeal to people who like the idea of getting their payments back should they never need the product.

Qualifying . . .

Critical illness insurance is sometimes subject to very stringent underwriting, and can be difficult to obtain.
Depending on the amount of insurance you require, you may be asked to take a medical exam and those who already have a history of illness may not obtain coverage at a favourable rate.
Generally speaking, it is best to obtain CI while you’re still young and healthy so that you will have coverage in force in later life, when you may be more liable to fall victim to a serious disease.
Obtaining coverage at an early age may also allow you to “lock in” your premiums at a guaranteed rate.

Next steps . . .

What are your concerns? Are you worried about the financial damage an illness could do to your retirement savings? If you had the money available, would you jump the lineup in Canada and get immediate treatment in the United States?
The position of critical illness insurance coverage should be assessed from two perspectives . . .

how it assists in the management of risk in your fiscal and personal affairs;
how it integrates with your comprehensive cash flow considerations – including your accumulation strategies as you endeavour to address both shorter and longer term goals and interests.

WHAT IS MORTGAGE INSURANCE?

Firth Bateman Feb 27, 2012

WHAT IS MORTGAGE INSURANCE?

Mortgage insurance is offered by most banks and lending institutions. They will offer it to you when you get a mortgage or refinance an existing one.

“Mortgage ‘life’ insurance” is an insurance policy that pays the balance of your mortgage to the lending institution if you, the person listed on the mortgage, pass away.

Mortgage insurance provides a life insurance amount equal to your remaining debt. As your mortgage decreases, so does the payout your life insurance contract provides.

The cost of the insurance is based on the mortgage amount and your age at the onset of the mortgage, and the payments remain constant through the life of the life insurance policy contract. Essentially, you are paying the same monthly premiums for a reducing amount of coverage as you pay down your mortgage.

What is traditionally described as “mortgage insurance” is great for the lender, because it (they) is (are) listed as the beneficiary of your policy.

HOW DOES TERM INSURANCE COVER MY MORTGAGE?

There is another planning approach that will address concerns for “insuring a mortgage.” Term life insurance provides protection for a specified period of time. A death benefit is paid to your beneficiary if you die while the policy is still in force.

When you purchase a term life insurance policy you are covered for the full amount of your mortgage – not just the outstanding balance – for the life of the policy. That means you have a constant level of coverage for the whole term of the life insurance contract.

Term life insurance is usually cheaper and you select your beneficiaries, versus having the beneficiary designated by the lender – as the lender. The proceeds from your term life insurance contract can be used, as well, in any way your beneficiary deems necessary – not just to repay your mortgage. This can be an important benefit of having your mortgage insured by a personal life insurance contract at the time of a claim against the contract.

YOUR BEST OPTION

When buying a new home, or when renewing or replacing a mortgage, is the perfect time to purchase term life insurance to protect your mortgage and your family (although the issue can be examined and explored at any time during the life of a mortgage). Based on its flexibility, coverage and price, term life insurance is often a superior option, when compared to “mortgage insurance.”

COMPARING MORTGAGE AND TERM INSURANCE

I PAY THE PREMIUMS, SO I OWN THE POLICY, RIGHT?

Term Insurance: Yes. You own the policy and you name your beneficiaries.

Mortgage Insurance: No. You are part of a group policy and the lender is the beneficiary.

IS THE COVERAGE FLEXIBLE?

Term Insurance: Yes. You choose the coverage you want, regardless of your mortgage balance. You can increase or decrease your coverage, renew your coverage and convert to permanent protection. If you renegotiate or pay down your mortgage, or sell your home, you can continue or discontinue your coverage.

Mortgage Insurance: No. The lender will only insure you for the amount of your mortgage. You cannot alter, renew or convert the policy. If you move your mortgage to another lender, you cannot transfer the policy – which can result in increased costs incurred to replace the coverage lost when the mortgage account is moved. Your coverage ends when the mortgage is paid off or ends.

CAN MY BENEFICIARIES USE THE PROCEEDS FROM THE POLICY FOR SOMETHING OTHER THAN PAYING OFF THE MORTGAGE?

Term Insurance: Yes. Upon death, the proceeds go directly to your named beneficiary (or beneficiaries), who then decides (decide) how to best use the money.

Mortgage Insurance: No. Upon death, the benefit (usually reduced) goes directly to the lender to pay off the mortgage.

IS THE COVERAGE GUARANTEED?

Term Insurance: Yes. Your insurance and premiums are guaranteed for the life of the policy. Only you can cancel or make changes to your policy.

Mortgage Insurance: No. Your premium and benefits are not guaranteed. Your lender can make changes at any time.

I LOOK AFTER MY HEALTH AND DON’T SMOKE. WILL THAT MAKE A DIFFERENCE TO MY PREMIUMS?

Term Insurance: Yes. The premiums you pay are based on your age, health and smoking status.

Mortgage Insurance: No. Since the mortgage insurance is usually provided in the context of a group life insurance plan, you pay the same premiums as everybody else.

“Universal” contracts or “Whole Life” contracts??

Firth Bateman Feb 27, 2012

In this discussion we feature a debate examining the features and the structures of “whole life” insurance contracts and “universal life” life insurance contracts . . .

Universal Life

What is it and who is it for?

The easiest way to describe a universal life (UL) policy is as a combination of a term insurance policy along with an imbedded investment account that allows for different investment options within it. It’s like a bucket where clients can pour in or deposit a flexible amount. There’s not a contractual premium the way there is with whole life (WL). Instead, there is a maximum and minimum deposit range.

Adapted from an article publishing a debate moderated by Dean DiSpalatro and Vikram Barhat that appeared in ADVISOR.CA on April 10, 2011. The “universal life” position is
taken by BRETT SIMPSON, Chairman, Rogers Group Financial and a trustee for the
Institute for Advanced Financial Education. The “whole life” position is taken by JAN
RUSSEL, CLU, CH.F.C., CFP, President, Russel Financial Services Inc. This discussion
has been adapted and amended to address a public audience.

Picture a tap at the bottom of the bucket, out of which is coming the mortality costs, or the amortized term insurance cost. You can choose whether those mortality costs are on a level cost-of-insurance basis or whether the premium increases annually as the client ages. If you have a level cost of insurance, you’d have that cost leaving the bucket each year.

This level cost for life is similar to a non-participating (no dividend) WL contractual premium. Under either level or increasing mortality cost structures in a UL policy, you could pour more in the bucket in a given year than what comes out of the cost taps, thereby building a surplus for future years. Clients should always be contributing at least the cost of the insurance that’s coming out the tap at the bottom of the bucket to ensure sustainability, unless there is a surplus.

A surplus allows you to skip deposit years in the future, or create an additional flow into the bucket from the investment return on that surplus that can be enough to subsidize the outflow from the bucket, which is mostly the level, or yearly renewable, cost of insurance. So the two things that go into the bucket are the deposit the person wants to put in and the investment return that gets recycled back into the bucket.

Does that make UL a better option than WL insurance?

It really depends on the need. UL is good for a person who doesn’t have any trouble with the discipline of saving. For somebody who’s not disciplined, a contractual premium [as in WL] that forces them to put in a certain amount at any given time is good. But flexibility, [as with UL], is always a nice thing. In corporately owned situations with uncertain corporate requirements, or variable cash flow requirements, the flexibility to put in excess deposits in some years and skip deposits in other years ends up being useful.

One of the advantages of UL is accountability. You can get a contractual guarantee on each of the components of UL, such as administrative costs, policy fees and mortality costs, whereas WL is all bundled together. You can get a guarantee on the overall bundle in WL, but not on the contractual components of the bundle.

UL separates those contractual pieces. You can see each of the pieces and isolate choices with each of the pieces with very specific contractual guarantees that vary between different insurers. Personalized choice and linked returns make it more accountable and less opaque in terms of investment performance.

There’s more room to customize the parameters of the UL chassis to the particular needs of the client. A WL plan, which has the same components — the mortality cost, the administrative cost, and the return that the insurance company is generating — guarantees the premium that is charged for a guaranteed amount of death benefit, but the premium they’re charging is an overcharge.

They’re charging what they need to in order to fund the policy if they’re going to make only a rate of return of about four percent. So if the insurer makes more on the overall participating portfolio, which is invested in mortgages, bonds, real estate and stocks, say a return of six to eight percent, then they didn’t really need to collect as much in premium to fund the mortality cost at life expectancy.

The excess rate of return is then credited back to the client in the form of a dividend. And that dividend is really a refund of the overcharged premium. So it’s not a taxable dividend in the way that we would think of a dividend from a stock. It’s really a refund of their excess premium.

A WL participating investment portfolio would be like a cruise ship ploughing through the waves, very stable because of its length and its girth, whereas a UL investment portfolio may be more like a small sailboat. It’s going to go up and down with the waves of market cycles because the investment horizon is generally going to be tied to something shorter-term.

A UL policy can be more flexible, and can be adapted more to somebody’s specific risk tolerances. Sometimes higher-net-worth individuals may feel they need or want to customize [the policy] to their particular tastes or tolerances. They may not want something as mass market as WL.

Whole Life

What is whole life insurance?

Whole life (WL) insurance is a life insurance product that lasts your entire life, with the death benefit increasing by means of a dividend. This dividend can be reinvested in the product, increasing the cash value on a tax-deferred basis over time.

Most WL plans are participating, which means the policyholder receives a dividend each year. When the insurance company collects a premium, the company first uses it to cover all the mortality and administration charges [associated with the policy]. The remainder goes into the par account, which is then invested. Dividends are allocated each year from the earnings of the par account.

[Unlike universal life (UL) plans], the client isn’t involved in the management of the portfolio — it’s done strictly by the insurance company. Generally it’s invested in things of a long-term nature — a portfolio of government and corporate bonds and loans, mortgages, real estate equities, and cash. The equity portion is usually much lower than you would see in a balanced mutual fund, for example, and because of this it’s a very low-volatility account.

As a result, WL policyholders will generally see their cash value rise every year, though the dividend may vary from one year to the next. When they get reports from their insurance company, they’re never seeing their cash value go down.

In the past, insurance companies got into a lot of hot water because they made projections on the level of future dividends, which could be used to pay future premiums, without enough disclosure. They didn’t provide enough information to policy owners that these projected dates on which policy owners could stop paying premiums were not a guarantee. Companies are now required to inform their clients that dividend projections are subject to the economics of rate of return on investments, mortality rates, and things of that nature.

The dividend can be used in a number of ways. For example, you can use it to buy additional insurance, so your protection grows over time. It can also be used to cover future premium payments, which means, at some point in the future, the values in the plan plus the continuing dividend would cover the premiums, although as mentioned before, this is not a guarantee. Nowadays, WL plans can be set up so there is a guaranteed date when no future premiums are required.

Who should buy it?

Generally WL products cost more than a minimum-funded UL product, [and are most suitable for people who have some financial latitude]. You certainly wouldn’t pick this kind of product if it meant you had to sacrifice paying down your mortgage, saving in your RRSP’s, or putting money towards RESP’s.

There are a few different profiles that fit the WL option. A good profile would be someone from 45 to 60 years of age who has done well financially. They may have paid down their debts, and no longer have a mortgage. And they may even have available assets beyond their RRSP to put away for their estate. [WL insurance is] a great estate planning tool because the dividend can be used to purchase additional insurance protection over time.

This increases the estate value of the policy, and it’s a great way of leaving money tax-free to someone you care about. WL insurance can even work well for a business owner who has excess cash and wants to put it into a policy. They can have the corporation own it, and still be able to access those cash values and have an estate value later on. The policy also works well for a younger person who doesn’t yet have dependants or a lot of debt. When you are younger, the cost of the policy is lower and you may have the affordability to put something away without it being a drag on your RRSPs and other savings. So that might be someone who has just come out of school, and they haven’t yet got a family or a mortgage — someone in the 25-to-32 age range. Everyone can use some permanent insurance — whether it’s WL or UL insurance — because some day we’re all going to die, and cash is always needed when that happens, even if the person didn’t get married and had no dependants. There’s funeral and other expenses that have to be taken care of. You can cover this off with a small WL policy, and then add a larger block of term insurance.

Combining WL and term

Having a part WL, part term insurance arrangement makes sense because the term portion will be low-cost. You’ll then be able to convert the term portion into a WL policy in the future when your needs change. Say you’re 55, and you want to start thinking about providing money for your estate. You can simply say to the insurance company that you want to switch over part of your term insurance to WL, and you won’t need to go through a medical exam.

If you have a serious medical issue at the age of 55, for example, and you already have a big block of term insurance, you can convert to WL and the insurance company can’t refuse — they would have to give it to you at standard rates. If you were to first apply for the insurance after having a heart attack, you would either be turned down or you would have to pay onerously high rates. Buying the block of term insurance is a small price to pay to have the option to convert later on. So you could be young and with no mortgage, but it still makes sense to protect your ability to get it in the future when you’ll really need it.

Some will say there’s so much more flexibility in UL because they can manage their investment options themselves. But it’s hard enough to manage your portfolio of securities in your RRSP, your non-registered account, your TFSA and your RESP. What I find is it’s not managed well most of the time within a universal life policy. And it’s not done proactively, because a lot of agents are just not wealth managers or don’t have the time.

So why not hand it off to the insurance company? Yes, you do have to pay a fixed premium and you can’t choose your investment mix. But if you look at the return on the par portfolio for the last 25 years with Sun Life, it’s 9.3%, [which is quite good].

I’ve also seen cases where people will fund a universal life plan with very little, and because of volatility they actually have to put up extra money at the end of the year. The cost of the insurance is deducted monthly, and all of a sudden the account value has gone down and there’s not enough money in it to cover the cost. But you never have to worry about that with [WL].

Good advisors design programs that match the client’s cash flow and needs. And they’re always given options. When I see clients, if I feel their [ability to afford insurance] and their life stage matches a term [product], we’ll show them term. We may not show them any WL at all. We just educate people, and in the end it’s the client’s choice. It’s really no different than the suitability requirements that you have to meet when helping people to invest.

KNOWING YOUR PRODUCT

Are there situations where a UL policyholder should also hold a whole life policy?

Simpson: Sure. I have both types of coverage myself. But it’s not a should, it’s a can. The two of them are similar and so part of it is diversification of strategy. [With the WL policy,] I’m going to use the duration-averaged return of the participating portfolio of the insurance company. I’m going to tie my returns to the insurance company, and I’m going to have an increasing death benefit if I’m going to use that participating WL system to reinvest my dividends in paid-up additions.

[With the UL policy,] I want to be able to customize my rate of return to my own risk tolerance. If I want an equity-like return, then I want to be able to invest in a diversified portfolio of businesses, through a stock type of mutual fund investment within my insurance policy portfolio.

What are the odds of an advisor making an unsuitable recommendation?

Simpson: They’re much higher in UL insurance because of the [possibility of a] combination of too low a premium with too high an investment return assumption. In that case, the policy actually can’t fund itself, forcing the client to put in a higher premium later than what was planned. In a WL, there’s a contractual premium that does not vary. The risk in WL coverage exists when using the non-guaranteed dividend to subsidize the contractual premium or pay for extra term coverage. This is where a lot of insurance companies were sued in class action suits in the late 1990s and early 2000s, when dividends decreased and could not meet expected uses. (Editor’s note: Agents selling universal life insurance in the 1990s defended high premiums by saying they would disappear after a few years. However, the premiums would only disappear under unrealistic rates of return.) Subsidized premiums didn’t vanish and the growth of policy benefits did not meet expectations.

Is there a clash of interests?

Simpson: I don’t think you can isolate the clash of interests between advisor and client to one product type. There’s always a conflict of interest in managing a client’s needs, and the advisor is expected to put the client interest first. There’s no right kind of insurance for everyone. Anybody that says there’s only one right kind is showing they’re really not that knowledgeable about insurance and its uses. Each one of the tools, each one of the insurance products has been designed for particular needs.

PENSION MAXIMISATION: WHAT IS IT?

Firth Bateman Feb 27, 2012

A discussion exploring a strategy for ensuring
maximum income through retirement,
brought to you by the associates of
FB FINANCIAL & Associates . . .

Maximizing Your Pension . . .

If you or your spouse is healthy, consider purchasing a
permanent life insurance contract a few years before
retirement.

Adapted from an article by Barry J. Dyke – a member of NAIFA-New Hampshire and an agent and advisor for more than two decades. This article is excerpted from his book, The Pirates of Manhattan, which is about the monetary system, finance and permanent life insurance. Contact him at 800-335-5013 or at castleassetmgmt@comcast.net. The original article is written to address an American audience, but the concept translates easily to speak to the Canadian fiscal context.

If you have a defined-benefit pension plan, you should not only consider yourself lucky but you should also understand that a lifelong guaranteed pension can have a high economic value. Also, a defined-benefit pension plan in the private sector is protected by the terms of the Government of Canada Pension Benefits Standards Act, 1985 (PBSA). Such a plan, as well, has an even higher value if it provides a guaranteed income for life for a retiree and spouse.

For instance, let’s look at the recently calculated, approximate value of a pension for a 57-year-old female government retiree. Under her defined-benefit pension plan, the retiree qualified for a life pension of $57,000, which had the actuarial annuity or lump-sum economic value of about $806,207. At retirement, the retiree, who is married, had to choose from three options:

The maximum income for life: No benefits, however, would be paid to the surviving spouse if she predeceased her husband.
A life pension of slightly less: If the retiree predeceased her husband, he would get a partial recovery of her plan contributions.
A substantially reduced pension for life: The pension, however, would cover her and her husband and guarantee both of them a pension for life.

Many retirees in this situation feel compelled to take the reduced lifetime income, commonly known as a joint and survivor pension. Once they select this option, however, it cannot be changed in most cases.

Points to ponder:

There are several important things you should consider before deciding to take reduced pension benefits:

If the retiree lives a short time, the surviving spouse faces a lifetime of reduced pensions.

If they both live a full life and die within a year or so of each other (which is not unusual), little benefit, if any, is realized after 20 or more years of reduced pension income.

In either case, the children of the retiree and spouse will never inherit any benefits.

Let’s review (“green” box, to the right) the potential costs associated with the retiree who was considering the $57,000 pension for life. Keep in mind that this is only an example:

In conclusion (after our review), the pension survivorship option is just like expensive term life insurance – and may never pay a benefit.

A better way

An alternative is pension maximization, via which you purchase a life insurance policy before you retire in an amount that would give the survivor or other heirs a similar monthly benefit. For example, you couldbuy a universal life policy for about $471,000, which would fund a survivor pension/annuity option if interest rates are at 4.25 percent for the next 30 years. The annual premium or deposit into the life insurance would be $7,308.

Conversely, a low-premium whole life insurance contract, which would guarantee the death benefit and provide cash values as an additional economic asset, would cost approximately $11,000 per year.

The best way

The best way to maximize your pension if you are healthy four or five years before retirement is for you to buy low-premium whole life insurance for about $8,600 per year. This strategy is widely used and has been implemented extensively in pension maximization circumstances for people.

Suppose, for example, a retiree’s spouse predeceases the retiree. The retiree still receives the maximum pension. The life insurance proceeds are now directed to the retiree’s adult children— something that would not have happened under a traditional joint and survivor pension arrangement.

In another situation, a retiree has accumulated so much cash in his/her life insurance contract that he/she can now finance the purchase of his/her automobiles with his/her life insurance loans instead of using bank loans. He/she is still in excellent health, although his/her spouse’s health is failing. The pension-maximization strategy established will work better for adult children who are heirs to the estate.

Some caveats

Pension maximization does not work in all circumstances, however. Someone whose health has deteriorated is not a good candidate for permanent life insurance, which is the fundamental component and economic workhorse of a structurally strong pension-maximization strategy.

Here are some things to keep in mind as you consider a pension maximization strategy:

Life insurance proceeds to the survivor are income-tax free, whereas survivor pension benefits are fully taxable as ordinary income.

If annuitized at an older age, the survivor will have a larger monthly income than he/she would under a traditional joint and survivor option. If life insurance proceeds are annuitized, a large part of that benefit will be income-tax free as a return of principal under the exclusion ratio.

If a retiree and his/her spouse die simultaneously, insurance benefits could pass to other heirs, such as their children.

Life insurance can provide additional benefits such as long-term care insurance and accelerated death benefits if the policy owner has a terminal illness.

If the survivor recipient of the pension predeceases the retiree, the policy can be put into a reduced paid-up mode, whereby no further premiums are required at a reduced life insurance benefit. The retiree could also surrender the policy for its cash value if need be, or borrow against it, even in a reduced paid-up mode.

If the retiree’s spouse predeceases him/her and the retiree remarries at a later date, the new spouse can be named the beneficiary of the policy.

FB FINANCIAL & Associates

Firth Bateman

Principal / Associate

e-mail: Firth.Bateman@telus.net

web: http://www.fbfinancial.ca

NORTH DELTA OFFICE

11921 80 Avenue, Delta, BC V4C 1Y1

PH: 604.591.1336 FX: 604.596.2223

Types of Life Insurance

Firth Bateman Nov 28, 2009 life insurance vancouver

Basically, there are three types of life insurance contracts that you need to know about:
Term, Permanent (often referrred to as “whole life” insurance), and Universal Life insurance.

types_of_life_insurance

Term life insurance

Term life insurance is the most traditional and best-known form of personal coverage, paying out to the policyholder’s dependents in the case of death. The main advantage of this insurance is that it is lower priced initially than other types of insurance, but it offers few other benefits.

This type of coverage typically operates for a fixed term of 10 to 30 years, depending upon the policy, and pays out the benefit amount if the policyholder dies.

Permanent (or “Whole Life”) Life Insurance

Permanent life insurance offers coverage for a lifetime, with a guaranteed payout upon death.

You choose the death benefit that will be paid upon death. You make payments in to the policy fund. Any amount you pay into the fund in excess of the cost of insurance (the premium) provided by the life insurance contract is invested and builds a cash sum over time. This cash investment enables the value of the death benefit to increase, or allows loans to be taken against the policy, with many people seeing this as a viable income stream for their retirement plans.

Universal Life Insurance

Universal life insurance offers an extremely flexible middle way, combining life cover with the chance to build up an investment income, at a lower cost than fixed permanent life cover.

This type of cover can be very flexible and allows payments to be varied, depending upon the current financial circumstances of the policyholder. Money paid over and above the normal premium can be used to either increase the cash value or increase the death benefit.

Summary

The three types of policies: TERM, UNIVERSAL, and PERMANENT (or “Whole Life”) insurance offer different benefits depending upon the needs of the policyholder.

The most affordable option, a simple Term policy, offers temporary coverage, but no other investment potential, and is usually a prerequisite when taking out a mortgage or a large loan.

Permanent (or “Whole Life”) and Universal Life insurance contracts are more flexible, offering tax-free investment potential alongside the lifetime coverage, allowing money to be invested into the death benefits or the investment account.

It is always important to seek independent financial advice before committing to any major financial decision and to be aware of all the long term investment opportunities available.

One of the easiest ways for you to make an informed decision before you buy life insurance is to sit down with a Financial Advisor to evaluate your situation. A Financial Advisor can help you determine the type of insurance coverage that is best for your unique situation.

Question or concern about Life Insurance?

Call Firth Bateman: (604) 591-1336
Life Insurance
Delta, BC