Affiliated with Sentinel Life & Sentinel Financial Management Corp.
Commentary - Hans H. Mathisen
MERRY CHRISTMAS AND HAPPY NEW YEAR!
It is my sincere wish that 1999 has been a good year for you and your loved ones and that you will enter the new Century full of optimism and enthusiasm.
LIFE LETTER for November, Insuring Car Payments, explains how most lending institutions take advantage of us when "insuring our loans". Whether its a car loan or a mortgage, you can usually do better when you arrange your own personal coverage. This costs you less. And you are in control. Ill be pleased to show you how you can be your own boss.
Decembers LIFE LETTER deals with The Last Great Tax Shelter. An increasing number of Canadians are taking advantage of the fact that Revenue Canada allows us to earn tax free Investment Income outside our RRSPs. An additional benefit of The Last Great Tax Shelter is that you can get your money out without paying tax on the growth of your investment! This is like not having to pay tax when you de-register your RRSPs. Sounds too good to be true? If you want to take advantage of this little-known tax shelter created by Revenue Canada, please call me. Ill show you how it works.
THE STOCK MARKETS As of November 30, 1999, you should have earned about 20% on your mutual fund investments for the first 11 months of 1999. If you havent, your money is not invested where it should be invested. Should you want to review the performance of your investments, please give me a call.
Hans H. Mathisen
"INSURING CAR PAYMENTS"
Albert, about to sign the papers on his new mini-van, was asked by the dealer, "How about life and accident insurance to cover your payments? We can just add it to your loan."
The cost? $2,124 added to his $20,000 loan ($859 for the life insurance and $1,265 for the accident and sickness insurance), which, he was told, would make his monthly payments if Albert died or couldnt work during the loan repayment period. He asked for a copy of the coverage wording and told the salesman theyd finish the paperwork the next day.
Beacause of finance charges, Albert figured his cost would actually be over $2,600 during the five years he will be paying gor this new vehicle. But only the amount left owing on the loan would be paid if he died. If he becomes disabled and qualifies for disability benefits, they would only make his $400 monthly payments for the balance of the loan period or until he goes back to work, whichever is shorter.
The insurance definitions said hes disabled only if he is unable to work at any job "for which the Insured Debtor or Joint Insured Debtor is qualified by education, training or experience." Albertrealized this means that even if he could pump gas, for which he "qualified" as a teenager, his disability claim could be denied.
Albert called his insurance and financial advisor for more information. He found out that as a 30 year old non-smoker, he could get over twice as much life insurance, $50,000 of five year renewable and convertible term insurance, for only $130 per year, and $450 per month of disability insurance with a full five year benefit period for only $196 per year. Unlike the dealership insurance, this coverage does not diminish over time. More importantly, over the five-year loan period his total premiums are almost a thousand dollars less!
Also, the personal disability plan protected him if he couldnt work at his own job, not just any job, and even if he is only partially disabled. And his life insurance can be renewed without new medical evidence. This is important because this is not the last vehicle hell ever buy and finance. Hell be older when he gets his next one, and may not qualify for the dealers coverage then because his health might change.
If he took the car dealers insurance, hed pay 60% more for inferior coverage. It made a lot of sense to Albert to have coverage that is far more economical, has better definitions regarding disability, does not reduce, is completely portable and renewable, and benefits him and his family instead of just the finance company.
He also liked the idea of covering his other debts the same way. When he met with the car salesman the next day, he just took the vehicle. As he wouldnt go to his insurance agent for an oil change, he wont be going to a car salesman for insurance.
"THE LAST GREAT TAX SHELTER?"
Sidney has accumulated quite an RRSP nest egg by contributing the maximum each year. And is concerned about the future taxes on RRSP withdrawals, whether at retirement, migration or death. To handle these ultimate and inevitable liabilities, Sidney is wondering whether life insurance might be an answer.
Sidney also saves money outside the RRSP, and doesnt like paying a significant portion of its growth to Canada Customs and Revenue Agency (formerly Revenue Canada), either. Fortunately, a Coopers Lybrand booklet on tax planning introduced a new idea, "exempt" life insurance, and said " such policies may be a powerful tool in the tax planning arsenal, particularly when many other tax shelters appear to have been curtailed."
So Sidney discovered that two financial concerns could be answered with one plan.
Yet another discovery was a life insurance idea, introduced in the late 1970s, called Universal Life. Its many improvements since then have produced an extremely flexible tax and financial planning tool.
Sidney learned that Universal Life provides an economical way of obtaining life insurance protection with a very flexible premium paying arrangement. Choose a premium that just covers the cost of insurance, or one that covers the insurance cost and then some, so the extra amount can be invested in a tax-exempt fund. The amount can be changed as cash flows change. Or pay the maximum for a number of years, then, coast for a while, letting the growth on the investment portion pay for the insurance.
The unique tax advantages of Universal Life can be visualized as a barrel. Imagine one with an open top and a tap on the bottom. Deposits go in the top of the barrel and the monthly cost of the life insurance trickles out the tap at the bottom. Meanwhile, the contents of the barrel earn a compound tax-free return. And theres a broad choice of investments that determine what is earned on the money left in the barrel. With enough in the barrel, earnings alone can pay for the insurance with tax-free dollars instead of after-tax dollars.
Sidney chose a plan that, at death, pays both the face amount plus what is in the investment barrel. This total death benefit (which includes the investment portion) will be paid out tax-free. Sidney named a beneficiary to avoid provincial death taxes (i.e. probate fees) on any and all of the death benefit. This also speeds up the death benefit payment as the probate process, which can take months or even years, is by-passed
Have you considered the tax aspects of your RRSPs and life insurance.
Mutual confidence is the power that binds together all harmonious human relationships.