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Benefits of Using Life Insurance as a Retirement Tool

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Yesterday, we talked about the retirement strategy of using life insurance as a savings mechanism. Today,  we look at the benefits of using life insurance for retirement.

To recap: Basically, you take out a guaranteed life insurance policy on an older relative and name yourself the sole beneficiary. When this older relative passes away, whether it is in 10, 20 or 30 years, you are ideally approaching or in retirement and receive the guaranteed payout.

Now how does this  benefit you as a retirement instrument?

  • If you are making $200,000-plus a year, and you are maxing out your RRSP contribution and TFSA contribution, over time you are probably left with savings held in non-registered investments or in a second property. Both of these are being taxed and subject to the variability of the markets.
  • If you are middle aged and you have a parent in his or her 60s or 70s, and in decent health, he or she will certainly qualify for permanent life insurance. By funding this insurance with money that would otherwise be taxed in some way, and getting a payout around retirement, this meets the objective of retirement planning perfectly.
  • Many people respond: “Isn’t life insurance very expensive at that age?” The answer is that the rate of return can be very good. This return is not tied to any investments held within the insurance policy. It is based on the dollars put in over the years, held within the plan using a guaranteed minimum return, and the insurance payout at the end.life-insurance-for-retirement-savings
  • If you want more tax sheltering than you are allowed with RRSPs and TFSAs, an alternative is to pay for the life insurance on your parent. In some cases the return is so good and the other benefits are so strong, you would want to do this instead of some of your RRSP and TFSA contributions.
  • If you are self-employed, earning good money but not earning a salary, you simply don’t have much or any RRSP contribution room. This type of strategy is a great alternative. You get the best of both worlds in terms of tax efficient income, and you still can benefit from a tax sheltered retirement strategy – without any hard limit on contributions. An even better option for self-employed individuals is to buy the insurance policy within their company.
  • Remember that the named beneficiary of an insurance policy can be quite flexible. In some cases, parents are more comfortable with the process if they know that the grandchildren are also named as beneficiaries on the policy.
  • Among other benefits of this strategy, the insurance policy is creditor proof, and the death benefit is not considered family assets in the event of marriage breakdown (unlike the RRSP and TFSA).

Some might suggest that it seems odd to financially benefit from a relative’s death. While one can understand the point of view, it is really no different than anyone who is likely to receive an inheritance. It is simply helping your family to do smart financial planning.

Make sure to read the article that originally describes how this life-insurance strategy works.

Maxed out RRSP & TFSA? An Alternative Tax-Sheltered Retirement Strategy

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There is an alternative tax-sheltered retirement strategy that is a substitute for RRSPs or tax-free savings account. This strategy allows you to invest a set amount every year (that you can comfortably afford) and guarantees that you generally earn a return of around 8% after tax, annually. In your late working years or early retirement, you receive a tax free payout. The investment does not move up and down with the stock or real estate market.

Intrigued? Here is how it works:

•You have maxed out your RRSPs. This could be because your income is high and you have good savings, or you have a sizable pension contribution, or as a self-employed individual who receives dividends you have very little RRSP room to use, and your TFSA is maxed out.

•You have a parent or in-law, aunt or uncle, who is in reasonably good health for his or her age, and is somewhere between 60 and 80. Reasonably good health means no recent or current cancer, heart attacks or strokes or other major diseases.

•You take out a permanent insurance contract on this individual. With permanent insurance, if it is held until death, it is guaranteed to provide a payout. For example, if someone puts in $12,000 a year for 15 years, that totals $180,000. The insurance policy might pay out $360,000 in 15 years. This is different from a “term 10” or “term 20” insurance policy that covers only a fixed time period, and usually has a return of negative 100 per cent. Permanent insurance allows you to know the payout on the investment. The only unknown is when the payout will occur.

•To implement the strategy, you would search the market for the best permanent insurance solution given the age and health status of the individual. That will require an insurance broker who has access to the full market, focuses on estate planning and understands the strategy.

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To better understand this life insurance strategy, here is an example:

We have an imaginary investor, Joe, and he is 41. His yearly income is $200,000, and he has no more room in his RRSP or TFSA. He has $150,000 in non-registered investment assets (and these are being taxed).

Joe’s mother, Susan, is 70 and in decent health (except for a bad knee). Joe’s insurance broker has searched the market to find the best return for a permanent policy for a 70-year-old woman. Joe deposits $12,000 a year for 15 years and the policy is fully paid up – a unique feature of this particular product. This policy also has a return of premium. It essentially adds one dollar of payout for every dollar Joe puts in.

After one year, Joe has put in $12,000. If Susan passed away, the insurance payout would be $193,000, for a return of 1,508 per cent. Every year Joe puts in $12,000, the payout goes up $12,000. In year five, Joe would have put in $60,000 and the insurance payout would be worth $241,000. In 15 years, Joe has put in $180,000. In this case, the policy is now fully paid, and Joe doesn’t need to pay another dollar. The payout figure does not continue growing past this point.

As it turns out, Susan passes away shortly after, at age 85. Joe is now 56 years old. The insurance policy pays out $361,000 to the beneficiaries. In this case, Joe is the sole beneficiary.

If Joe had put the same $12,000 a year for 15 years into a non-registered GIC, to have the same after-tax return as this strategy (assuming Joe pays a 46 per cent marginal tax rate), he would have to find a GIC paying 15.35 per cent.

Not only did this strategy provide Joe with extra tax shelter, but it guaranteed he would at least double his money, tax free, whether Susan lived to age 71 or age 95.

Read Part II to learn about the benefits of using life insurance as a retirement savings tool.

5 Surprising Ways Debt Financially Helps You

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The smartest business people have always recognized the value of debt in building wealth. The idea that all debt leads to financial ruin can often be wrong.

To take a closer look at when debt can be  good, here are five cases to consider:

1) When you can use borrowed funds to earn a greater after-tax return than the after-tax cost of borrowing. For example, if the debt costs you about 4% annually after tax deductibles to borrow, and you can make after-tax returns of greater than 4% then you will grow youth wealth by borrowing and using those funds.  Two Yale professors, Ian Ayres and Barry Nalebuff recently found out that in analysis going back to 1871, if younger investors used margin to increase their investment power, on average, they could retire six years earlier and still achieve the same retirement lifestyle.

5-ways-debt-is-good2) When you don’t have the cash to buy something today, but are very confident that you will be able to pay for it over time, it can be good to take on debt. The most common case of this is buying a house. Without debt, very few people could ever buy their first house.

 

3) When http://healthsavy.com there is a time-limited opportunity to buy something of value. A good example of this might be an ability to buy private company shares, invest in a company matching program, or make an RSP contribution in a year when your income is high.

4) When there is a window of time to do something special. For example, if an older person dreams of taking a big trip somewhere expensive but waiting on better cash flow, they should consider getting a line of credit and taking the trip anyway. Health reasons might detract future possibilities.

5) When you believe that future credit will be hard to come by, it is often good to arrange for credit or debt today. An example might be if you are currently an employee but are planning on starting a new company or becoming self-employed. The time to get debt is before you change your employment.

For all the scenarios above however, it is important to have a strong payback plan.

What is important to remember is if you arrange your debt options through careful planning, for a specific purpose and based on your ability, carrying some debt might be helpful for you.

Why Manulife IncomePlus is Not for the Average Retiree

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Why Guaranteed Retirement Income Benefits is Not for the Average InvestorRecently, “guaranteed retirement income” products like Manulife Income Plus and Sunwise Elite Plus have exploded in the Canadian market. Manulife IncomePlus generated almost $3.4 billion in assets for Manulife Financial, Canada’s largest insurer between 2006-2008, and it is worth a closer look.

What are guaranteed retirement income investments like IncomePlus?

What happens with products like IncomePlus is that you have a retirement portfolio that guarantees a minimum annual flow of income for life (starting at age 65) and a guarantee against losing your investment money. Once you invest $50,000 or more, IncomePlus guarantees that you can withdraw 5% of that investment annually for life. The investment pool is “adjusted” every three years to reflect increases in market value. Sounds tempting? The catch is that any financial product that offers a guarantee comes with high fees that erode your returns.

What are the fees associated with IncomePlus and why are they so high?

IncomePlus is built on a foundation of Manulife’s segregated funds, which are mutual funds with various insurance guarantees attached. Segregated funds charge a higher fee than mutual funds (although this is often justified due to the insurance component), but IncomePlus also charges additional “guarantee” fees. According to personal finance columnist Rob Carrick, the “total fee load can be as much as 3 to 3.5% for some funds. By comparison, the largest Canadian balanced funds these days have MERs that are at least a full percentage point lower.”

There are two main problems with IncomePlus:

1.      The guarantees against market losses are mostly a waste of money for any investor who has a time horizon longer than 10 years, because the 10 year return almost always is higher than 0% except for very aggressive portfolios.

2.      In addition, the 25 segregated fund choices for IncomePlus are predominantly conservative choices with bond, balanced and asset allocation funds, but no pure equity funds. Paying higher fees for a guarantee would only have been justified if there were higher levels of risk and reward, but not for these conservative options.

IncomePlus can be appealing to investors who are extremely risk averse and invest only in GICs, as the return for IncomePlus might be higher – but not if interest rates go up meaningfully. But for the common investor, this product is not appealing. It deters investors from getting significant gains (due to the fees) and the forced conservative investment options. While this might not be a concern during a year of poor market returns, you will very likely do much better for the long run by avoiding these high fees.

A much better approach is to generate income from a well-balanced portfolio, combined with tax and estate planning for a much lower fee. To learn more about Canadian Retirement Income Investments, click for our free guide below.

For help finding better alternatives to Manulife Income Plus, please contact me at 1-888-816-8927 x221 or by email at tedr@tridelta.ca

Ted Rechtshaffen MBA, CFP
TriDelta Financial

Am I Ready for Retirement?

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Are you financially and emotionally ready to retire? What are the things you should consider when thinking of retirement? Here, we discuss some of the necessities for determining “retirement readiness.”

Goals for Retirement

When deciding to retire, the first step is to have your own fine-tuned vision of what retirement looks like. What are your goals for the next life stage? To better understand yourself, you might consider filling out a goal-setting questionnaire, such as this True Wealth Questionnaire that we frequently use with our clients.

The purpose of our easy goal-setting questionnaire  is primarily not financial, but mostly about measuring where your life is today and what you want your future to look like.

Financial Ability

Once your lifestyle vision is sorted out, it is time to shift the focus to the financial planning side. Try to estimate a financial plan that projects the next 30 years or so.

Consider talking to a financial planner to get a good sense of what your lifestyle will be like in retirement if you retire today, or at a certain point in the future. A comprehensive financial plan will expand on other issues too, like how much you can afford to help Three steps to knowing when you are ready for retirementyour children or grandchildren, or how to support your favourite charities. Based on your financial ability, you might get a “green light” for retirement, but it doesn’t mean you should retire.

Personal Considerations

Of course, financial ability is not the only concern for retirement.

For many of us, our jobs are an important part of our identities and can be very difficult to give up “cold turkey.” Also, retirement can significantly alter the balance and routine that currently exists with your spouse or partner – sometimes in a bad way.

Another issue is how to fill all of your free time. Without a plan that reflects your retirement vision, hobbies and goals, the free time can lead to depression. Eileen Chadnick, a certified coach and principal at Big Cheese Coaching in Toronto, says it is a mistake to plan for a life of full-time leisure, “Seven days of fishing gets stale very fast. The balance paradigm shifts in retirement. The key is to determine what the right balance is for you”

The issue of retirement has become much more complicated than simply aiming for a financial number. Much like other things in life, a successful and happy retirement takes planning – both financial and emotional.

If you want to read more, here’s an article that talks about all the things you can do in your free retirement time. It’s enough to get anybody excited!

How Much Can I Afford to Donate to Charity?

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Like many Canadians, you might be wondering “How much can I afford to give to charity? How can I budget for charitable giving? Is there a smarter way to give?”

The average donation to registered charities in Canada in 2008 was less than $700 in households with gross incomes of more than $100,000. A Fraser Institute Study called, “Generosity in Canada and the United States” revealed that in Ontario, we were giving only 45% as much as those in New York.”

The reason for this is simple:

Most Canadians don’t have the confidence or knowledge to be donating larger amounts of money because no one has ever taken the time to explain to them how much they can afford to donate and the benefits that come along with it.

I believe that if Canadians had a better handle on what they could afford to donate, in many cases they would be comfortable giving more.

To help with this, TriDelta has put together a free and easy online tool called the Donation Planner, which answers the basic question:

“How much could I afford to give?”

The donation planner looks at how much you can afford to donate to charities each year, how much this will save you in taxes, and what your estate will be worth AFTER these donations.

In many cases, the number will surprise you.

 

How much Can I afford to Donate to Charity?

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