Basic Planning for Young Families

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As a young family, you will be facing a lot of new challenges that you may or may not be prepared for along the way. Whether it’s children, a mortgage, or unexpected expenses that come up, now is the perfect time to start thinking about all the potential pitfalls that may arise.

In this article we want to share some of the ways that insurance can help you stay ahead of these issues, as well as how to prepare yourself for some of life’s obstacles that you and your family may face.

What Issues Should You Worry About the Most?

Now that you’re starting a family, your life is just one piece of the puzzle. Your spouse and any children are also top priorities, meaning that you should consider what could happen to everyone in a variety of scenarios. Here are some crucial questions you and your partner should discuss;

What happens if one of us dies? – While this question may seem a bit morbid, it’s a necessary possibility to plan for, particularly if you are a one-income household. Even with two breadwinners, chances are that your bills and financial responsibilities are too much for one person, meaning that you need to supplement any lost income as a result of one of you passing away.

What happens if one of us becomes disabled? – Disability can cripple a family unit almost as much as death. Not only do you have to worry about losing income because you or your spouse can’t work, but you will likely have mounting medical bills that will exacerbate the situation.

Even if one of you can still work, is the disabled spouse able to care for the children? Will his or her disability impact their ability to do simple tasks, like buying groceries, picking the children up from school or even changing diapers? If the worst should happen, you need to be ready.

How are we saving for future expenses, like college or retirement? – If you’re like most Canadians, you probably worry about having enough money saved for your children’s post-secondary education and your retirement.

As a young family, you may believe that retirement is an event that’s too far off to consider right now, but the fact remains that when you begin saving for retirement will have a significant impact on how comfortable your retirement will be. Sooner rather than later is advisable for both retirement and university savings. Remember, kids grow up fast and you will want to be ready to help them avoid crippling student debt.

How Insurance Can Help

Worrying about the future can be stressful, which is why it’s imperative that you and your spouse put a plan into place. Thankfully, insurance policies can help create peace of mind for both of you, so let’s look at some of the options available;

Life Insurance

Regardless of your current financial situation, if you or your spouse dies suddenly, it can derail your plans, and it could put your family at risk of accruing debt. When discussing life insurance plans, here are a couple of things to consider;

The Differences Between Term Insurance and Whole Life?

Term Insurance

  • With term life insurance you pay premiums for a specified duration (i.e., 20 years).

  • Your monthly payments are relatively inexpensive.

  • The policy either terminates or renews at a substantial cost at the end of the term period.

  • This kind of policy is excellent if you want peace of mind while the kids are still young

  • Or if you want to avoid high initial premium prices.

Whole Life Insurance

  • Whole life insurance is a permanent plan that can provide protection for as long as you live.

  • Some Whole Life policies become paid up (e.g. 20 pay Life) and stay in force until death or the policy is surrendered.

  • With this type of coverage, you could have a policy on which you have not paid any premiums for decades and when you die your family will receive the death benefit.

  • Another advantage of whole life insurance is that you can contribute money that can also help with retirement. Should you require funds while you are alive, you can borrow against the cash value of your policy or cash surrender the policy in the unlikely event you don’t need it.

Disability Insurance

As we mentioned, a disability can hurt your family as much as a death can. Depending on your employer, you may be eligible for disability insurance through a group plan. One thing that you don’t want to solely rely on, however, is government benefits such as the Canada Pension Plan. Unless you’ve been paying into CPP for many years, your disability benefits most likely would not be enough to cover expenses and lost wages.

Instead, it’s probably best to get an individual disability insurance policy so that you know you’re covered and won’t face any financial shortfalls.

Investing in Your Family’s Future

University education and retirement are two massive expenses for which you should be prepared. Also, if you don’t have a house yet, you should plan on paying a mortgage for up to 30 or 40 years as well. Here are some tips to help you save money for these life events;

Start Early

You may think that saving for these things means that you have to put most of your paycheck away each month. However, even if you save $25 a week, that’s better than nothing. Over time, the money will grow and earn interest, meaning that you can wind up with a significant amount when the time comes.

Open a Registered Educational Savings Plan

When it comes to planning for post-secondary education, an RESP is an excellent way to put aside money for your children. The government will also pay a bonus of up to $500 per year (to a maximum of $7,200) on eligible contributions. There is no annual maximum contribution limit, but the lifetime maximum is $50,000.

Contribute to an RSP (if no company pension plan)

Registered Savings Plans allow you to invest for your retirement and deduct your deposit from your income for income tax purposes. Usually, the maximum allowable contribution is the lesser of 18% of your previous year’s earned income or the maximum contribution amount that changes each year. The maximum contribution for 2023 is $30,780.

Open a Tax-Free Savings Account

Perhaps even before starting an RSP, consider opening a Tax-Free Savings Account.

  • An individual aged 18 and older may contribute up to $6,500 to a TFSA. This can be done every year with the maximum limit adjusted for inflation and rounded out to the nearest $500.

  • Funds contributed to a TFSA are not tax-deductible, but the growth and any withdrawals are tax-free.

  • If you have not contributed to a TFSA, you have been accumulating deposit room for the years you did not contribute. As of 2023, that deposit room has increased to $88,000.

There is an old saying, that people don’t plan to fail, they fail to plan. The sooner you start that planning the more effective it will be.

As always, please feel free to share this information with anyone you think would find it of interest.

Estate Planning for Blended Families

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Avoid Disinheriting Your Children

In today’s family, it is not unusual for spouses to enter a marriage with children from previous relationships. Parents work hard at getting these children to functionally blend together to create a happy family environment. Often overlooked is what happens on the death of one of the parents. In most cases, special consideration for estate planning is needed to avoid relationship loss and possibly legal action.

Typically spouses leave everything to each other and when the surviving spouse dies, the remainder is divided amongst the children. The problem? Even with the best of intentions, there is no guarantee that the surviving spouse will not remarry and inadvertently disinherit the deceased’s children.

6 Estate Planning Considerations for Blended Families

The Family Home

  • In the situation of the family home being owned by one parent prior to the marriage, the other spouse may consider purchasing an interest in the family home. In this situation, consider owning the home as tenants-in-common to allow for each spouse to manage their interest in the home separately.

  • Provisions can be made in the will for the surviving spouse to remain in the home until the time of their choosing (or death) before passing on the interest to their respective children.

Registered Retirement Savings Plans

  • To take advantage of the tax-free rollover from their RRSPs each spouse should consider naming each other as beneficiary. If there are no additional investments or assets to pass on to the children, consider using life insurance as the least costly way to provide a legacy for the children.

Other Assets and Investments

  • If each parent has other assets or investments that could provide income in the event of death, a qualifying spousal testamentary trust could direct that the surviving spouse receives all the income from the trust with the possibility of making encroachments on the capital for specific needs. Upon the surviving spouse’s death, the remaining trust assets will be distributed to the appropriate children.

Choose a Trustee Carefully

With trusts being vital to effective estate planning, careful consideration has to be given as to whom will be a trustee. For blended families, children of one parent may not be comfortable with the choice of the trustee for their inheritance. Some situations may call for multiple trustees or perhaps the services of a trust company.

Although effective, using testamentary trusts might result in some children not receiving their inheritance until the death of their step-parent. Life insurance may be the ideal solution. Proceeds from life insurance will guarantee that the children will be taken care of upon the death of their parent.

Advantages of Life Insurance for Blended Family Planning:

  • Can be an effective way to create a fair division of assets when one spouse enters the marriage with significantly more wealth;

  • Death benefit is tax-free and could be creditor and litigation proof;

  • Ability to name contingent owners and beneficiaries (including testamentary trusts);

  • Death benefit could be used to create a life estate under a testamentary trust, providing income to a surviving spouse with the capital going to the appropriate children at the surviving spouse’s death;

  • With a named beneficiary proceeds pass outside of the will so cannot be challenged under any wills variation action;

  • Provides for a significant measure of control and certainty as to when and where the proceeds will end up.

The Elephant in the Room

It is important to remember that whatever planning options are used, total and open communication within the family is essential to maintain family harmony and ensure everyone is aware of the state of affairs. Full discussion will avoid misunderstandings and reduce uncertainty as to what the future may hold for everyone in the family.

Planning for blended families should involve professional advice in creating solutions that satisfy the objectives of both spouses and their respective children. Call me if you require help in this area or as always, please feel free to share this article with anyone you think would find it of interest.

Copyright @ 2021 FSB – All Rights Reserved

Disability Insurance and Small Business: How a Small Business Owner Used Disability Insurance to Stay Afloat While Managing Depression

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Sandra ran her own successful insurance agency company for over a decade before it hit her like a ton of bricks – she was chronically depressed and something had to change.

Triggered by a combination of constant stress leading to severe burnout and her 12-year-old son’s recent diagnosis with Type 1 diabetes, Sandra needed some time away from the office to recover and receive treatment. Her depression was absolutely debilitating and could have been devastating to her business and income.

Luckily, Sandra, whose name has been changed to protect her privacy, had purchased two disability insurance policies eight years prior that would help her through such a turbulent time. Sandra worked in the insurance industry and had seen just how important it was to protect yourself from a loss of income in case of a debilitating illness or disease.

“We would see the financial devastation that a disability or an untimely death could cause,” Sandra said. “That had a strong impact on me and I wanted my income and my business to be protected.”

Sandra purchased two disability policies: An office overhead insurance policy in the amount of $10,000 per month that protected her business and covered office expenditures for a period of 18 months. The second policy, personal disability insurance, was an income replacement policy that covered her until age 65 or the length of the disability. It protected her personally by providing her with a $10,000 tax-free, monthly income that allowed her to take the time off work that she needed to receive treatment. Sandra was also happy to learn that she could still spend a small amount of time overseeing her business while continuing to receive the benefits.

“Purchasing the policy gave me peace of mind, knowing what could have happened and ultimately what did happen,” she said.

In general, disability insurance, or commonly referred to as DI, pays a claim due to sickness or accident if the insured is unable to work beyond the normal waiting period. As opposed to critical illness insurance, which is paid out in one lump sum, disability insurance is paid out in monthly installments while the insured remains disabled. The policy that Sandra purchased paid disability benefits until she reached age 65.

After months of treatment, Sandra decided to sell her business and start a new business with her husband: one that allowed her the flexibility to spend more time working on her own needs and the needs of her family. Having disability insurance allowed her to make that transition in her own time and without harming her financially – all while working with qualified medical professionals to get help for her depression.

Sandra’s story is not unique. While most working adults like to believe that they are immune to calamity or harm, unfortunately, that is not the case. According to Statistics Canada, 33% of workers between the ages of 30 and 64 will experience a disability for longer than three months. And most disability claims will come from major illnesses, not accidents.

Which disability insurance policy is best for me?

Working with a financial advisor will help you determine what type of living benefits best fits your needs. But we can outline the basics here to get you started.

Short-term disability insurance: Short-term disability insurance will cover the loss of income due to a temporary illness or accident. The tax-free coverage typically extends between six to 26 weeks, and payments begin after your workplace sick leave expires. Usually, but not always, these plans are provided by employers and typically cover up to 70% of your income.

Long-term disability insurance: As the name implies, long-term disability will cover for a longer period of time depending on your policy. Long-term disability insurance provides monthly payments that commence following the elimination period, which is usually 30 to 90 days after the onset of disability, and can continue up to age 65.

Office Overhead Insurance: Office overhead insurance covers your office expenses if you become disabled. Eligible expenses include rent, utilities and staff salaries.

Group Disability Insurance: This type of disability insurance is typically provided through an employer. If the premiums are paid by the employee, the disability benefit is received tax free.

Questions? Reach out if you are interested in exploring which type of disability insurance would best suit your needs.

As always, please feel free to share this article with anyone you think would find it of interest.

Copyright © 2021 FSB Content Marketing – All Rights Reserved

Preparing Your Heirs for Wealth

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If you think your heirs are not quite old enough or prepared enough to discuss the wealth they will inherit on your death, you’re not alone. Unfortunately, this way of thinking can leave your beneficiaries in a decision-making vacuum: an unnecessary predicament which can be avoided by facing your own mortality and creating a plan.

Avoiding the subject of your own mortality can also be an extremely costly to those you leave behind.

If you have a will in place you are ahead of the game. However, authors of the 2017 Wealth Transfer Report from RBC Wealth Management point out that a will is only a fundamental first step, not a comprehensive plan.

“One generation’s success at building wealth does not ensure the next generation’s ability to manage wealth responsibly, or provide effective stewardship for the future,” they write. “Knowing the value (alone) does little to prepare inheritors for managing the considerable responsibilities of wealth.” Overall, the report’s authors say the number of inheritors who’ve been prepared hovers at just one in three.

Two thirds of the survey’s respondents say their own wealth transfer plans aren’t fully developed – a critical barrier to having this discussion in the first place.

While the report focuses on wealthier beneficiaries in society, the lessons remain true for most: to make the best decisions about your wealth transfer, there needs to be planning and communication with your heirs.

1. Recognize that action today can help you create a better future

First, it’s important to acknowledge that creating an estate plan means contemplating your own death – an inescapable element of the process. It can also involve some awkward conversations, particularly if you’re not in the habit of talking about money with family and loved ones.

Without planning the outcome you leave may not be the one you would choose:

“Despite their efforts, parents don’t always succeed in translating good intentions into effective actions. They tend to resort to the informal, in-house learning methods they received in childhood,” say the RBC report’s authors. “Without intending to, parents repeat the lessons that contributed to the weaknesses of their own financial education. In the end, they are not equipping the next generation with the right skills to build lasting legacies.”

2. Understand the tax implications early.

To many, the taxes due on death will almost certainly come as a shock. In many cases, the single largest tax bill you will pay could be the one that your executor handles for you.

In Canada, leaving your assets to your spouse will defer these taxes until he or she disposes of the property or dies. However, if a spouse is not inheriting your assets and real property, planning for this “deemed disposition” is needed to allow your heirs time to make appropriate decisions about your property and legacy.

You may want to consider strategies that will greatly reduce the impact of the taxes to your estate. These strategies could include the use of joint last to die life insurance.

To illustrate how the growth in value of property can result in taxes payable at death, consider an asset which many Canadians own and enjoy – the family cottage.

Recreational real estate in many cases has “been in the family for years.” It often will have appreciated in value significantly since its purchase. Say you purchased the family cottage for $100,000. If the property is now worth $500,000, half of that gain – $200,000 is added to your income and taxed as such in the year you die. That will result in a tax bill of approximately $100,000.

If your family does not have the liquid funds available to pay this bill, the cottage or some other asset will need to be sold to pay the Canada Revenue Agency. Purchasing life insurance to pay the taxes due at death is one way to bequeath the family cottage to heirs. This will allow your children to continue to enjoy the property without having to raise the money to pay the taxes.

All capital property – except your principal residence and investments held as a Tax-Free Savings Account – is dealt with in a similar manner. If your stocks, real property, and other assets have appreciated in value since you first purchased them, half of that amount will be added to your taxable income in the year you die. If your assets included commercial or rental property against which the Capital Cost Allowance has been claimed, there may also be a recapture of depreciation. Again, deferral is available when assets are left to a spouse but if they are left directly to children or other heirs, the taxes become payable when you die.

As if this is not bad enough, the full value of your RRSPs or your RRIF must also be deregistered and included on your final tax return if the RRSP or RRIF is not left to a surviving spouse.

3. Get help to build your plan, then share it with those who matter.

Estate planning typically isn’t a “do-it-yourself” project. Instead, you’ll probably need to rely on a network of professional advisors who can bring their expertise to different parts of your plan.

Once you have your plan in place, it’s time to ensure that the people who are impacted by it are aware of your wishes.

Members of your professional network can help explain your plan to beneficiaries and help those who inherit your assets to understand your preferences and the decisions you’ve made.

Let’s get together to review or create your wealth transfer plans and discuss how you can get assistance in communicating those plans to the people who matter the most.

As always, please feel free to share this article with anyone you think would find it of value.

Juvenile Critical Illness with Return of Premium – Protection if you need it. A refund if you don’t.

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Critical Illness Insurance – Not Just for Adults

Most of us have experienced or known someone whose family has been greatly impacted by a parent being diagnosed with a life-threatening disease or condition. But what about when it happens to children? Sadly, all too often children are affected by childhood diseases such as:

  • Type 1 diabetes mellitus

  • Congenital heart disease

  • Cerebral palsy

  • Cystic fibrosis

  • Muscular dystrophy

The emotional and financial impact of these types of diagnosis can be devastating for a family.

Why would juvenile critical illness coverage make a difference?

  • Provides funds to find the best treatment and care for your child – inside or outside of Canada.

  • Provides the financial resources to be able to focus on your child’s needs so you don’t have to worry about;

    • Working

    • Extra childcare expenses for other children in the family

    • Extra expenses incurred by the illness.

  • Being prepared for this unexpected event will give you the priceless freedom to spend extra time with your child without the stress of financial concerns.

While most life insurance companies in Canada offer Critical Illness protection for adults, not all offer similar coverage for children. Of those that do, Sun Life provides a particularly unique policy when combined with a Return of Premium Option.

What makes Sun Life’s Juvenile Critical Illness Unique?

  • Insures against 25 adult conditions, plus the above childhood illnesses.

  • At age 24, childhood conditions drop off and the policy automatically continues as an adult plan.

  • The Return of Premium Option provides an automatic refund of 75% of all premiums paid at age 25 or 15 years from the policy date whichever is later.

  • The policy can be surrendered 15 years or later from that date for a refund of the balance of total premiums paid.

What happens when there is no claim?

Bob and Sally purchase $200,000 Critical Illness Term to 75 with Return of Premium Rider on their 5 year old son, Michael. The annual premium for the policy is $1,393 ($462 of this premium represents the Return of Premium Rider)

  • At Michael’s age 25, an automatic refund of premiums returns $20,895. This represents 75% of the total premiums paid to date.

    • Adding the Return of Premium Rider for a cost of $462 a year represents a tax-free rate of return of 7.26% on that portion of the premium.

  • In Michael’s case, he can surrender the policy any time after his age 40 for a full refund of the balance of the total premiums paid.

Additional Premium Refund at surrender:

  • Age 40 $ 27,860

  • Age 45 $ 34,825

  • Age 50 $ 41,790

Sun Life’s Critical Illness Insurance plan with the Return of Premium Option for juveniles is a very unique plan that provides peace of mind if you need the protection and a full refund of your premiums if you don’t.

If you would like to explore this exceptional plan in more detail please call me and I will be happy to assist. Also, feel free to share this article with anyone you feel would benefit from this information by using the share buttons.

* – assumes application is made for non-smoker rates at age 18

Copyright © 2017 FSB Content Marketing Inc – All Rights Reserved

A Lifetime Gift for Your Grandchildren

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The Cascading Life Insurance Strategy

If you are a grandparent wishing to provide an asset for your grandchildren without compromising your own financial security, you may want to consider an estate planning application known as Cascading Life Insurance.

How does the Cascading Life Insurance Strategy work?

  • The grandparent would purchase an insurance policy on his or her grandchild and funds the policy to create significant cash value;

  • The grandparent would own the policy and name the parent of the grandchild as contingent owner and primary beneficiary;

  • The cost of life insurance is lowest at younger ages, maximizing the tax deferred growth of the cash value in the policy.

What are the benefits of the Cascading Life Insurance Strategy?

  • Tax deferred or tax free accumulation of wealth;

  • Generational transfer of wealth with no income tax consequences;

  • Avoids probate fees;

  • Protection against claims of creditors;

  • Provides a significant legacy;

  • Access the cash value to pay child’s expenses such as education costs. (Withdrawal of cash value may have tax consequences);

  • It’s a cost effective way for grandparents to provide a significant legacy.

For the grandchild, he or she ultimately receives a gift that will provide significant benefits:

  • A growing cash value that can never decline;

  • Access to borrow from the policy for education, down payment on a home, or to invest in a business;

  • The policy could also provide an annual income by changing the dividend option to cash;

  • Life insurance which continues to grow in death benefit to protect his or her future family.

Case Study

Let’s look at an example of this strategy. Grandpa Brian is 65 and has funds put aside for the benefit of his grandson, Ian.

  • Grandpa Brian purchases a 20 Pay Participating Whole Life policy on Ian, age 11, for an annual deposit of $5,000;

  • Brian’s daughter, Kelly is named as contingent owner in the event of Grandpa Brian’s death and beneficiary in the event of Ian’s death;

  • At Ian’s age 31, the policy becomes paid up with no future premiums.

If Grandpa Brian were to die at age 85 the following could happen:

  • The ownership of the policy now passes to Ian’s mom Kelly;

  • The cash value of the policy (at current dividend assumptions) would be $ 134,049 and the death benefit of the policy would be $679,634;

  • Kelly has a choice to remain the owner of the policy or transfer the ownership to her 31-year-old son without any tax consequences.

Because of Grandpa Brian’s legacy planning, Grandchild Ian, now age 31, has a significant insurance estate that will continue to grow with no further premiums! By Ian’s age 45, the death benefit, at current dividend scale, would be $1,030,045 with a cash value of 311,811.

Please call me if you think your family would benefit from this strategy or share this article with a friend or family member you think may find this information of value.

Note – The numbers shown in the Case Study are using Equitable Life’s Estate Builder 20 pay Participating Whole Life policy with maximum Excelerator Deposit Option.