Critical Illness Coverage...Leaving the Dent Out of Your Financial Timeline

Critical illness insurance may provide you with a source of funds at a critical time in your life. Let's talk about how a critical illness or condition could affect your family, and how you can include critical illness insurance in your financial security plan.

Unfortunately the odds are stacked against us:

• 1 in 2 men and 1 in 3 women are expected to contract a heard disease at some point in their life
• 1 in 2.3 men and 1 in 2.6 women are expected to develop cancer in their lifetime
• 70,000 Canadians suffer heart attacks every year
• 40,000 to 50,000 Canadians suffer a stroke each year

However, due to medical advancements:

• 80% of hospitalized heart attack patients survive, the percentage is higher for those with their first heart attack, and lower for those with recurrent heart attacks
• 80% of stroke patients survive the initial event
• The relative cancer survival rate has almost doubled since the 1960s^*

In addition to these survival rates, individuals today are living longer!

Changes in Life Expectancy	1920	1950	2003
Men (ages)	59	66	77.4
Women (ages)	61	71	82.3

If you need immediate treatment the wait time may be long and could cause a financial drain if you need to seek treatment elsewhere. As of 2007, the median wait time for Canadians is 18.3 weeks. This doesn’t take into consideration our aging population and increased strain on our health care system.

This chart shows how much out of country treatment may cost based on treatment at the Mayo Clinic in Canadian Dollars:

Out of Country Treatment	Canadian Dollars (Assumed CAD/USD exchange rate of $1.07)
Heart Transplant (2-4 weeks in hospital)	$283,500 - 449,400
Coronary Artery Bypass (1-4 vessels, 5-7 days in hospital)	$74,900 – 90,950
Radiation Cancer Therapy (for 6 weeks)	$53,500 – 74,900

Now think, do you know someone who is suffering or has suffered a critical illness? Do you think it had an impact on his or her lifestyle? These types of illnesses can lead to loss or reduction of income, increased living expenses, lifestyle changes, loss of choice and independence, jeopardized retirement goals and dreams, and a risk to your children’s future.

Think of your current situation, if you were faced with these financial stressors, how would you pay for them? RRSP withdrawals? Borrowing? Selling personal assets? I work critical illness coverage into all of my client’s plans, that way there will not be a dent as large as this in your financial timeline.

Let’s sit down and talk about critical illness coverage. Not only will you protect you, but you will protect those around you from the financial burdens of these catastrophic events.

 Sources: Heart and Stroke Foundation, 2006
                National Cancer Institute of Canada: Canadian Cancer Statistics 2008
                Statistics Canada 2006
                Transplant Financial Services/Mayo Rochester 2008
  The statistics provided in this post have been developed by identified sources and are not based on the definitions of critical conditions contained in the Oasis policy. They are provided for general information only.
 * In the 1960s an individual with cancer was 33% as likely as an individual without cancer to survive another five years. Today an individual with cancer is 59% as likely as an individual without cancer to survive another five years.

4 Ways to Maximize Your Income Today

4 WAYS TO MAXIMIZE INCOME TODAY

Tracy Piercy / February 13, 2014

The problem with the typical retirement plan is that it focuses on long term savings. This approach emphasizes getting high returns on investments, and cutting back on expenses to create a bigger pool of savings. Instead, the key to creating sustainable income is to use current income to create more money today and in the future.

Of course, market and interest rate risks are still a consideration. But the following concepts are about cash flow, not growth. So investment returns are minimal, and the overall concepts are less volatile. Flexibility and access to cash is the objective.

1. Leverage existing assets. If you can borrow money at a rate that’s slightly less than what you can earn on an income producing investment, then you create a cash flowing investment. This can be used to build an income producing asset. The spread between borrowing and investing can be as little as 1%. The key is that the investments are not invested for growth. They’re strictly for cash flow. If you do get a bit of growth, that’s a bonus.

Aim for long term returns in the range of 5%. So if the cost of your investment loan is $100 per month on interest only, and you can earn $125 to $140 per month from income, then the extra $25 can be applied towards the principal on the loan or towards reducing non-deductible debt.

A client recently used this strategy. He had home equity but minimal cash, so he set up a line of credit for 50% of the value of his home and then invested 75% of that into an income producing segregated fund. This income covered the interest,  plus some principal, on the line of credit. The client had access to cash to fund his lifestyle, and the line of credit paid for itself in 15 years with minimal tax implications.

2. Use savings to reinvest. A 60-year-old single, self-employed entrepreneur had $60,000 inside an RRSP. There was no way she could save enough to provide her with the $40,000 she currently needed for her lifestyle expenses. But, she could do this:

• Withdraw from her RRSP over five years for a net, after-tax monthly income of $792;
• Direct $500 per month of the net RRSP income towards an investment loan at 3.5%, and invest the $170,000 proceeds at 5% into a segregated fund; and then
• The net after-tax income on the investment is $500 per month, leaving a total monthly income of $792 per month. Finally, she can use these funds for lifestyle expenses, and to develop a product for her business so she can create additional income.

Her alternative to accumulate savings to provide $792 in passive income is to direct $1,589 per month at 5% towards her RRSP for five years. She’d end up with $170,000 that could be withdrawn over 45 years and would be fully taxable. But she’d have to sacrifice income today, and would not be able to invest in her business.

3. Insured retirement. This concept is one I learned over 20 years ago. It’s not relevant for everyone, but it can provide a cash flow solution. The concept is to direct the money a client is currently spending on life insurance towards a whole life or universal life policy. For example, if the insurance cost was $100 per month for $100,000 of life insurance, the cash value inside the policy over a 25-year period could amount to $50,000, or more.

This is the amortization many people have for their mortgages. So include the insurance/savings discussion when you’re talking to your client about a mortgage. Suggest buying term insurance, and investing the difference. Or create a complete package that builds an asset inside a policy, which can be used as collateral for a loan. This would provide your client tax-free income from the loan, as well as death benefits that would pay off any outstanding balance during the life of the mortgage.

4. Bank on yourself. This is another insurance concept involving whole life insurance. Funds are directed into the insurance policy for a short period of time. Then they’re used as collateral for a loan that doesn’t require conventional bank credit qualifications, and has flexibility on how and when it’s paid back, as well as what it’s used for. Plus, the money that remains inside the policy continues to grow.

Remember, this is a cash flow strategy. Say your client creates an asset inside the policy for $10,000. Then that asset can provide borrowing power for, perhaps, a car, an education or a holiday.

These are just a few approaches that reduce the emphasis on growth, and decrease expenses to plan for financial independence.

Tracy Piercy, CFP is the founder of MoneyMinding. She is an author, speaker and financial educator providing books, training, courses and materials for both advisors and clients to help create sustainable income and increase financial capacity.

Originally published on Advisor.ca

Throwback Thursday!

Pay Yourself First!

When I say 'pay yourself first' I am not talking about buying that new pair of shoes, or the latest gadget. The way I like to think of paying yourself is through a me tax; and think of that me tax as being paid to The Government of YOU!

What do you do after you get that money deposited into your bank? Go to the mall? The grocery store? Gas station? You are not alone. 98-99% of Canadians today get their paycheque and immediately go and spend their money on their needs and their wants. Then if there is any money left over, they put their money into some sort of a savings plan. You may remember from my prior post on the first cornerstone of financial planning we talked about two separate people; Person A and Person B. Let's look at these two people again.



Like I just discussed, we can see that Person A receives their paycheque and immediately spends their money on their needs and wants, then if there is any money leftover they then save.

However, Person B is who I strive to get all of my clients to become, it doesn't happen overnight, but through taking baby steps we will be able to move you more and more towards the financially independent Person B.

Every paycheque we are all used to seeing a certain percentage of our income deducted by the wonderful government, after all the other deductions we may have (CPP, EI, benefits etc.) we are finally left with our take home pay. Person B receives their paycheque and immediately takes a percentage off the top (like to government) and deposits it into some sort of a savings plan; this is why we refer to it as a me tax; think of that account as 'The Federal Reserve of You!'. 

The most effective way to set this up is so it is virtually automatic; the timing should be perfect here. What I like to do is set up your withdrawls so that they happen the same day you get paid. That way, the money is deposited, then withdrawn, and you barely even realize it was every there!

So I challenge you, set up a plan to pay yourself first! Better yet, call me and we can set up a rock solid plan! If you are already doing this, great! You one of very few people who are doing this! But where is your money going? Is it truly the best option for you?

If you would like to contact me, please send me a message in the box to the right. You can also reach me at Scott.Loney@Freedom55Financial.com or by phone at (905) 475-0122, ext. 411.

Mortgage Insurance...Your Second Biggest Depreciating Asset

We all know our cars drop significantly in value the second you drive them off the lot, some say you lose upwards of 20% as soon as you pull out of the dealer. I'm sure most of us are bitter about this however for a lot of us, a car is a necessary utility that we all must have. We all accept the fact that we are paying for something that is guaranteed to drop in value. 

What if I told you that more and more Canadians are out there purchasing another asset that drops significantly in value! It's nothing immediately tangible, but rather a form of insurance called mortgage life insurance.

Let me first explain mortgage life insurance. By law, every time an institution writes a mortgage, they need to offer their clients some form of life insurance to cover the balance of the mortgage. I think sometimes people feel obligated to purchase the coverage through their lender. While you’re not obligated to take mortgage life insurance from your lending institution, I strongly recommend you consider your coverage options.

Unfortunately, when you purchase your mortgage insurance you get through the lending institutions, the coverage is not owned by you. It’s an agreement between the lending institution and an insurance company. You have very little, if any, control over the agreement. If you decide to move your mortgage to another financial institution or even make changes to the mortgage within your own lending institution, the insurance coverage isn't transferable because you don’t own it. It does not move or change with you. This is significant because insurance is not purchased with dollars alone – you must qualify medically. If your health changes, you may find you have much less flexibility with lending institution mortgage insurance. Getting new coverage with a new mortgage may not be an option. With a personal insurance contract, your coverage is not tied to your mortgage in any way. So even if your health changes, you can make decisions on moving your mortgage or refinancing. Plus god forbid anything were to ever happen to you (or your spouse) the lending institution is the beneficiary to that insurance contract! So unfortunately you have no say in how that money is disbursed.

Second, I will talk about that matter of a depreciating asset. With mortgage insurance, the death benefit or amount of insurance decreases as your mortgage decreases. This may make sense to some, however the downside to this is that you are paying a level premium for the length of your mortgage, for that big depreciating asset. What we can see in the illustration below is a comparison between personally owned insurance with a level premium and a level death benefit, compared to mortgage insurance which again has a level premium however has a decreasing death benefit.

With all this being said, I challenge you to look at your policy. Did you take on the institutions mortgage insurance, or were you ahead of the game and took out your own policy? If you would like to learn about your options other than mortgage insurance I ask you to please call me. I will show you the benefits of an individually owned policy and I can also show you many more advantages of owning your own policy. Also, there are options out there where you can actually pay a level premium for an increasing death benefit!! Let me take the time to show you.

I can be reached at (905) 475-0122 x 411, by email at Scott.Loney@Freedom55Financial.com, or you can send me a message in the contact box to the right!

http://www.aaapaydaycash.com/blog/wp-content/uploads/2013/07/MortgagevsLife.jpg

"The Costly TFSA Blunder that People Keep Making"

Cornerstone Four: Financial Security at Death

I know we are all ten feet tall and bulletproof; however unfortunately, the fact of the matter is that someday our time will end here on earth. When that happens, what I like to do is make sure your family is now financially impacted by your loss. What I will show you first are the four changing needs for life insurance.

First, I want you to think, have you ever heard the approximate price of a funeral today in Ontario. I have heard of some as low as $4000 and have heard other stories where funerals have cost upwards of $40,000! However, the average funeral and burial cost in Ontario today is approximately $10,000. This is what we would call a final expense; something that is there no matter your age when you pass away. We see this in the light blue area above. There is a slight increase because as you age, there are additional debts to be covered, as well as taxes and fees that are incurred with your death. So think about yourself today; think about the cost of a funeral and your current debts; believe it or not, that is your immediate need for life insurance.

Next thing I want to talk about is another changing need for life insurance called income replacement and debt elimination. Over time you are expected to earn more money, not only due to inflation, but we can also assume that you are going to move up in your company and earn more and more money. If you were to pass away prematurely, think about what burden your family would be left with if they no longer had your income coming in to pay the bills every month. If you are the sole provider for your family, that impact could be huge! In addition to this, as you earn more, you spend more. You buy a bigger home, a nicer car, a nice getaway on the lake, if you have debts from those large purchases, unfortunately they do not disappear. This income replacement and debt reduction is the second changing need for life insurance as you can see in the yellow shaded area above.

I will now address the third changing need for life insurance which we refer to as your estate. As I addressed earlier, as you earn more money, you may buy more toys. They may have been in the family for a while and losing those would be a huge detriment. Through life insurance, there is actually a way you can protect your estate from all of the nasty taxes that are imposed upon the second death of a couple. Through the use of life insurance, you can protect your estate from all probate fees, taxes and any other fees that may be incurred. Believe it or not, when your kids inherit your cottage, the gains on the property are actually taxed! Let me illustrate the fees that may be associated with the transfer of a secondary property. 

Here we see a cottage that was purchased for $60,000 30 years ago; today, that property is now worth $259,317. Assuming 50% capital gains inclusion rate and a 46% tax rate, the total taxes payable on the cottage to be rolled over to your children would be $45,843! That is the total fee payable for taxes only! On top of that, you may have lawyer fees and other fees that the government may impose. Would you want to leave your dependents with that tax liability?

The final use for life insurance is using the policy to actually enhance your retirement! I am not going to go into too much detail with this one however you can always contact me to learn more about this! In a nutshell, you can use your life insurance policy to actually provide you money during your retirement and there are ways to structure this so that every single dollar would be tax free!! That is a lesson for a later date and one we should discuss in person. 

I want to close this post by talking about your insurable interest. Today, if we were to go to the insurance company with an application, they may (based on underwriting) insure you for up to 20 times your current salary. However, if you were to delay taking out life insurance for say 20 years, the insurance company may only be willing to insure you for about five times your current salary! This is due to changes in medical history, as well as your age.

The two biggest factors in taking out a life insurance policy and the cost involved come down to two things: age, and whether you are a smoker or non-smoker. So put time on your side and call me today. Unfortunately you are never younger than what you are right now!

I can be reached in the contact box to the right, or by phone at (905) 475-0122 ext. 411.

Cornerstone Three: Living Benefits

I have now covered liquidity and retirement and those sum up the wealth accumulation side of financial management. Now, I am going to move to the risk management side of financial management.

Now, if I asked you today what your biggest asset is what would you tell me? Your house? Your car? Your cottage? What if I told you your biggest asset is actually worth millions. You might be looking at me like I have three heads right? But let me show you your multi-million dollar asset. 

Let's say today you are 25 years old and earn approximately $50,000 per year. Now let's assume you want to retire when you are 65. So in 40 years of working if you were to earn $50,000 per year for the rest of your life you would have earned $2 million dollars. 

Now thats a big number right? But we both know you won't be making $50,000 for the rest of your life, once we account for raises and inflation, we can make an assumption that you will actually be earning approximately $3-5 Million in your lifetime! So now think about your biggest asset. I think now your biggest asset is you and your ability to earn money!

Now think about your other big assets that you had in mind before; your house, your car, your cottage. Do you have insurance on those? Well I will assume you are a law abiding citizen and you do. 

What if I told you that there was a way to insure your ability to earn an income, and that on top of it, if you don't make a claim while your insurance is in force, I will give you every penny you paid in premiums back. I think if one car insurance company offered this, everyone would jump ship! Let me show you how I can protect your ability to earn an income.

What I will first talk about is how you can protect yourself and your family if you were to become disabled and unable to work. Some of us have employee benefits through work, and in that benefit package there is typically some sort of a disability plan. I don’t know how yours works or even if you know how yours works (most people don’t) but let me show you how most disability plans work.

Most disability plans have been designed with an incentive factor built in which prevents a person on disability from collecting more than approximately 85% of their take-home pay. The 15% shortfall is intended to create the incentive for the person to want to go back to work. As a result, people on disability will be expected to take at least a 15% decrease in their take-home pay, and most commonly a one-third decrease from their existing income. Most often the plan is not indexed for inflation which means if you were to become disabled at age 30 and stay disabled, your disability income would be two-thirds of your existing income at age 30, and will stay at that amount through your lifetime. As we have learned already in retirement, inflation causes a dollar today to be 'worth less' than a dollar tomorrow, however your income will not increase so your lifestyle while disabled will drop at a rapid rate. The chart below shows the gap that happens between your disability income, and your expenses which may drop, but unfortunately do not completely disappear.

What I have explained shows you what happens if you do have a plan in place. But some of you may be self employed, if that the case, do you have anything in place? Think of how big that gap would be. 

The following chart shows some examples of active claims that Great-West Life paid. As you can see, disability can strike anyone at any age.

Now that covers if you were to need to replace an income to cover any regular expenses. What if you were to need a lump sum of money? This lump sum can cover anything from medicine to immediate care abroad. There is actually a concept out there that will pay you a lump sum of money if you were to contract cancer, have a stroke, or were to have a heart attack.

Let me first share with you some statistics:

• There are an estimated 70,000 heart attacks in Canada each year. 
• More than 50,000 strokes occur in Canada each year.

• During their lifetime:
• 1 in 2.2 men and 1 in 2.5 women living in Canada are expected to develop cancer.
• 1 in 9 women is expected to develop breast cancer.
• 1 in 11 men and 1 in 16 women are expected to develop lung cancer. • An estimated 55,000 to 75,000 Canadians have Multiple Sclerosis. 

However with this being said, more and more people people are living from these conditions!

• Although prostate cancer remains the most frequently diagnosed cancer among Canadian men, prostate cancer death rates declined significantly between 1995 and 2004.
  
• Although breast cancer is the most frequently diagnosed cancer among Canadian women, the breast cancer death rate has declined by more than 25% since 1986.
  
• Over the past 40 years the rates of heart disease and stroke have steadily declined. The rate has declined: 25% over the past 10 years, 50% over the past 20 years and 70% between 1956 and 2002. 
  

Now let's take a look at the critical illness claims by type:

I know, depressing, however the facts are there and unfortunately, we all know someone who has been affected by one of these illnesses. 

Now how can we protect this? I have concepts which I can provide with my clients which would pay you a lump sum of money if you were to have a heart attack, stroke or cancer (with the option to add 21 other illnesses and injuries). God forbid, if you were to ever have one of these life altering events happen to you and lived for 31 days, I would be able to provide you with a lump some of money to put you and your family at ease during these terrible times. 

What this means, is that your plan will not be interrupted while you are recovering.

What I have now talked about are two different ways you can ensure that your plans are not interrupted during difficult times. There are ways to insure you, and if nothing happens, which I'm hope nothing does, I will deliver every penny in premium you have paid into the plan back. 

If you would like to see how you can protect yourself and your family, please contact me. Please allow me to show you how we can make sure your plans stay on the rails.

I can be reached in the comment box to the right, or, you can call me at (905) 475-0122 ext. 411.