Commentary - Hans H. Mathisen
three ECs of Life Insurance - The
March issue of LIFELETTER deals with the versatility
of life insurance. You may find that now is the time
for you to review your life insurance coverage. Are you
adequately covered? And for the right purpose. Is your
life insurance program in sync with the three ECs? Do
you want some fresh ideas? I may have some ideas you
Start your 2006 tax planning now - Tax planning is an ongoing and never ending process. Tax planning should be part of your overall financial plan. LIFELETTER for April mentions but three ways to reduce the taxes you pay. There are also other ways you can cut down your tax bill. Please call me for details.
LIFE LETTER MATURE - A few tips to indicate whether we're still safe drivers; and how seniors can take income from their RRSPs. The way seniors choose to take income from their RRSPs can often determine the level of income received and how long that income will last. I will be pleased to show you alternative scenarios.
THE STOCK MARKETS - The TSX Composite Index is up by 7.44% as of March 31, 2006. This performance compares to 3.66% for the Dow Jones; 3.73% for the S&P 500; and 6.10% for NASDAQ. For the first quarter of the year, Japan's Nikkei is up 5.89%, and Hong Kong's Hang Seng increased 6.24%. In Europe, London's FTSE 100 grew by 6.15%; CAC 40 in Paris increased 10.72%; and Frankfurt's DAX was up 10.32%.
all the major international indexes are doing very well. Deliberately,
I do not report to you on what happens in emerging markets. When
weighing risk vs. return, the performance of the stock markets
in the industrialized world is more than satisfactory. The diversification
of client' investments by country will continue to be based on
The three ECs of life insurance
Life insurance is initially purchased for any of a number of reasons. As time goes by, many people question why they are still carrying their policies as the original purpose no longer applies. Here are the three uses of life insurance:
Estate Creation - When Ralph and Alice bought their first life insurance policies, they arrived at the amount of coverage with the help of their insurance advisor. The advisor used what is known as a Capital Needs Analysis (CNA) to arrive at the proper amount of insurance. A CNA measures how much of an estate needs to be created in the event of the death of either Ralph or Alice so the survivor can maintain their standard of living.
The CNA has three parts:
1. Cash needs at death - This includes final expenses (funeral & burial, legal & probate, taxes); mortgages and other debts; child or home care costs; education funding; emergency fund; and, special bequests and charitable funding.
2. Income needs at death - A calculation is made to determine how much income the survivor needs for their standard of living. Existing sources of income are deducted from this amount to arrive at capital needed to replace the income shortfall.
3. Cash available at death - There are some plans in place already that can contribute to Ralph and Alice's estate to offset their needs. They used life insurance to create the rest of their estate.
Estate Conversion - Ralph is a part owner in a business. He has built up substantial value in his shares and wants them to contribute to his estate value on death. However, Alice does not want to be a part owner of the business nor does Ralph's partner, Ed, want her as a partner.
Ralph and Ed each bought life insurance to allow them to convert the value of their shares to cash for a surviving widow. Let's say Ralph died. There would be enough life insurance proceeds available for Ed to buy Ralph's shares from Alice.
Estate Conservation - Ralph and Alice want all of their estate to go to their children
on death. As they grow their estate, they also increase the amount
owing their silent partner - the taxman.
Ralph and Alice can use the life insurance policies they originally bought to create an estate to conserve their estate. The tax bill will still have to be paid, but their children can use the proceeds from the life insurance, dollars that were paid for with pennies.
This article is for information purposes only and is not intended
to provide specific insurance or income tax advice.
Hans Mathisen today at (306)242-7042.
Copyright © 2006 Life Letter. All rights reserved
Start your 2006 tax planning now
It is too late to do anything about our 2005 income tax plans. However, now is the time to plan for 2006. After all, most people spend more time planning a vacation than their finances.
Actually owing a little bit to the taxman - Each year, Canada Revenue Agency (CRA) gives out tax refunds totaling over $12 billion. Almost 60% of Canadian taxpayers get refunds that average about $1,000. CRA gets to use this money, your money, all year and does NOT pay you any interest on it.
Carl liked getting a big tax refund each year. Because of RRSP contributions and a change in his marital status, he gets about $5,000 refunded every spring. He would much rather use his own money during the year than lend it to CRA interest-free.
He had not made any changes to his TD1 form since he started working, even though his situation had changed. Carl completed a new form for his employer and now they withhold much less for tax purposes each paycheque. By also completing a form T1213 - Request to Reduce Tax Deductions at Source and filing it with CRA, he arranged to have his monthly RRSP deposits deducted from his income before taxes are calculated.
Carl realizes that it is much better for him to owe a few hundred dollars in taxes each year than to lend his money to CRA just to get a big refund.
Being more generous to charities - Statistics show that Canadians are pretty stingy when it comes to charitable giving compared to many other countries. Along with the good feeling you get by helping out a charity, you can also get a nice tax reduction.
Natalie earns about $45,000 per year and gives a little bit to charities. The first $200 of donations gets her a tax break (in the form of a non-refundable tax credit) of 16% federally. She also gets the break on her provincial taxes. Everything over the $200 gets her a tax break of 29% federally. At Natalie's income level, her top federal tax rate is only 22%. This represents a tax break 7% greater than the maximum she actually pays in taxes.
Buy ing a Tax Advantaged Insurance Plan (TAIP) - A TAIP is a life insurance policy that allows you to deposit more than the actual cost of the insurance death benefit into it. The excess deposits earn interest, either tax-deferred or tax-free.
Rick had a need for some life insurance. He chose a policy that allows him to pay more than the minimum required to cover the insurance cost. The policy also has a maximum premium he can pay that keeps the policy "exempt" for tax purposes. Any deposits Rick makes between the minimum and maximum accumulate on a tax-deferred basis.
On death, the face amount of his policy, plus whatever his additional deposits have grown to, will actually be paid to his beneficiaries tax-free. Rick can make withdrawals from his policy, up to the adjusted cost base (ACB), tax-free. If he withdraws more than the ACB, he will be fully taxed on the excess. But his money will have had taxes deferred on the growth until then. This plan works best if Rick has already maximized his RRSP contributions.
This article is for information purposes only and is not intended to provide specific income tax advice.
Want help with your financial strategies?
Call Hans Mathisen today at (306)242-7042.
Copyright © 2006 Life Letter. All rights reserved
Mutual confidence is the power that binds together all harmonious human relationships.