November/December - 2012
Financial Plans and Divorce - is the topic of LIFE LETTER for November. A marriage breakdown can be very disruptive for the whole family, but dealing with your financial and estate plans today can avoid months of delays and thousands in expenses later.
Financial Plans and Divorce
History tells us about half of marriages in Canada end in divorce. Andrew and Sara are about to end theirs. They are concerned about the changes that will have to be made to their financial and estate plans. Some financial and estate issues they need to address are:
Life Insurance - The first thing that needs to be done is a review of the beneficiary designations. If there are children, they may be the new beneficiaries and trustees will need to be chosen if they are minors.
This will affect both personal plans and group benefits. When one parent is responsible for child support payments, new life insurance may be required to cover this obligation.
After the sale of their house, Andrew and Sara may each buy a new home with their share of the proceeds as a down payment. If either gets a new mortgage, life insurance will be needed to cover it.
If either remarries, a complete review of their life insurance needs will be in order. If the various needs and obligations are not adequately provided for, a long and costly legal battle may follow.
Wills - Andrew and Sara will each need to make new wills. Provisions will need to be made for both child custody and support obligations. It is best to have a lawyer prepare the new wills, as do-it-yourself will kits are usually not adequate.
Depending on province, unless a will is specifically prepared in anticipation of a marriage, new wills need to be done again after either remarries. Prior obligations still need to be provided for in the new will.
Disability Insurance - Both Andrew and Sara will be on their own and no longer able to rely on each other should either become disabled. Group benefits, if they have them, may not be adequate to meet all their needs. Personal disability insurance may be needed to help provide for every day needs and other obligations should illness or injury prevent either from working for a period of time. Consider a complete review of their disability needs.
Critical Illness Insurance - This insurance provides a lump-sum tax-free benefit if the insured survives a heart attack, cancer, stroke, or other listed serious illness. If either Andrew or Sara suffers a critical illness, money should be the least of their worries.
Registered Retirement Savings Plans - If one spouse has more in their RRSPs than the other, a divorce settlement may require an equalization of funds. The Canada Revenue Agency allows tax-free transfers between RRSP plans of one spouse to the other due to a marriage breakdown. Review RRSP beneficiaries as well.
Provision for the tax liability on death needs to be considered. Life insurance can be a very economical way to pay the taxman and assures the full value of the RRSPs goes to their beneficiaries. A marriage breakdown can be very disruptive for the whole family. Future disruptions can be minimized by dealing with all your financial and estate plans today. A little time and a few dollars now can avoid months of delays and thousands in expenses later.
Copyright © 2013 Life Letter. All rights reserved
Be Prepared to Make Changes - because it's the right thing to do!
How is your financial parachute?
Most of us take for granted that we will be able to get out of bed every morning and go to work to earn a living. We base all our financial plans on this seemingly obvious statement. Our most valuable asset is the ability to earn an income. Unfortunately, it is also one of the most vulnerable and most of the undesirable things that can affect it are beyond our control.
You have life insurance, a medical and dental plan, and full coverage on your house, cottage and vehicles. But have you secured your most valuable asset against the greatest risk? The threat of a disability is greater than the other risks you routinely cover. Look at the risks we face each day and the chances of them happening:
1 in 88 homes catch fire in a year *
1 in 21 vehicles is involved in an accident **
1 in 7 people in Canada are disabled ***
A disabling injury or sickness that lasts too long can be catastrophic. The principal breadwinner of a family, instead of being a major source of family income, becomes a drain on its remaining resources. And these resources may already be strained by other family demands.
The facts tell us that a substantial number of us are destined to have the ability to work taken away by a period of disability. For example, a 25-year old has a 53.7% chance of becoming disabled for 90 days longer or longer before age 65. A 35-year old has a 50.3% chance and the likelihood for 45-year old is 44.3%. ****
Many mistakenly believe that most disabilities are accident-based. Nothing could be further from the truth. In mid-career, age 45, only 25% are due to accidents. Even at the higher-risk age of 25, just 46% of disability claims are accident-related. By age 62 this has dropped to a mere 12%. As less than one in sixteen of such accidents occur in the workplace, few are covered by Workers’ Compensation. ****
Other government plans, like Canada Pension Plan (CPP) and Employment Insurance (EI), may pay you if you become disabled. However, the benefits are minimal (maximum $1,185.50 per month for CPP and $485.00 per week for EI as of September 2012) and may be short-lived (just 15 weeks for EI).
If you become sick or hurt and cannot work, how will you pay your bills? How long will your savings last? Who will support your family? Can your family support you? Can you afford to stay in your present home? What will happen to your retirement plans?
If you do not have satisfactory answers to any of these questions, you should consider protecting your paycheque with disability insurance.
National Fire Protection Association: Residential Fires (2011)
Copyright © 2013 Life Letter. All rights reserved
Tax Free Savings - because it's the right thing to do.!
Mutual confidence is the power that binds together all harmonious human relationships.