The Rule of 72

Watch our short video on how the Rule of 72 works when trying to determine how long it takes for your money to double.

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What is an Annuity?

An annuity is a investment product sold by financial institutions and in particular life Insurance companies. They are designed to work like a work pension plan, where they give a fixed payment for a period of time.
They can be purchased individually as term, life-time, inflation indexed, or for a joint life (term or life)

Guaranteed Monthly Income
Basically, you pay a financial institution (often an insurance company) a sum of money and they give it back to you in regular monthly payments, as determined by many factors such as your age, sex and the length of term you want guaranteed income for. You receive a regular income stream made up of interest and principal.

Are they for everyone?
If there’s no chance you’ll run out of money, annuities are probably the wrong choice. They make little sense if you have an ample employer pension, or you are poor in health. Since your work pension is already giving you an income for life, the best return on your money that is in an annuity comes from living much longer than the average person.

They are good if you need to top up your guaranteed monthly retirement income from all your sources to maintain a certain standard of living. (CPP + OAS + Work Pension + Annuity = Guaranteed Retirement living for life) You do not need to invest all your savings into an annuity. Just purchase what you need to get that monthly amount that you want to live with in your retirement years. You have the freedom to use the rest of your savings as you please since you opted to not lock in your whole annuity.

If you want to learn more about Annuities and if they are right for you, speak to a licenced life agent such as ourselves, or one in your community.

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What is a Segregated Fund

What is a Segregated Fund?

A Segregated Fund (also known as Seg Fund for short), is a type of investment fund administered by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death or upon Maturity.

A segregated fund is an investment fund that combines the growth potential of a mutual fund with the security of a life insurance policy. Segregated funds are often referred to as “mutual funds with an insurance policy wrapper”.

Like mutual funds, segregated funds consist of a pool of investments in securities such as bonds, debentures, and stocks. The value of the segregated fund fluctuates according to the market value of all the securities held within.

Segregated funds do not issue units or shares; therefore, a segregated fund investor is not referred to as a unit-holder. Instead, the investor is the holder of a segregated fund contract. Contracts can be registered or non-registered. (held in or outside of an RRSP or TFSA). Registered investments qualify for annual tax-sheltered RRSP or TFSA contributions. Non-registered investments are subject to tax payments on the capital gains each year and capital losses can also be claimed.

Segregated Funds are only sold only by licensed insurance representatives.  The monies in a Segregated fund must also be kept aside from all other company assets in the insurance company.

Segregated Funds offer the following guarantees.  Maturity & Death Guarantees, Potential Creditor Protection, Probate Protection, and depending on the company, they have the Reset option of annual to every few years.   A Segregated fund allows the contract holder to take a little more risk with their investment, because of the Maturity protection, or fear of downturn in the markets.

There comes an added cost to Segregated funds because of the guarantees and insurance added.  This varies by company and contract, but most often can cost .5%-1% in additional MER fees that would normally be charged my a comparable Mutual type fund.

For more information on how Segregated funds can fit in your portfolio and the companies that offer them feel free to contact us.

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Leaving a Work Pension Plan

Check out our video on what happens to your work registered pension plan when you leave your job for a new one with another employer.

 

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Annuity Settlement Option

There may be certain circumstances with your family situation where you might want to consider using an Annuity Settlement Option (ASO) rather than leaving a lump sum payment to a family member when you pass away.

An ASO allows you to specify the amount and frequency that a beneficiary will receive money.  For example, let’s say you have $500,000 in assets that you will be leaving to a beneficiary. You may want to make sure that this money lasts them for the next 25 years. You can specify that when you pass away that the money be put into an annuity and your beneficiary would receive $20,000 per year (plus interest) for the next 25 years.

This strategy is beneficial for beneficiaries who cannot manage assets, to ensure there is money for a child or grandchild to go to college or university and this may also be beneficial for certain ODSP recipients.

Here is an example:

You may have a son or daughter that is not good at saving and feel they would blow an inheritance or payout from your life insurance policy.  You could set them up to receive a certain amount each year as we described above.  If you have more than one beneficiary you can create different ASO’s for each.  You can select to have one person receive their full amount at death, and the others you may use the ASO.  It is really up to you and how you wish to setup your beneficiaries.

An Annuity Settlement Option has no fees or ongoing management requirements. You as the owner of the policy get to control the specific terms of the contract. It is a simple, inexpensive and effective wealth transfer tool. An ASO provides savings of probate, and estate fees, increased privacy, and potential creditor protection.

Annuity Settlement Options are only available through life insurance companies, sold by Licenced Life Insurance Advisors.

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GICs vs GIAs

Many Canadians have money in GICs at the bank but they may not realize the benefits of opening a GIA (Guaranteed Investment Account) with a licensed life insurance advisor.

What is a GIA? (link will take you to the Ivari website.  They are one of the companies that offers this product in Canada)

Upon death, the proceeds from a GIA would be paid directly and without penalty to a designated beneficiary. This money would not be part of the deceased person’s estate, and it would not be subject to probate, legal and other legal estate fees.

Investing in a GIC vs a GIA

--Joe invests $400,000 in a GIC at the bank --Jack invests $400,000 in a GIA (with your Insurance Advisor)
--Joe’s interest rate is 0.9% --Jack’s interest rate is 1.25%
--Joe earns $3600 of interest income annually --Jack earns $5000 of interest income annually
--Joe pays $250 of probate on the first $50,000 --Jack pays $0 Probate fees
--Joe pays $5250 of probate on the next $350,000 (1.5%)
--Joe’s Total Probate is $5,500
--Joe’s Legal fees are 5% x $400,000 = $20,000 --Jack pays $0 legal fees
--Joe’s Total Cost is $25,500 --Jack’s Total Savings is $25,500
--$400,000 - $25,500 = $374,500 paid to beneficiaries --$400,000 paid to beneficiaries

Call us today for your free no-obligation rate.  We work as brokers and are contracted with over 20 companies in Canada.  Let us explain to you why GIAs may be more favourable than GICs with a Bank.

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Charitable Donations Tax Credit

We prepare income taxes for clients and a lot of people are not aware that charitable donations should all be claimed by one spouse. The other thing that we find is that people are not aware of what sort of income tax benefits they receive when they make an eligible charitable donation.

There is a charitable donations tax credit and the government gives you 16% on the first $200 of donations that an individual makes and 29% on any donations there after.

You can claim mounts up to 75% of your net income unless you are giving a gift of certified cultural property or ecologically sensitively and then depending on the circumstances you may be able to claim up to you 100% of your net income

For the most part when clients come in a typical family might give $100 to the Canadian cancer society $50 to the MS association and $100 to the heart and stroke foundation. Let’s use that as an example to determine how much a family would receive an income tax credits.

So on the first $200 it is a 16% credit which equals $32 of benefit

On the next $50 it is a 29% credit which equals $14.50 of benefit

Also the government announced a first-time donors super credit so for any charitable donations made after March 20, 2013 then first-time donors may receive an additional tax credit of 25% on the first $1000 of monitory donations that they make above the amount indicated above.

Another item that some people do not know is that in one year you may claim donations made from January to December 31 of the applicable tax year. You can also claim any unclaimed donations made in the previous five years made by yourself or made by your spouse or common-law partner.

There is no advantage to a higher income earning spouse claim in the credit or a lower income earnings both claim in the credit the key is to pick one spouse and have them clean the entire donation amounts made by the family.

The key is to ensure that you’re only claiming donations where you have received the charitable gift receipt by a registered charity.

It does not happen often but I have had a few clients audited for their donation receipts so be sure to keep these on file for seven years in the case of an audit.

The most common mistake that people make is they don’t keep track of all their charitable donations in the current year.  At tax time, they can’t locate their receipts (perhaps missing a few) to be able to maximize their credit.  It is best to start a folder or tax envelope, and keep all of your income tax related documents together.  This habit will make it easy to do your return and also enable you to receive the best benefit from your generous gifts.

Check out the tax calculator from CRA website

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Guaranteed Insurability Rider

Nobody wants to think about getting sick or their health changing, but if it does, having a Guaranteed Insurability rider on your life insurance policy could save you a ton of money and a ton of headaches.

This rider is an additional benefit on a life policy, beyond the death benefit.  It allows an owner/individual the right to purchase additional life insurance at specified time periods, without having to go through medical underwriting.  Some policies automatically include this feature and some policies can include it with an additional small cost.

This is a worthwhile investment to include in a life insurance quote if you know that your health might change in the future, or if you have medical problems in your family.

With some insurance companies the ability to exercise this rider ends at age 40 and with some it is age 45.  Some companies will allow you to purchase $25,000 of life insurance and some will allow you to purchase up to $150,000.  All companies are different, so its good if you ask your Life Insurance advisor.

Think of this, as people age, even if they do not have a serious illness, they will normally gain weight, experience some health problems, and also people are less healthy when they are older than when they were younger.  Any decrease in health will likely decrease the assigned health rating for a new policy, which increases the cost of insurance.

So imagine someone you know or yourself has had a serious illness.  Would they want the ability to increase their insurance coverage to give their beneficiaries the highest possible protection possible?   Guaranteed Insurability allows the owner/insured of the policy to do this.

Not every life insurance company in Canada offers this rider.  Be sure to do your homework before purchasing a policy if that is an option you would find valuable.

Here you can obtain a quote on Term Life Insurance, then find out how much more a Guaranteed Insurability Rider will cost from your advisor.

 

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Greeting Cards

Have you ever been in a store perusing the greeting cards and find one that you like only to turn it over to find out that the card costs $5.99? Or $8.99?

I used to do that because I would be running late to a birthday party for one of my nieces or I waited until the last minute to buy a Valentine’s Day card for my husband and next thing you know I’m spending $8 to $10 on a greeting card.

I am going to share a little trick with you that will save you a ton of money and a ton of headaches.  And also some frantic last-minute running around.

I have a list on my phone of greeting cards that I purchase on an annual basis for my friends and family. I also keep a few extras just in case.

The following is a sampling of the number of cards that I purchase in a year.  I am sure everyone else’s list is similar.

  •  Valentine’s Day–hubby
  • Mother’s Day–Mom, mother-in-law, Grandma, Great Grandma, stepmom
  • Father’s Day–Dad, father-in-law, Grandpa, hubby
  • birthdays–hubby, 4 stepkids, mother-in-law, father-in-law, 3 brother-in-laws, sister, sister-in-law, 2 nieces, Mom, Grandma, Grandpa, Great Grandma, Dad, stepmom, assistant, 6 to 8 girlfriends
  • anniversary–hubby, in-laws
  • Christmas–hubby, sister, Mom, in-laws, Grandma & Grandpa, Great Grandma, Dad, assistant, 4 stepkids
  • Graduations–usually 1 or 2
  • weddings–at least 2 per year
  • sympathy–at least 6 per year
  • baby showers–at least 2 per year
  • wedding showers–at least 2 per year
  • thank you cards–at least 4 per year
  • get well soon cards–at least 4 per year

You can see that I purchase at a bare minimum 60 greeting cards per year.  Most of the cards I was buying at Shoppers Drug Mart or Hallmark were $3.99.  When purchasing a Valentine’s Day card, Anniversary card or card for a wedding, I find that most cards are $6.99 to $8.99.

Now I go to Dollarama or similar dollar store and will buy my Valentine’s Day card in January as well as all the birthday cards on my list.  Then when Mother’s Day is approaching, I have my list and pop into the dollar store and pick up for my Mom, mother-in-law, etc.

If I bought 60 cards at the dollar store with tax it would be $67.80.  If I estimated conservatively and said every card was $3.99 plus tax at the drug store or a card store then it would be $270.52.  This is a savings of over $200 in a year.  I probably in reality send closer to 80 cards so the total would be $360 per year.  So by making a plan and picking up cards when I’m in the dollar store, I can save myself anywhere from $200 to $300 per year.

I use an app on my phone called Wunderlist.  It is available in a desktop version as well as almost every mobile platform.

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Tax Free Savings Account

In 2009 the Canadian Government announced that any Canadian 18 years of age or older can put $5000 into a Tax Free Savings Account.  You are not taxed on any of the growth that this account makes.  You do not pay tax on this money when you withdraw it.

The annual contribution amount for 2010, 2011 and 2012 was $5000, in 2013 and 2014 it was $5500, in 2015 it was $10,000 and now in 2016 it is $5500.  This means that if you have never opened an account, and you were at least 18 in 2009 then you would have $46,500 of contribution room available.

I find that there are 3 types of TFSA investors.

  1. This type of investor uses this account similar to how they would use a savings account.  This person puts say $100 per month into the account and 6 months later they need to withdraw money to pay for new brakes on their car.  Then they save a few more months and need money to buy Christmas gifts.  For this type of investor, I suggest opening a TFSA with your bank and invest in a Daily Interest Savings Account.  This account will pay you 1.25 to 1.50% on average.  It is easy to cash in the money when you need it and you will not lose any money in this account.  Yes the interest rate is low and you will not make much, but at least you will have savings should something arise and you need the cash.
  2.  The second type of investor is the one that is saving for a mid-term goal.  This might be a car, big family vacation or home renovation.  This person might put $100 to $200 per month away or they may be aggressively saving $500 per month.  If this investor is planning on taking out the money in 2 to 3 years to take the family to Disney, I would also recommend a Daily Interest Savings Account at the bank. What if there is a downturn in the markets?  Imagine that you are taking your family to Disney for March Break and the $8,0000 that you saved is only worth $7800?  If you are saving for something that has a 1 to 3 year time horizon, then be more conservative with the investment.
  3. The third type of investor is the one that treats their Tax Free Savings Account like another pot of money that they are growing for their retirement, or other long term strategy.  This investor has money set aside for emergencies and they want their Tax Free Savings Account to grow and accumulate and they really appreciate that the money that grows in here is tax-free.  The growth can be as great as an RRSP or any other long term strategy as long as you leave it put.  The greatest challenge with a TFSA is the ease of access unlike the RRSP where you get taxed if you withdrawal your funds early.

If you fall into the third category, then you should be chatting with a Financial Advisor to help you choose a portfolio that is appropriate for your risk tolerance.  Here you can choose to have equity, bonds and funds that give the potential for dividends and growth.  I choose to be very aggressive with my personal TFSA because unless there is some catastrophic, super big emergency in my life, I don’t plan on touching the money.  You can google TFSA: Our number-one tax shelter. In this Money Sense article they describe how some Canadians have really made out well with their TFSAs.

One word of caution.  You never want to over contribute in any calendar year into your TFSA.  The Federal Government will eventually audit you and you will have to pay back 1% per month on excess amounts.

Contact us for more information on how you can use your TFSA for your long term or retirement savings.

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