Category Archives: Insurance

Should you consider getting life insurance before the rules change on Jan 1 2017?

Life insurance is commonly thought of as a simple estate planning tool. Yet it can also make a very powerful investment tool due to its favourable tax treatment.

Deposits and cash growth in life insurance policies are generally tax-free within certain limits, as are death benefits, which makes life policies used as investments very valuable.

On January 1, 2017 the part of the Canadian Income Tax Act governing life insurance policies will be amended to more accurately reflect changes in mortality rates (people are now living longer). It will also place additional limits on life insurance deposit amounts considered tax exempt.

If you decide to take advantage of life insurance for investment purposes and estate planning before these tax changes take place, your life policies will be grandfathered and provide you with the ability to invest more money tax-free than life policies purchased in 2017 and beyond.

There are many situations whereby you should consider investing in life policies before December 31, 2016. A couple of key situations include:

  •  Your business is growing. Insurance taken out on the owners can create or strengthen succession plans to insure the business won’t suffer when key people are unable to continue working for any reason.
  •  You own properties whose value has grown beyond the capacity of your estate to cover estate tax obligations. It’s possible that capital gains taxes will not allow you to have your estate assets distributed in the way that you’d like. Life insurance can be purchased to cover big tax hits such as these, and allow you to leave more to loved ones and charities.

If you’ve already set aside specific funds to go to beneficiaries such as your spouse, grandkids, kids, community causes and charities, Bequest Insurance’s Generosity Multiplier™ can mobilize those funds to guarantee that your beneficiaries receive even more than you hoped, at no additional cost to you.

Rates of return on our Generosity Multiplier™ are based on age, and since none of us are getting any younger and tax changes are coming on January 1st, this could be the perfect time to contact Bequest Insurance to learn more about how you can reduce your taxes and leave more to meet your personal or business needs!

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Do you have charitable gifts in your Will?

DSCF0608The great things that you wish to accomplish with charitable gifts in your Will may be affected by changes to Canadian tax rules in Bill C-43 that come into effect January 1, 2016.

The new rules are generally more advantageous to gifts in Wills than the existing framework. They allow executors to allocate charitable tax credits to the donor’s final tax return, the previous year’s return, and/or any of the first three years of estate returns. Also, charitable gifts will also be valued on the day the gift is received by the charity. This is a major change – previously, the gift was receipted based on its fair market value on the donor’s the date of death.

You should also know that the first three years of an estate are now called a Graduated Rate Estate, or GRE. This means that income taxes paid by an estate in it’s first three years are based on a graduated scale. After three years estate income is taxed at the highest marginal income tax rate.

Your estate may be impacted if your charitable gifts are distributed after the three year GRE period. If this happens, the charitable tax receipt can only be applied against that year’s estate tax return, and can’t be allocated retroactively to the tax returns of the deceased or any of the years of the GRE’s existence.

DSCN1861_2If you want to donate appreciated assets to charities, the capital gains tax exemption for gifted property will no longer be available to the estate after the three year GRE period. This may result in smaller settlements to all beneficiaries due to unintended additional income taxes owing by the estate.

In many circumstances, the new GRE will be a non-issue. However, it may become expensive if your estate is complex and takes more than three years to settle, since your estate can lose the advantages of the GRE. For example, this may happen when charitable gifts are delayed until your spouse dies, or where other entities are involved such as corporations or family businesses that may need more time to be settled or restructured. The possibility of challenges to the Will may be another concern.

DSCN2803In fact, anything that may delay an estate from winding up before the 3 year GRE period expires may become an unintended and expensive situation for an estate that expects to use charitable donation tax credits and other tax-friendly strategies available only to the GRE. If your valuable charitable tax credits are forced to go unused, this will almost certainly throw a wrench into your best-laid estate plans.

If nothing else, Bill C-43 is a compelling reason to get proper legal and financial advice on your circumstances today to determine whether any changes should be made to your Will and to your current investment strategies to ensure that all of your legacy intentions will be met tomorrow.

Recent market volatility and your investment savings

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This morning my wife Marlena asked me if we should be worried about the recent stock market activity that’s all over the news these past few days.

I reassured her that the vast majority of our retirement savings were carefully placed in products that offer guarantees that keep them immune to market swings.

When speaking with clients for the first time to determine the most appropriate choices for their own investment needs, my goal is also protect your own hard-earned savings against the effects of these negative market events

As my client, you learn that it’s important to establish a stable savings portfolio following sound practices such as having a proper asset mix of stocks and bonds based on your risk tolerance. Some financial institutions call this balanced approach ‘safe investing’.  Our work goes further, offering you more advanced and sophisticated levels of protection.  For example, choosing investments that historically have been able to recover very quickly from market downturns can often be critically important during both your savings and income years. Additionally, I am constantly monitoring your investments to ensure they continue to perform as anticipated, and always looking for new or better solutions that might fit your specific needs and keep your savings safe so you can use them when you need them.

Events such as the current market downturn can’t be predicted, but I offer all of my clients even more ways to protect their savings. Often that comes by choosing insured investment products that can provide a 100% guaranteed benefits on your capital, guarantees on savings growth, and/or contractual guarantees to provide you with an income for life that rides out these volatile markets.

Marlena was comforted when I reminded her that our own savings are 100% guaranteed and our income is contractually guaranteed for life.

Please feel free to contact me anytime if you have any questions or concerns about your current investment savings. If you know of anyone else who can benefit from this worry-free approach to their investments, I invite you to share my contact information with them.

 

Best Regards

Jack Bergmans 

Certified Financial Planner/ Founding Partner Life Insurance & Estate Consultant

Bequest Insurance

Phone: (416) 356-4511
Toll free: (888) 708-3134 Ext. 2

Will you be happy when you retire

If you are like most Canadians and don’t have a defined benefit pension plan and don’t have the financial capacity to self fund your retirement for your entire life you are probably going to run out of money at some random point in retirement.

Here’s a basic reason why. Let’s say you have $100,000 saved for retirement. You’ve invested in a basket of balanced medium risk mutual funds in a contribution pension plan at work and some RRSP funds at your bank.  You decide to retire at age 65. You convert your plans to a Registered Retirement Income Fund (RRIF) and take out  4% right away.  Then the stock market has a correction. Market corrections can’t be forecast but you can expect that if you’re retired for a couple of decades or more it’s bound to happen few times.

You had $96,000 left in your savings after your first withdrawal but the correction made it worth $80,000. So the next year, at age 66 you need to take out 4.17% of $80,000 leaving you with $76,664. (You must take out a minimum amount from your RRIF every year and that minimum increases until you’re 94 where it max’s out at 20% of the RRIF’s value per year).

To keep this example going, your savings don’t grow the next year because it’s a flat market. So now at age 67 you need to take out 4.35% leaving you with $73,329.

Age:  Starting Balance                         Savings Balance

65       $100,000                 – 4%          = $96,000

65       $96,000                   – 16.7%     = $80,000 (example market correction)

66       $80,000                   – 4.17%     = $76,664

67       $76,664                   – 4.35%     = $73,329

This is essentially what happened to most retirees savings in 2008 and 2009 and in  many cases the losses were much worse than this. It’s painfully obvious that if you are underfunded in retirement, to be financially happy depends on being lucky with good markets. Planning on luck in this case would mean that in three short years your nest egg would be down 26.7%!  Even worse,  the market has historically not been able to catch up to losses like these so at some point in retirement you’re going to either spend less than you need to or run short on money sooner than you’d like. It’s a treacherous spiral and anyone caught in this trap won’t be happy when they retire.

A good rule of thumb is that if the value of your assets can sustain you in the lifestyle you want to at least age 100 you’re probably going to be ok.  Keep in mind that new mortality tables indicate that our median lifespans are ever  increasing so the younger you are, the longer you’re likely to need to plan for.

If in your case you can’t see how you can self fund your retirement to at least age 100 you would be very wise to move some of your savings into pooled income solutions.  Pooled income solutions will give you a guaranteed income for life so you’ll never run out of money. These products are only offered by insurance companies and typically include such things as Variable Annuities and Annuities.

Variable Annuities are a solution that’s very popular with people who don’t have access to defined benefit plans. Variable Annuities can be described as self directed defined benefit pension plans and can be excellent solutions both during savings years and at retirement because you’ll know up-front the guaranteed minimum income you’ll receive for life. Variable annuities also give you the upside potential of mutual funds so over time your guaranteed income for life can ratchet upwards and  will be contractually locked in for the rest of your life. Joint accounts can be set up and you always have access to your money at any time, a great feature that’s bound to make you happy.

When you use savings that are not in RRSP’s or RRIF’s to buy an Annuity your income is almost all non-taxable so you’ll need significantly less upfront money than alternately deciding to take income from bonds or GICs (which are taxed at the very highest rate).  Often an annuity is used to bump up retirement income using only a portion of your savings because once you buy an annuity you no longer have access to that money. You decide what makes the most sense in your circumstances.

Also, at retirement age Annuities normally give you a much higher income than other guaranteed income products. If you outlive what you paid for your annuity, your income continues for the rest of your life anyway. You’ll be happy. If you don’t outlive your initial investment your beneficiaries will get what’s left over. It’s a very good deal.

Almost everyone will tell you that retirement isn’t all about money. There’s family, friends, activities, travel and everything else we’d like to get more involved with. Pooled income solutions give you a guaranteed financial foundation so no matter how stormy the weather gets, you know that your lights will always be on and there’s always going to be food on your table.

It’s not surprising then that in most cases,  switching some of your savings into guaranteed for life pooled income solutions is an ideal step you can take today to be on the road to be happy when you retire. Quite frankly, nothing beats comfort and peace of mind.

What really happens to your assets when you die?

With a few simple changes you can leave a lot more to your beneficiaries and pay much less in taxes when you die. 

Often the conversations we have with  clients leads to the inevitable question, “What happens to my assets when I die?”

Many people assume that upon death, all of their money will automatically go to their spouse, kids, place of worship and charities.

In our experience, the wills and personal finances of most people are not properly set up to realize these goals.

Often, it only takes a few simple changes to allow your bequest wishes to be much more valuable and effective, while making the handling of estate matters much simpler for your executor.

In this article I’ll explain a few examples of things that normally occur when someone dies that create some common problems and impediments, and how you can easily solve them.

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Problem 1: You don’t have a will.

As in most places in North America, dying in Ontario without a will essentially means that your assets will flow in pre-set proportions to people and creditors the government deems to be ‘next in line’. If you want your entire estate to go to your spouse and kids, this will happen though maybe not in the proportions you imagine and only provided your debts don’t outweigh your assets. However, when a provincial trustee must step in to administer your estate, they deduct very high fees and probate taxes, which reduces the value of your estate and can also result in all kinds of other unforeseeable problems.  For example, your family home may need to be sold to pay these taxes and fees. Also, your estate is likely to be frozen and inaccessible for at least one year – or even many years depending on the complexity of your case. These common outcomes cause significant financial and emotional hardships on surviving family members who continue to rely on the proceeds of your estate.

If you are living common-law and die without a will, it’s extremely important to know that your rights as a married couple end immediately on your death. Your partner may be put in a position where they may not be able to claim any of your estate.

Solution 1: In almost all cases, directing your wishes through a will is a very inexpensive way to prevent many unwanted outcomes. Even though I am not a lawyer, this is very nearly always the first thing I recommend to my clients.

Problem 2: Heirs and creditors can challenge your will and reduce the size of inheritances and charitable gifts.

Even if you have a will, there are still many circumstances that can reduce the value of your estate, and obstruct your bequest intentions.  There are simple ways to set up your bequests to allow you to be completely sure that your bequest wishes are followed.

Let’s say you have set aside money to go specific beneficiaries including your children, grandchildren and a few charities. You have specified who will get what in your will.

However, probate taxes and fees, legal fees, and funds going to creditors will cut into your inheritances. Because money can do strange things to people, your children may challenge your choice of beneficiaries and even your charitable donations. Also, if you’ve not listed your charities by their formal legal name, charities of a similar name may each lay claim your donation. These common problems can tie up your estate for years.

You can make many simple and free changes that will make your estate much more valuable, and free from any contentious tug-of-wars over your money.

Solution 2: Another way to eliminate any challenges is to give your community-based legacy gifts through charitable Community Foundations. Many offer you the attractive option of making a charitable contribution now and deciding later which causes will get your money, and how much each will receive. You can make as many tax-deductible donations through Foundations such as these as you like, and they will then follow your wishes and efficiently dispense your funds upon your death.

Solution 3: If you are sure you won’t need the money you’ve set aside, consider giving it to your beneficiaries while you’re alive. This will reduce the size of your estate and therefore probate taxes and fees. When your beneficiaries are charities, gifts made while you are alive produce tax credits that you can use to your reduce current taxes – and unused credits can be carried forward for as much as five years. Lower taxes now will allow you to give more to all of your beneficiaries.

Solution 4: If you have income that is more than you spend, consider making significant ongoing contributions to your favourite charities. The charitable tax credits can significantly help to offset your current taxes.

Solution 5: If there is a chance you may need the money you’ve set aside as you grow older, or you want control over changing your beneficiaries in the future, or you want to completely avoid probate taxes, fees and delays, consider moving your funds from bank savings accounts, mutual funds or money market funds into identical products offered by insurance companies. By doing so, you can directly assign beneficiaries and easily change them at any time, without incurring any costs as you would to change your will. Then when you die, these funds will pass to your beneficiaries outside of your estate. Your beneficiaries will receive the funds within three to four weeks of the insurance company receiving your death certificate.

In addition, some insurance companies will provide a 100% guarantee on your principal so you’ll know for sure that your investments and subsequently your bequests won’t be negatively affected by market fluctuations.

Even better, leaving your bequests in this way removes this money from your estate (just as if you gave it away during your lifetime), which will lower your estate’s probate taxes and fees on remaining assets in your estate. Lower taxes means you will leave even more to your beneficiaries!

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Solution 6: Purchasing a life insurance policy with money that’s already set side for beneficiaries is a simple way to significantly multiply what you’ll bequest to these beneficiaries. You simply use the money that’s set aside to pay your life insurance premiums. In particular, if you want to leave money to charities, it is often to your advantage to pay your policy off in one lump sum or over a few years.

As it is with any insurance product, your bequests will go to your beneficiaries tax free and outside of the estate. They will flow quickly and directly to your beneficiaries, usually within three to four weeks of the insurance company receiving your death certificate. No hold-ups, no taxes, no hassles.

These are some simple options available to you that will allow you to have complete control over what happens when you die. If you’d like to discuss how you can easily create a more valuable estate that reflects your personal circumstances, please feel free to contact me anytime.

Next: Including your favourite charities as your beneficiaries is not only a good thing to do but can help significantly reduce the taxes owing on your estate.