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September/October 2002

Commentary - Hans H. Mathisen

Where Should I invest My Money?- The September issue of LIFE LETTER outlines the many advantages of investing your money with a life insurance company. Guarantees. More security of your principal. More flexibility. Please call me with any questions you may have.

How Long Will I Need Life Insurance? - Considering inflation and the tax man, we will all need more - not less - life insurance as we get older. And the older we get the more life insurance we will need. That is, of course, if we want the major portion of our worldly assets to go to our heirs, rather than Revenue Canada. And, if you plan to live beyond age 75, permanent life insurance is the only kind of insurance that will pay when you walk out. (Term life insurance is initially inexpensive, but the cost of this type of protection gets very high after you reach age 50). And Term Life Insurance is designed to expire before you and I do. That's why it costs so little - initially. Please call for details.

THE STOCK MARKETS - The markets are taking a beating, but my advice hasn't changed: stay invested where you are now, as moving out at the bottom will lock in your losses permanently. And, now is the time to invest! I'll be pleased to suggest alternative investment options.

Disability Insurance For Retirees - I call it Living Care We can no longer count on the public purse to care for us during our senior years, as one-out-of-two over the age of 65 (that is 50%!) will spend some time in a long term care facility. And the costs can be devastating! Please read this article and contact me for details about how reasonable it is to protect yourself and your loved ones against the high cost of Long Term Care. .

HAPPY INVESTING!
Sincerely,
Hans Mathisen



 

LIFE LETTER

Where Should I Invest My Money?

After the branch of the financial institution Steve had been dealing with closed and merged with a different one, with shorter hours in a less convenient location, he decided to look at his options. He learned that there are many advantages to investing with a life insurance company. They include:

1. Potential Creditor Protection. All products offered by life insurance companies allow you to name a beneficiary. As long as the person you choose is a family member, your money is usually protected from creditors. Other conditions may apply, so ask for details.

2. Bypass Probate. Because proceeds go directly and quickly to your named beneficiary on death, you can avoid costly probate and legal fees. This means that the full value of your investments go to the people you choose.

3. Long Investment Terms. Life insurance companies have been making long-term promises for centuries. You can invest in longer investment terms, up to 30 years or more. Banks and trust companies usually don't offer terms beyond five years as deposits won't be insured by CDIC.

4. Consumer Protection. The life insurance industry provides policyholders with a consumer protection plan called CompCorp (the Canadian Life and Health Insurance Compensation Corporation). This plan protects you, within prescribed limits, if a life insurer becomes insolvent, (www.compcorp.ca/ 1-800-268-8099).

5. Pension Income Tax Credit. Because GICs with life insurance companies are annuities, interest you earn or accrue is reported as annuity income. For those age 65 or older, this income is eligible for the pension income tax credit. Interest income from GICs elsewhere never qualifies for this valuable tax benefit.

6. Protect Against Drops in The Market. Like mutual funds, segregated funds provide returns based on the performance of underlying securities. Segregated funds are backed by a life insurance company and guarantee to return at least 75% of your deposits, less withdrawals, when the contract matures (usually ten years). This guarantee also applies on death. Some plans can even offer 100% deposit protection on death or maturity.

7. Life Annuities. A life annuity is one of the oldest retirement income options available. They are only available through a life insurance company and provide a guaranteed income for life. Banks and trust companies can offer a term-certain annuity, but typically these fall outside of the CDIC consumer protection plan.

8. Professional Advice. Insurance company advisors are uniquely qualified to provide expert financial advice. They receive extensive training in financial services as well as tax and estate planning. Many advisors also have affiliations with other financial institutions, allowing them to provide you with customized financial solutions to help you reach your financial goals.

Want help reaching your financial goals? Call today!

Call Hans Mathisen today at (306)242-7042.
or email -
hans@mathisen.ca

Copyright © 1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
All rights reserved

 

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LIFE LETTER

How Long Will I Need Life Insurance?

Jake and Sarah were wondering how long they would need life insurance. One person said that they only need coverage for twenty years, after which they should self-insure. Another said that they should only buy permanent life insurance because of the cash values. They decided to meet with a life insurance professional to get the whole story.

They learned that everyone has unique needs and that these needs change as they pass through their different life stages.

When Jake and Sarah first bought life insurance, it was to provide for the following:

1. Final expenses
2. Debt elimination.
3. Child or home care funding.
4. Education funding.
5. Special bequests or charitable giving.
6. Income needs for the survivor.

As their children got older, the need for child-care funding was eliminated. After the kids are finished with post-secondary education, there won't be a need for education funding. Jake and Sarah have successfully reduced their mortgage and other debts over the years, so the debt elimination need has also reduced. They plan to use their RRSPs and other retirement plans to provide for their income needs.

They soon realized, though, that they have lifetime needs that must be provided for. And these needs will change in amount over time.

When they were younger, not much was needed to cover off their final expenses. However, inflation has increased this need and will continue to do so. The average annual compound inflation rate in Canada over the past 30 years is 5.3 (Source: Statistics Canada). This means that in about fourteen years, twice as much money will be needed to pay off these expenses than today.

Let's say that Sarah would need $25,000 today to pay Jake's potential funeral and burial, and legal and probate costs at his age 40. At his age 54, she will need $50,000 and at age 68, the need will be $100,000. At about his life expectancy of age 82, Sarah will need $200,000 to pay these expenses. And the same holds true for when Sarah dies.

We can't forget Jake and Sarah's most insidious heir, either. Canada Customs and Revenue Agency (formerly Revenue Canada) will be waiting for the second death to occur and will want the taxes due on the RSP assets. The RSPs will likely be taxed at the highest personal tax rate of between 39 and 49, depending on which province they live in. If they have $500,000 in their RSPs at that time, up to $245,000 will be needed to pay off the taxman. Life insurance is a cheap source for this cash.

A typical term life insurance policy provides protection only until age 70 or 75. Premiums usually go up every five or ten years. It is certainly a cost effective way to cover the short-term needs we have. But in the long run, some permanent insurance will be needed to cover our long-term needs.

Want help reviewing your insurance needs?

Call Hans Mathisen today at (306)242-7042.
or email -
hans@mathisen.ca

Copyright © 1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
All rights reserved

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Disability Insurance For Retirees
An Essential Financial Planning Tool
Written by Gary Opolsky, a disability specialist and vice-president of GSO Insurance in Toronto.

What happens when retired individuals fall ill or cannot take care of themselves due to an accident? Many people believe that their spouse or children will care for them. This can be the case, especially when it is only a few hours per day. "However," says Dr. Stuart Egiel; family physician and chief of Elder Health Services at Trillium Health Centre in Toronto, "over the last 10 years I have noticed that fewer people have had the time available to care for sick parents because both spouses are working. People are being discharged from hospitals faster and may need considerable recovery time at home. In that case either privately funded home care or, when the disability becomes pro-longed, a long-term care facility is needed."

A review of the statistics for the older population illustrates the problem. For those 65 and over, one out of two, that is 50 per cent, will spend some time in a long-term care facility (The New England Journal of Medicine, 1994). Thirty-seven per cent of Canadians over 85 live in an institution (Government of Canada: Canadian Seniors A Dynamic Force) and the average length of all stays greater than one year is 6.2 years (Best's Review, October 2000). In addition, world-wide studies show that one in 13 people over 65 will develop Alzheimer's disease, and one out of three people over 85 are affected by the disorder. Finally, in 2001, over 300,000 Canadians suffer from some form of dementia.

New drugs and breakthroughs in medical techniques have helped prolong lives. In many instances, individuals have recovered from their illnesses and can lead normal lives. Others, however, are faced with a whole new world of medical and paramedical care. For example, someone who has a stroke or develops Alzheimer's could need partial or full-time live-in care.

We used to rely on our governments to provide home care services. However, our Medicare system is now providing fewer services, and many of these are being shifted from hospitals, where they are covered under the Canada Health Act, to home and community-based care, where they are not.

Moreover, Community Care Access Centres have had their funding frozen and cannot provide homemaking services. Home care, plus some nursing care (at $30 per hour), and additional expenses for drugs and other necessities, could amount to $200 per day or more, or $6,000 per month. At a marginal tax rate of 40 per cent, one would need an annual income of $120,000 to cover these costs, or use up some capital. It is no wonder that the number one concern of seniors is that they will outlive their assets.

So how can anyone prepare financially for these situations? Wouldn't it be great if you could arrange, for a relatively low price while still healthy, a form of tax-free benefit that would provide some or all of the funds needed to finance these additional expenses. Such a program does exist It is called long-term care. I like to call it disability insurance for retirees.

A very popular concept in the U.S., it provides funds to pay for home care or a nursing home. Canadians believed that our governments would take care of us in our senior years, especially if we are sick. The reality is that our medical system is under strain and public care for seniors is constantly being eroded due to lack of funds. In Ontario alone, there is a waiting list of 15,000 people for subsidized nursing homes. Is that how you want yourself, your parents, friends, or associates to end up? I know you do not wish that for anyone.

Facility care can be very expensive. The costs range from $2,000 per month to $6,000 per month for the luxury model. This covers rent and food and often two hours per day of care. If more personal care is required, the individual needs to pay for it.

Could the average retiree afford these costs? Most can, at least for some time. Much depends on the total assets available and the rates of return one gets on those assets. Most retirees want a steady cash flow and that requires them to usually invest conservatively. Today, a conservative return is in the range of three to four per cent Thus, unless the retiree has a very large asset base, he/she may have to start depleting it when faced with unexpected circumstances.

One of my clients related the following experience: "My parents both got ill around the same time. Each had a different medical problem that required varying levels of care in the beginning. Eight years later they are both in a home. During the first eight years, they exhausted their whole asset base of $1,000,000. My sister and I arc now funding their care. It is a tremendous financial burden."

This situation need not happen to anyone. What is needed is a safety net that provides retirees with additional money, so that their capital will be left relatively intact. With proper planning, they should be able to outlive their capital, thus avoiding placing a tremendous strain on the finances of their children who may then be looking at large outlays for university education or trying to pay off their own mortgage.

Many retirees I know do not have life insurance. They hope that the income from their investments and RRSPs will not only carry them through retirement, but that they will leave some money for their children. As it is important for them to leave their children or grandchildren a legacy, they should realize that an illness could totally annihilate their objectives.

How much do these plans cost and how do they work? The plans offer facility care on a stand-alone basis, with a home care component that can be added. The maximum monthly benefit available today is $9,000. Plans have various waiting and payment periods for each type of benefit. Let's consider the following example.

Fred Junes is 66 and his wife, Shirley, 64. They each wish to receive a monthly benefit of $3,000, with a lifetime payout for both home care and facility care coverage. They have chosen a 90-day waiting period. In their particular case, the monthly cost is $342.

The waiting period, like that in a disability policy, is similar to the deductible provided for in a car insurance policy. It is the interval of time the insured has to wait from the onset of his/her need for home care or facility care until the insurer initial payment. The shorter the waiting period, the more the policy costs. Similar to disability products, there are various payout periods, up to a lifetime payout. In the above example, the couple could have paid anywhere from $ 153 per month for a one-year benefit for each coverage with a 90-day waiting period, up to $373 per month with a zero-day waiting period for facility care and 60-day for home care.

Given my 20 years experience in the disability field, and seeing the reality of how illnesses have impacted on the lives of relatives and friends of our parents, I always counsel clients to consider the lifetime benefit No one can choose their disability and no one knows for how long an accident or illness will incapacitate them. If cost is an issue, it is better to have the most benefits with a lifetime payout and a longer waiting period, rather than a shorter waiting period and reduced benefits. Most people can pay for the first 90 days of additional expenses, but few have the resources to cover these costs for 10 or 20 years.

Many people ask if a medical examination is required. Unlike life insurance there is no such examination, but be aware that individuals who have an infirmity, such as using a cane, even if it is occasionally, will not be offered coverage.

I urge you to look seriously at this type of insurance. I believe that it may become one of me most important financial planning tools of the 21st century.

For more information, contact Hans Mathisen .

 

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Mathisen Financial, Inc.
335 Redberry Road
Saskatoon, Saskatchewan S7K 4W5
Bus. (306) 242-7042 Fax. (306) 242-4314
Email:
hans@mathisen.ca