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Weekly Personal Finance Roundup January 30th 2015

January 30th, 2015

Weekly Personal Finance Reading

In our articles this week, we wanted to create a discussion around back-to-back annuities, as well as, RRSPs and TFSAs. We also looked at how hard it might be to obtain insurance if you participate in extreme sports. 

We debated whether back-to-back annuities are a good a idea or a bad idea.

Explored the dangers of 5 extreme sports that may be tough to get insurance

And examined the differences and similarities between RRSPs and TFSAs.

On the list for weekend reading this week we have a wide range of diversity. Personal finance experts started a discussion on the topics of the Canada Learning Bond and the state of the Canadian economy. There were also a few helpful articles for those that need help with their finances. One of these provided income sources for the needs and wants of retirement. While other articles added important actions people need to add to their to do list. Enjoy your weekend and here are the articles in our weekly roundup!  

The Big Cajun Man at Cajun Finances gives his opinion about Smartsaver.org and how children of lower-income families can take advantage of the Canada Learning Bond. 

At Money We Have, Barry Choi asks the question, what's up with the Canadian economy? The issues he covers are the interest rates, the strength of the dollar, job losses, state of real estate and oil prices.

Mark Seed of My Own Advisor provides an income source for the wants and needs of retirement

Retire Happy's Sarah Milton gave us 4 financial numbers that we need to know. One of them is your credit score, she explains why.  

David Israelson from the Globe and Mail listed 7 items that your financial checklist should have

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RRSP vs. TFSA: Which Savings Plan Is Right For You?

January 28th, 2015

TFSA vs RRSP Savings Plan

A Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) are the two best choices for many Canadians when it comes to setting aside savings and investing some of their current income for the future. Yet, the question remains, among RRSPs and TFSAs, which savings plan is better?

There isn’t a universal answer to that question, as both RRSPs and TFSAs offer their own advantages and disadvantages. While some people in a certain income and age bracket will be better off using TFSAs, others will find that investing in a RRSP is the best way to go.

Let’s take a quick look at how RRSPs and TFSAs compare against each other.

Investing in RRSPs and TFSAs

When it comes to the type of investments allowed under each plan, both RRSPs and TFSAs don’t really differ from one another. Savings accounts, Guaranteed Investment Certificates (GICs), stocks, bonds and mutual funds are all eligible investments for both RRSPs and TFSAs.
Speaking of mutual funds, it’s also worth noting that many insurance companies will sell you segregated funds rather than mutual funds. These segregated funds are also eligible to be put into RRSPs and TFSAs. While segregated funds are similar to mutual funds in many ways, they also have several exclusive benefits. Some of these advantages include having a maturity guarantee of 75% of your principle investment, resetting privileges to lock in growth and protection of assets from creditors.

While RRSPs and TFSAs both have similar types of eligible investments, that’s where most of the similarities between the two savings plans end. From here on out, they go in different directions.

Contributing to RRSPs and TFSAs

Let’s start with how you contribute to each plan. Canadians earning less than $130,000 a year can contribute up to 18% of their annual income to their RESP. Anyone earning over that amount can contribute a maximum of $24,270 (2014 figure) annually to their plan. It’s also very important to note that you can’t make any more contributions to your RESP once you pass the age of 71.

Contributing to a TFSA works very differently. You can only contribute a maximum of $5500 (2014 figure) to this plan annually, regardless of your income. On the other hand, there are no age limits and you may keep contributing up to the yearly limit indefinitely.

Taxing Your RRSP or TFSA

RRSPs and TFSAs are also taxed differently. Your RRSP contributions are tax deductible and you will receive a tax refund for them annually. That refund can go towards your RRSP contribution for the upcoming year. You can even take advantage of this tax deductible status and hold investments like USD stocks in your RRSP without paying any of the taxes you would normally be charged if you were holding this stock in your portfolio outside of a RRSP. All of this seems like a good deal right? Unfortunately, there is a downside. While your RRSP contributions are tax deductible, any money you take out of this account in the future will be taxed accordingly as part of your income. This means that if you have a decent pension and draw additional money from your RRSP, you could be heavily taxed during your retirement years.

Unlike RRSPs, TFSA contributions are not tax deductible. This means that any contributions that you make to your TFSA will be taxed just like the rest of your income. On the flip side, the money in your TFSA isn’t taxed and you can withdraw it entirely tax-free. This tax-free status also applies to any additional money you may earn from your invested money in a TFSA. For example, if you earn $1000 a year based off your invested money in a TFSA, that $1000 would be not be considered as “income” and won’t be taxed.

Withdrawing from a TFSA and RRSP

This brings us to the next major difference between these two plans: withdrawing money. TFSAs will let you withdraw your money at any time. The amount of money you withdraw in one year will be added to your contribution limit for the next year. For example, if you withdrew $5000 in 2013, you would be able to contribute an extra $5000 toward your TFSA in 2014 alongside your regular contribution.

RRSPs are much more restrictive when it comes to withdrawing money from your account before you reach your retirement years. Typically, you are only allowed to prematurely withdraw funds from your RRSP if you’re purchasing a house or paying for education. Any withdrawn money from your RRSP has to be repaid in yearly installments.

Conclusion

Well, that’s it for most of the major similarities and differences between RRSPs and TFSAs. Like mentioned earlier, there is no easy answer for which plan is universally better for you. Both of them provide their own unique advantages and benefits. If you have a large income, then strongly consider contributing to both of these great money saving plans.

If you have a lower income and can only choose one plan, then consider contributing to a TFSA. Because you have a lower income, you likely won’t be able to take advantage of the RRSP’s tax deductible feature anyway. Having the flexibility to withdraw your money from your TFSA at any time could also come in handy if you’re in need of emergency funds or have short-term goals you want to accomplish.

If you’re part of a higher income bracket, then consider contributing to a RRSP before the TFSA (although you should definitely be thinking about contributing to both plans if you have the funds). This will allow you to make a large yearly contribution to your RRSP and reduce your total income tax at the same time. You can then use those tax savings to invest in a TFSA if you wish. Because of your higher income, you’re also much less likely to require emergency access to the funds in your RRSP account.

Again, there’s no right or wrong answer here. At the end of the day, it’s important for you to do your research and figure out which savings plan here fits your own personal needs. Just remember though, its best that you start contributing to these plans as early as possible during your professional life in order to reap the maximum benefits.

5 Extreme Sports That Can Make It Tough To Get Insurance

January 27th, 2015

5 Extreme Sports2

If you participate in extreme sports, getting life and disability insurance is absolutely necessary. There have been countless cases, such as this one involving skydiver Kenzie Markey, where an uninsured person participating in an extreme sport suffered serious injuries and racked up expensive medical bills during treatment.

Unfortunately, it’s not easy getting life or disability insurance if you’re involved in dangerous sports that can result in serious injury or death. During the insurance underwriting process, many companies will ask you if you participate in extreme sports or hazardous activities. If you answer in the affirmative, you will be asked to complete supplementary questionnaires and provide additional information.

If an insurance company determines that your participation in a hazardous sport is too risky, it could decline your policy outright, charge you a higher premium or add an exclusion clause to your policy. An exclusion clause is an agreement between you and the underwriter stating that the policy won’t pay out if your injury was the result of participating in an extreme sport.

Despite the extra hurdles, it’s still possible for people who participate in extreme sports to get life or disability insurance at an affordable premium rate as long as they take the right steps.

Let’s take a look at 5 extreme sports that can put your life or disability insurance applications at risk. We’ll also talk about what you can do to ensure that you pass the underwriting process if you participate in any of those sports.

1. Scuba Diving

Scuba diving is a form of underwater diving where the divers use their own independent source of breathing gas. The word “scuba” stands for self-contained underwater breathing apparatus. Using the scuba gear allows divers to have a greater amount of movement and freedom underwater.

While scuba diving is no doubt an exciting activity, there are several risks associated with it. Some of these include equipment malfunction while underwater, decompression sickness, negative effects due to breathing high-pressure gasses and possible injuries related to changes in water pressure.

While applying for life or disability insurance, scuba divers can make the underwriting process easier if they obtain proper diving certification and use the recommended equipment required to have a safe dive.
Other factors such as total years of experience, diving for a recreational or competitive purpose and the duration/depth of the dive can also influence the underwriter’s decision.

2. Mountaineering

Mountaineering is a broad category that includes various activities such as mountain climbing, bouldering, rock climbing, snow/ice climbing and scrambling.
The risks associated with mountaineering are obvious. Broken bones, hypothermia and natural catastrophes such as avalanches or rock-falls are some of the more common dangers climbers face. Death is also a worst-case scenario when performing this activity.

When applying for a life or disability insurance policy, mountaineers are more likely to be successfully underwritten if they’ve received formal training and obtained safety certification. Belonging to a club or a climbing association rather than performing this activity alone can also be a positive factor.

Finally, the time of year and how high a climber is intending to ascend during a climb are also considered during the underwriting process. Typically, the lower a climber is intending to ascend, the easier it is for them to be insured.

3. Skydiving/Parachuting

Skydiving is a sport involving jumping out of a flying aircraft and freefalling down to the ground before using a parachute to gradually slow down the descent in order to land safely.

Despite the thrilling nature of skydiving, it is often considered by insurance companies to be one of the most dangerous extreme sports in existence. This is because skydiving accidents often have the potential to result in serious injury or death.

The most common dangers that skydivers usually face is dealing with parachute failure during freefall and unstable weather that can interrupt a controlled descent.

When applying for disability or life insurance, skydivers can make the underwriting process easier if they have a license and a solo certification (this certification allows skydivers to attempt solo dives without direct supervision).

Insurance companies are also less likely to grant independent skydivers a policy. A skydiver who is affiliated with a professional club and an established drop zone is far more likely to be successfully underwritten.

4. Automotive Racing

As the name implies, automobile racing involves the racing of automobiles in a competitive setting. Typically, multiple drivers participate in a single race and the driver who sets the fastest time while completing a set number of laps wins the race.
Despite automobile racing being a mainstream sport in most countries, insurance companies usually still list it as an extreme sport and require racers to complete supplementary information forms during the underwriting process.

The biggest risk usually associated with automobile racing is vehicle crashes resulting in major injuries or even death depending on the severity of the accident.

Automobile racers applying for life or disability insurance first need to obtain proper certification required to race competitively. They also need to disclose other information such as their automobile type, expected minimum and top speed during a race and even the type of fuel used by their automobile.

Regarding the races themselves, automobile racers have to disclose which tracks they’re racing on and list the track’s length and surface. Finally, competitive racers typically have to belong to a recognized governing racing association in order to be granted an insurance policy.

5. Bungee Jumping

Bungee jumping is an activity that involves jumping from a tall structure while hanging from an elastic cord. The jumper freefalls until the cord is fully stretched out and then rebounds upwards as the cord recoils. The jumper remains hanging in the air until their momentum completely dies down.

There are several risks associated with bungee jumping. Some of these include equipment malfunction during a jump and unstable winds altering the trajectory of a jump. Neck injuries, whiplash and eyesight damage have also been recorded.
When going through the underwriting process, bungee jumpers should specify how frequently they jump on a yearly basis, where they perform their jumps and what height they typically jump from.

Performing all jumps while in a controlled environment and working with a professional organization that is industry-certified also plays a huge role in passing the underwriting process.

Are Back-to-Back Annuities a Good Idea?

January 26th, 2015
back to back annuities

Annuities are a great way to ensure income in your retired years. Back-to-back annuities, or insured annuities, are particularly useful, but there are a few things you should know and consider first.

What Exactly Is A Back-to-Back Annuity?

It is an annuity you buy that gives you a fixed, guaranteed income for life, backed by an insurance policy that allows you, at the end of life, to pass on the capital to beneficiaries. Additionally, what you receive from annuity payments is enough to cover your life insurance premium and still give you cash in hand. Many have discovered that back-to-back annuities actually help to decrease their annual taxable income because a portion of each payment is considered a return of capital, thereby saving them from OAS clawbacks.
A large investment is best

If you can afford to invest $100,000 or more into a back-to-back annuity, you will stand to benefit the most. This type of annuity is as much about income security as it is about securing your wealth for future generations.

Simplicity

Annuities are very simple and function more or less like a retirement fund. You don’t need a degree in finance or economics to understand how these work, or how to set one up, which is always a bonus! They also provide guarantees, which are also nice when you are investing large sums of money.

Tax Advantages

There is a substantially greater tax advantage to this type of annuity, when compared to GIC’s and other annuities. When you first begin drawing on a typical annuity, the taxable portion of your payout is at its highest point. In contrast, back-to-back annuities utilize a constant taxable portion over the life of the annuity, which aids in manageability and means more pocket money after tax. The life insurance policy also guarantees a tax-free return of the annuity’s purchase price to a beneficiary.

Your Future

No one knows what their future will hold when the retirement years roll around. How will your health be? What will your mental state be like at that point? Will you still be able to take care of yourself? These are the great unknowns, and for many who plan to enjoy retirement, they don’t want to be worrying about making investments and closely monitoring their portfolios. There is a comfort to back-to-back annuities.

Lacking In Options?

When you are over 70 years of age, securing something like life insurance can be challenging. This is another reason why a back-to-back annuity is a great option. It will provide a consistent income that won’t stop once you pass away.
Interest rates matter

These types of annuities work best when interest rates are low, and they are largely recommended for those 70 years of age and older. Keep in mind that this annuity is primarily about leaving a financial legacy and while it is a great idea and option – it may not be for everyone.

What’s All The Worrying About?

Many don’t consider this, but as the average lifespan increases what we need for retirement also increases. If you built your retirement plan on the premise that you were only going to live until the age of 70, then you might find yourself destitute by the time 85 rolls around. Many people have not planned well enough or considered just how long they will be around and by the time they realize it, panic sets in. For those who do hold considerable assets, they have to worry about future market conditions and preserving their financial legacy for future generations.

The Best Case Scenario

The person who stands to gain the most from a back-to-back annuity is a healthy male, age 65 to 75 who gets in when interest rates are low. This is the best possible circumstance for a single-life policy. There are, however, other types of back-to-back annuities that you should consider. There are spousal policies in which you can choose a first-to-die, or last-to-die policy, which will help you control how payments work and when they begin.

A Test Case

Here is a hypothetical example from the Financial Post, of how a back-to-back annuity could work:

“Consider a 70 year-old female with a marginal tax rate of 43.70% who purchases a $500,000 insured annuity at current rates. Her insured annuity pays out $39,222 per year at prescribed terms. She pays insurance premiums but, because her annuity payment includes return of capital, only part of it is taxable. With these deductions the annual net cash flow would be $17,985 per year or 3.60% after-tax and expense yield.” - Quote from Kim Inglis of The Financial Post

So, are back-to-back annuities a good idea? Yes, they are, but there are many factors you need to consider before diving in. First and foremost, you need to consult a financial advisor to explore all the products available to you. If you decide that a back-to-back annuity is the way to go, it needs to be purchased through someone who is licensed to sell insurance. Whether you are single or married, you can benefit from annuities, especially for partners where one is healthy and one is ill (the healthy one carries the policy). Talk to your advisors today.

Weekly Personal Finance Roundup For January 23rd 2015

January 23rd, 2015
Weekly Roundup Bank of Canada

New this week in the world of Canadian personal finance, blogs are writing about the Bank of Canada lowering their key interest rates for the first time since 2010. Be that as it may, the major banks in Canada are still deciding whether or not they will lower their prime rates as a result. The Bank of Canada news is not the only subject personal finance writers are blogging about this week. Other topics in this roundup cover the Ontario Retirement Pension Plan and self-employment, exchange traded funds, and taking control of your finances as well. Enjoy your weekend and here are the articles in our weekly roundup!

Mark Goodfield from Blunt Bean Counter writes about how the Ontario Retirement Pension Plan defines and excludes the self-employed.

Canadian Couch Potato provides advice on taking your ETF to the next level. 

Gail Vaz-Oxlade published a recent post in her This & That series. In this edition, Gail provides advice in taking control of your finances.

Lastly, Brighter Life reported on the biggest news story in Canada this week when Bank of Canada cut their interest rate down to 0.75 per cent. You can read our article about how this will affect your insurance premium. 

Bank of Canada Lowers Interest Rates: How This Affects Life Insurance

January 22nd, 2015

Bank of Canada Low Interest Rates

 

Bank of Canada Cuts Key Interest Rates

Bank of Canada shocked the Canadian finance community yesterday when it announced that they have cut their overnight lending rate by 0.25 per cent. The Central Bank of Canada attributes that the cause of the cut in key interest rates is due to the falling price of oil. In the past six months, the price for oil has decline to US $50 from US $105. Oil importing economies, for example the United States, benefit from the low cost of oil. In addition, the low oil prices are expected to boost global economic growth and create divergence among economies as well. Meanwhile, in economies that export oil, for example Canada, will experience negative growth and inflation. Bank of Canada’s action to lower key interest rates was to provide a counter against inflation and keep financial stability. The Bank predicts that oil prices will rise again to US $60 per barrel in the medium term.

Along with the overnight rate lowering to 0.75 per cent, the Canadian dollar has also lowered to 81.07 cents compared to the US dollar. To give an idea of how low both key interest rates and the Canadian dollar are, Bank of Canada has not changed their key interest rate since September 2010 and the dollar has not closed this low since April 2009.

The lower price of oil, the cut of key interest rates and the weakened Canadian dollar attributes to a negative impact on the country’s economy. The Bank now forecasts GDP growth to be 2.1 per cent for 2015, down from the original 2.4 per cent prediction from October 2014. However, by 2016 the economy is expected to make a turn around by the end of 2016 hitting GDP growth of 2.4 per cent.

Why Low Interest Rates Are Bad For Your Life Insurance Policy

When Bank of Canada lowers its interest rates the outcome is that forms of borrowing, mortgages, credit card and lines of credit, also have lower interest rates as well. However, lower interest rates for life insurance policies generate the outcome of higher premiums. In order to understand why premiums rise, we need to understand how life insurance companies turn a profit.

If you own a permanent life insurance policy, and calculate the premiums you expect to pay during your lifetime, the total sum would equal less than the death benefit. Since companies do not collect enough premiums to equal the death benefit then they are losing money. So how do they make a profit?

One way life insurance companies turn a profit, is from clients cancelling their policies creating revenue from lapsed policies. The problem with this method is that not enough people are cancelling their life insurance policies for companies to make a profit. This creates a situation where life insurance companies have to raise the cost of premiums to pay out the death benefit of other customers.

Another method is through long term investments. While you are paying your premiums, insurance companies invest your money in long term investments for, example, bond markets. This is one of the factors that determine the price of your premium. If an investment they make return at a reduced amount, insurance premiums increase. An insurance premium may have cost a certain amount before the Bank of Canada decided to lower key interest rates. That same policy may now cost more in terms of premiums after the new interest rates take place. For those that have locked in their insurance policies with guaranteed rates, they do not need to worry about their premiums changing. In the long run, interest rates do affect new consumers, as well as, anyone planning to change or cancel their policy.

What Can You Do?

If you have been holding off on buying permanent life insurance coverage, the time to act is now, especially since the Bank of Canada has lowered interest rates to 0.75 per cent. Waiting is never a smart choice when it comes to life insurance. You could hope to wait until the Bank of Canada decides to increase the interest rates again but there is no guarantee when it will happen and to what percentage.

 

David Hutchison | Director of Sales, Western Ontario Foresters Canada

January 21st, 2015

David Hutchison
Director of Sales, Western Ontario
Foresters Canada

1. What type of life insurance do you own?

I currently own an universal life insurance policy with a level cost of insurance. 

2. What factors did you consider when determining the coverage amount?

I was young when I purchased my plan and the main factor, at the time, was to cover‎ student debts, funeral expenses and to leave extra for my family. In addition, I wanted something that would grow with time. Something that would increase as my needs did with time.

3. Do you believe in life insurance for children?

Absolutely! Insuring children is a great way to cover future insurability and provide access to cash value for post-secondary education needs or down-payments. Who wouldn't want to take advantage of the opportunity to get an adult's coverage, at a child's rate?

4. What is the biggest life insurance mistake people make?

Waiting. ‎Life insurance tends to be put on the back burner, running the risks and the costs up unnecessarily.

5. Outside of life insurance what other types of individual insurance are often over looked‎?

A crucial mistake in today's world is that critical illness and disability insurance are often overlooked by advisors when analyzing a financial plan for their clients. Ask your clients, "how would they maintain their current lifestyle in the event of an illness or accident?" Chances are, they have no idea.

































































































 

David Hutchison started in the Policy Owner Services Dept with Foresters in 2009, before joining the Sales team in 2010. After 3 years as an Inside Sales Support Specialist, David transitioned to role of Brokerage Manager before being promoted to Director of Sales, Eastern Ontario. David's mandate is to educate advisors and to help build their business utilizing Foresters' unique value proposition. A little known fact, David worked as a TV sports broadcaster in Kitchener for a year and a half prior to joining Foresters. 

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What Are the Differences Between a Broker And an Agent?

January 19th, 2015

What is the difference between an independent life insurance broker and a captive life insurance agent? This infographic helps us figure that out:

life insurance brokers vs agents
 

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Weekly Personal Finance Roundup For January 16th 2015

January 16th, 2015

In this week's personal finance roundup, there is a theme of retirement and investing among most Canadian personal finance reporters. In addition, there was also a report about the Canadian job market and its changes from November to December in 2014. Enjoy your weekend and here are the articles in our weekly roundup!

Early Retirement Investing

Boomer and Echo gave details on how to start an index portfolio.

Jonathan Chevreau from Money Sense explains why early retirement isn't for everyone.

My Own Advisor wrote an article on the transition from working life and into retirement life. One of his main points was understanding your insurance needs in retirement.

Tom Drake published an article on Canadian Finance Blog about safe investing with Canada Savings Bond.  

Canajun Finances provided a detailed report on the Canadian job market from November to December 2014.

Brian So | Insurance Advisor, AAFS Insurance

January 14th, 2015

Brian So
Insurance Advisor at AAFS Insurance

1. What type of critical illness insurance do you own?

I own a term-10 policy with $100,000 of coverage.

2. What factors did you consider when determining the coverage amount?

I first considered the cost of income replacement should I be away from work while receiving treatment. I also considered medical expenses not covered by Medical Services Plan (MSP).

3. Do you think people underestimate the importance of critical illness insurance and if so why?

I think since critical illness is still fairly new compared to life and disability insurance, it does not receive the same amount of attention as those types of coverage. Some may feel it overlaps with disability insurance, but as I posted recently, the cost of a significant illness may ruin one's retirement plans and there's nothing disability insurance can do.

4. What are some limitations or exclusions should people watch out for?

An exclusion to look out for is the moratorium period, where no benefit is payable for cancer or a benign brain tumour within 90 days of policy issue. The exclusion is necessary to prevent people who suspect they have one of these illnesses from making a claim immediately after policy approval.

5. If you had to choose between critical illness and life insurance which one would you choose and why?

I would choose life insurance because death is final, whereas you may recover from a critical illness. Your family will suffer an even greater financial loss as a result of your death than from a critical illness. 

Brian So

Brian So, BSc, CHS, is an insurance advisor at AAFS Insurance. He helps his clients in the lower mainland of British Columbia discover their insurance needs and find suitable products and solutions for those needs. He wants to meet individuals who care deeply about their financial goals in hopes of designing a plan to help them reach those goals. He is currently on the road to becoming a CFP.

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