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Critical Illness Insurance or Long-term Disability Insurance?

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Long-term disability insurance and critical illness (CI) insurance are both types of living benefits  insurance Canadians set up to protect themselves, their families and their financial assets in case of physical hardship. The two are easy to confuse, but they address different needs and hardly overlap. Here are some of the frequently asked questions about the two types of Living Benefits:

What exactly is Long-term Disability insurance?

Long-term disability insurance is designed to replace your income from employment or self-employment. It pays out a monthly benefit, typically a percentage of what you earned before becoming disabled. The benefits may last for a few years – and possibly until you’re ready to retire, if you can’t go back to your own job or any job.

What is Critical Illness insurance?

Critical Illness insurance is a product that pays out a tax free lump sum in the event that someone acquires a critical illness like cancer, heart attack or stroke, to name a few. The money can be used to travel to the U.S. or elsewhere for treatments, cut back at work, pay off debts, take a sabbatical, fund home care. It is flexible. If you stay healthy and have the right product, you can even get back every premium dollar.

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What is the difference between Long Term Disability (LTD) Insurance vs. Critical Illness (CI) Insurance?

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Which one is better for me: Long Term Disability Insurance or Critical Illness Insurance?

The answer is dependent on your personal life circumstances; statistics show that since more people are likely to get cancer, heart attacks or strokes – the major illnesses covered by CI – than to become and remain disabled for more than six months, CI tends to be a more popular product choice. If a Critical Illness occurs prematurely, the insurance benefit will be significant considering it was not funded for a long period of time – which is what this coverage is essentially for.  If you live a full life, the option to have all premium dollars returned is there and can be incorporated into your retirement years.

To calculate the amount of critical illness insurance you might need, try out the free RBC Critical Illness Insurance calculator.

The Benefits of Segregated Funds for Older Investors

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For older investors, segregated funds provide the benefits of a low-risk option with good returns.

What are segregated funds?

Sold by Canadian insurance funds and advisors, segregated funds are a type of investment vehicle that allows your money to grow, while providing certain guarantees such as reimbursement of capital upon death. Put simply, segregated funds offer you the growth potential of a mutual fund with the guarantees of life insurance.

While those interested in avoiding market risks used to focus on GICs and short term bonds, particular segregrated funds now allow older Canadians the full ability to take advantage of the upside of investments with protection against losses!

Advantages of Segregated Funds

a) If you are under the age of 70 as a new investor, most segregated funds guarantee 75% or 100% of your principal investment over 10 years OR when an investor dies, as long as you are under the age 0f 70. For older investors, Empire Life, a large Canadian insurance company, now has a great segregated fund offer with 100% guarantee for all clients who are under 80. This 100% death guarantee has some real value if you are 70+. This benefit becomes very valuable for an individual who is not in great health (there is no physical health check required). This ability for an older investor to still have a 100% death benefit guarantee is crucial to this opportunity as it means that the guarantee might kick in over a much shorter period than the traditional 10 years.

b) Because it is considered an insurance product, the proceeds (on death) for non-registered money will pass directly to your beneficiaries’ tax free and without probate.Segregated-Funds-Benefits

c) Segregated funds are not only offered as Balanced or Income funds. Traditional “higher risk, higher reward” asset class funds are also available. For example, Empire Life’s Elite Equity Fund has an annualized return of 10% going back to 1969.

d) Unlike mutual funds, the segregated funds can be reset up to twice a year. If the value of your funds increase, you get to lock in a higher floor value.

e) As an example, Empire Life only charge fees in the 2.5% to 2.75% range. While this would seem high in comparison to an ETF or index fund, the principal guarantees, reset features, and avoidance of probate fees make this investment significantly more valuable for older investors.

If this article was of interest to you, read about why an age-based investing strategy might not be right for you!

The RSP: Minimize Your Biggest Future Tax Bill

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In the future, your biggest tax bill will be your RSP taxes.

We all know of the benefits of tax refunds and tax-free growth for RSP, but what happens after you retire?

Here is how the RSP taxation works:

• Your RSP grows tax-sheltered until you draw out money. Any money you withdraw each year is considered “yearly taxable income” for tax purposes.

•If you wait to withdraw your money, the year you turn 72, your RSP turns into an RIF, which means that the government mandates you must withdraw at least 7.48% each year and pay tax on it. If you are married and you pass away, the RSP/RIF will simply transfer over to your spouse.

• The year the surviving spouse passes away, the entire value of the RSP/RIF is considered one year’s taxable income. If you have a $500,000 RIF left at that point, the government will take $212,000 in taxes!! This is often shocking to the estate.

A few tips to help you avoid your biggest future tax bill

How do you avoid this huge tax hit?

1. Don’t save so much in your RSP in the first place. Unless you are in the top tax bracket (and enjoying the maximum RSP refunds), saving too much now can lead to a massive tax hit at the end. In low income years, put less or nothing into your RSP.

2. Draw more money out while you are alive to enjoy it. From a pure financial perspective, you want to draw out registered money in years when it can be done at a lower tax rate – those years when you have very little other income. From a philosophical point of view, you want to draw out the funds when you are still able to enjoy it.

3. You can use strategies like the RSP meltdown to effectively draw out more money from your RSP by creating a tax deduction equal to the amount withdrawn. This strategy can be quite effective for many people, but does require some leveraged investing, and you might require professional advice.

The main message here is that you need to have a long-term tax minimization strategy, instead of simply saving up RSP funds.

One quick and free tool is the The Tridelta Retirement 100, which helps you see your likelihood of running out of money, your likely estate size and lifetime tax bill. By playing with RSP numbers, you can see the impact yourself.

May: Canadian Investment Review

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The recent increased volatility, which shook commodity prices this week has slowed Canadian stock market growth to the point that we’re now slightly negative on the year. Our outlook however remains positive and we continue to expect low double digit returns by year end.

JP Morgan also maintain a positive outlook on the US market and see the S&P 500 reaching 1475 by year end, a 10% increase.

April had a 730pt swing on the TSX during the month but only finished down 170pts. It was an interesting month but pales with the first week of May:

May 1st – Obama gets Osama. Economists are split on whether this is a negative or a positive. The negative position worries about the backlash of terror attacks adding an aspect of risk to the economy. They further point out that this event does not impact earnings, unemployment or economic expansion. The positive position believes that the death of Osama bin Laden is a devastating blow to Al-Qaeda especially as it appears he was still playing a major leadership role, increased Arab democracy, a “Post Al-Qaeda era” and lower oil prices as a result of increased long-term Middle Eastern stability.

May Investment Review

May 2nd – the Canadian markets were quiet post the Osama news and prior to the election. We witnessed a ‘Conservative Majority Government’ with the NDP as the official opposition. Regardless of how you voted, a majority government is viewed as stable to international observers. It is also the most market-friendly result with a government focused on controlling the deficit and able to enact measures without the inevitable compromises associated with a minority status. Read More

[IN THE NEWS] Guaranteed Retirement Income, But At A Price

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In this Globe and Mail article, Rob Carrick explains in detail life annuities that guarantee you retirement income.  Along with quotes from our VP Estate Planning, Asher Tward,  Mr. Carrick explains how annuities are rigid investments that you are locked-in to, providing low payouts:

Guaranteed Retirement Income, But At A Price

By: Rob Carrick at the Globe and Mail (February 25, 2011)

“The life annuity is a retirement investing product with to-die-for optics.

Life annuities pay a regular, guaranteed amount of money every month for as long as you live, which addresses two big retirement risks. One, that the stock market will crash just as you’re about to start drawing down on your retirement savings and, two, that you’ll outlive your savings.

Worry-free income for people who don’t have company pension plans – that’s the idealized view of life annuities. But for reasons that relate both to current financial market conditions and the way in which life annuities are constructed, their real-world appeal is limited. READ  MORE AT SOURCE…

[IN THE NEWS] A Retirement Product That’s Guaranteed, But Not Very Attractive

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In this Globe and Mail news article, Rob Carrick discuses the unattractive features of guaranteed retirement income products.  After 2 years of sales of these products, Ash Tward and I explain to Mr. Carrick why we still do not sell these products to our clients; there are better, cheaper and more flexible investment options.

A Retirement Product That’s Guaranteed, But Not Very Attractive

By: Rob Carrick at The Globe and Mail (September 17, 2010)

Retirement income, guaranteed.

That got your attention, didn’t it? After two straight years of stock market drama, what a relief it is to know there’s such a thing as a retirement investment you can count on.

On this simple sales pitch, the guaranteed minimum withdrawal benefit has quietly become one of today’s most successful investing products. This trend has occurred even while GMWBs have become less attractive than they were when they were introduced. And truth is, they weren’t that great to begin with.”  READ  MORE AT SOURCE…

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