Participating In Your Life Insurance – A Good Investment?

Life insurance is a vital and necessary part of every financial plan. But there are a whole lot of life insurance types and products out there – so making the decision about what’s right for your personal situation, budget and longer-term financial and retirement goals can be difficult.
In this column, we will focus on one type of insurance that you should consider if your needs and wants match this profile:

• You have a low to moderate tolerance for risk.

• You want protection for a lifetime with guaranteed premiums, guaranteed cash values and tax-free benefits guaranteed for your beneficiaries.

• You want an investment component included with your insurance coverage providing the potential for tax-deferred growth without the need to manage those investments.

• You want to build tax-advantaged savings that you can draw upon as needed for personal or business needs (although any cash values withdrawn from such a policy may be subject to tax).

You can get all of these benefits and a few more from Participating Life Insurance or also known as PAR Whole Life.., Participating Insurance combines life insurance with an investment component that also pays dividends.
PAR Insurance works like this:

• Your premiums go into an account with the premiums from all the other policyholders holding a PAR policy with that life insurance company.

• The amount of your premiums and the other coverages in your policy are calculated using long-term assumptions for death claims, investment returns and other factors. Your guaranteed premium, values and death benefit are based on these factors and are guaranteed for the life of your policy.

• The pooled premiums from all policyholders are invested in a balanced portfolio managed by investment professionals.

• When the actual returns on these investments are greater than the assumptions in place for the life of the policy, there is an account surplus that is paid to policy owners in the form of dividends (although policy owner dividends are not guaranteed).

• Dividends have a cash value that is credited to your policy and owned by you. You can use the dividends to: increase the policy’s cash value on a tax-advantaged basis, to withdraw cash from your policy or borrow against it, to buy additional insurance without the need to prove your insurability, or to lower your out-of-pocket premiums.

PAR insurance products are available with many coverage and payment options. Your professional advisor can show you how to tailor your insurance coverage to meet your needs today and tomorrow.

Your Cottage And Keeping It In The Family

Ahh, your cottage – a place of sanctuary, family fun and warm memories. But passing along a cottage to the next generation can set off complex financial and family issues. Here are some suggested steps to ensuring cottage continuity.

Know what your kids want - You know that cottage ownership is a big personal and financial responsibility that is not for everyone. Discuss this with your children and if any of them are not interested in inheriting the cottage, avoid family squabbles by making sure they are treated fairly in your will.

If you decide on shared ownership, keep in mind that it can be a difficult proposition. That’s why it can be useful to obtain legal advice when you put an agreement in place – about such things as who uses the cottage and when, who pays for repairs, maintenance and upkeep, and the other nitty-gritty aspects of joint cottage ownership – to avoid protracted disputes and misunderstandings.

Manage the tax burden - If your cottage has appreciated in value, your estate can face a significant capital gains liability that could force its sale by your heirs.

Capital gains taxes are based on the difference between the cost of your property and its current fair market value at the time of your death. The cost of your cottage is what you initially paid for it plus the value of any capital improvements you made to it over the years – a new deck or roof, for example, including the cost of anyone you hired to do the work for you – so keep your receipts to account for all these costs to help offset capital gains. General upkeep costs such as painting the cottage are generally not considered capital improvements.

Consider taking advantage of the primary residence exemption. You are allowed to name a primary residence that is exempt from tax on capital gain. The residence must be a property you ‘ordinarily inhabited’. It can be either your city home or your cottage. You are allowed just one principal residence at a time but you can choose to exempt the property with the bigger gain.

Have a succession plan - Include an effective strategy for passing on your cottage. One option is to purchase life insurance with tax-free death benefits that will cover the capital gains on your cottage and/or other expenses and avoid the forced sale of estate assets. Life insurance is also a good way to equalize an estate where one child wants to keep the cottage, whereas other children would prefer to sell it and divide the proceeds of sale.

Some of these estate planning options may not work in your situation, so it’s a good idea to talk to your professional advisor about your wishes for your cottage and the financial and estate planning options that will work best for you.

Take Advantage Of Tax Savings With Universal Life Insurance

If you're a prudent Canadian, you likely already know the value of life insurance and have your own life insurance plans in place. You know that the primary reason for buying life insurance is to have the funds available to help pay final expenses, to help ensure you family's financial future, and to help ensure your legacy is passed on as you wish.

What you may not know is this: By selecting the right type of permanent life insurance policy, you can save on taxes and accumulate a cash reserve that builds through the years - a cash reserve that is readily accessible should you need a quick money infusion for any reason.

This type of permanent life insurance is called "Universal Life Insurance" and here's how it works:

• Unlike other types of insurance, Universal Life Insurance includes two distinct parts. Each payment you make is divided into an insurance premium and a deposit into an investment (or investments) of your choice.

• The growth in the investment portion of your policy is considered tax-deferred by the Canada Revenue Agency as long as it is not redeemed. For that reason, Universal Life Insurance investments tend to enjoy faster growth than most conventional, non-registered investments.

• Most Universal Life Insurance plans allow you to choose the amount of life insurance you want and to adjust the death benefit and premiums to fit your changing circumstances.

• Your death benefit – including the full value of your investment account – will be tax free to your beneficiaries.

• And, you can access the cash reserve in your Universal Life Insurance policy if needed to pay for unexpected expenses. You can do this by permanently withdrawing some or all of the cash reserve; through a loan secured against the cash reserve of the policy; or by using your policy as collateral for a line of credit.

A Universal Life Insurance policy can be a good option for people seeking financial security while accumulating additional funds for use in an emergency or to carry out certain aspects of their financial plan (such as developing sufficient income for retirement). It should also be considered a long-term investment because the return on the investment portion, combined with the tax savings, deliver the best results when left to grow over time.

If you want insurance and long-term, tax-deferred investment growth, Universal Life Insurance can be a good option for you. A professional advisor can help you select the right policy with the right combination of insurance amount and investments options that fit your personal risk tolerance and your overall financial and legacy goals.

Making The Tax-Free Savings Account Fit For Your Life

As of January, 2009, Canadians have a new tax-free option for saving – the Tax-Free Savings Account (TFSA). TFSAs are a flexible investment vehicle into which you can make non-deductible contributions (up to $5,000 per adult in 2009) that will grow and can be withdrawn without incurring taxation. Withdrawals can be made at any time for any purpose. Unused contribution room can be carried forward indefinitely and any amounts withdrawn in a year will be added back to your contribution room in the following year.

So, how you use your tax-free TFSA dollars is totally up to you. But it’s a good plan to ‘fit’ your TFSA investment uses to your life stage. Here are some tips.

Young adults and young families

• Save for emergencies and large short term expenses -- like a vehicle, vacation or home down payment without having to liquidate investments and paying taxes on the income.

• Save for a home – in addition to or in place of the RRSP Home Buyers Plan.

• Save for education – in addition to or in place of non-registered savings, the RRSP Lifelong Learning Plan or RESPs.

• Save for your children – as a parent, you retain control of TFSA funds and when to disburse them.

• Save to start a business – TFSAs are a tax-effective way to save the initial equity you need and can be used as security for bank financing.

• Save for retirement – in addition to your RRSP contributions.
  

Mature adults

• Save for emergencies, large short term expenses and retirement, in addition to RRSPs.

• Save your tax refund – contribute your RRSP tax refunds to your TFSA.
  

Retirees

• Save for emergencies and large short term expenses.

• Shelter excess income from future taxation – if your combined retirement income (from RRSPs, pension, OAS and CPP) is more than you need to live on, build up a non-taxable reserve in your TFSA.

• Build retirement savings after RRSPs – you can’t contribute to an RRSP after age 71, but you can still invest in your TFSA.

• Build a tax-free inheritance for children – a TFSA can be transferred to a surviving spouse/common-law partner without affecting their TFSA contribution room. On the death of the second spouse, the children may inherit the total amount tax-free.

Your professional advisor can help you make the most of your TFSAs and other investments, at every life stage.

When It Makes Sense To Borrow For Your RRSP

Wealthy people often borrow to invest. They call this 'leveraging' or 'leveraged investing' - but what it really boils down to is using someone else's money to make your own investments. You don't have to be rich to benefit from the value of 'leveraging'. In fact, you may be able to take advantage of a 'leveraging' strategy right now that could help you save on taxes and could increase your potential retirement income at the same time.

If you're like most Canadians, your Registered Retirement Savings Plans (RRSPs) will be an important source of income during your retirement years. And, if you're like most Canadians (a whopping 78 per cent in the 2003 tax year[1]), you probably have unused contribution room in your RRSPs. To make the most of the potential tax-saving and income-building advantages of your RRSPs, you should fill up every bit of your unused contribution room as quickly as you can - and leveraging can be an effective way to do just that.

Borrowing in order to contribute to your RRSPs could pay off in two ways: First, you'll increase the size of your tax refund and second, you'll have more money growing inside your tax-deferred retirement plan. Here's an example: assume that your RRSP contribution limit is $3,000 this tax year. (The actual amount of your RRSP contribution room is provided on the Notice of Assessment you received from the Canada Revenue Agency after filing your tax return last year.) Depending on your tax bracket, a $3,000 contribution could net you nearly $1,500 in tax savings at the time you file your tax return in the form of a larger tax refund, while also potentially adding $30,188 to your retirement plan over 30 years (on a pre-tax basis, at an annual compound rate of 8 per cent ). And, that's for just a single contribution of $3,000!

The government allows you to accumulate and carry forward all your unused RRSP contribution room from previous years back to 1991. You can make up the unused RRSP contribution room at any time, but sooner is better because you'll have more money growing on a tax-sheltered basis inside your RRSPs.

The issues to consider from a leveraging strategy are these: Borrowing at a low interest rate and paying off the loan quickly, otherwise the cost of borrowing can diminish your potential tax savings and investment returns. Financial institutions often offer RRSP loans (which are really loans meant only for the purpose of contributing to your RRSPs) at prime rate or lower. For top-up loans, limit the payback schedule to one or two years.

[1]The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investments.

For larger loans, don't exceed five years. The leveraging strategy often works even better when you use your increased tax refund to repay the RRSP loan even faster.

Your professional advisor can help you map out an RRSP leveraging strategy that works best for you.

Giving While Living - Keeping It In The Family

You may be among the growing group who hope to pass on wealth to their children during their lifetime. A recent research study showed that the majority of Canadians (63 per cent) believe it's best to give children financial gifts while the giftor is alive.

The 'giving while living' trend has significant implications for tax and estate planning - and for your own lifestyle. That's why your first step toward making a 'giving while living' decision should be to take a critical look at your own finances. If you are certain your finances will allow you to make a gift, here are some other things to consider:

What should I give? The simplest answer is cash - but that may not be the best choice. When you give cash, you also give up any control over the amount you have gifted and you may not want to do that. One solution is to characterize your gift as a loan and take back a promissory note with appropriate security - that way, you can maintain a certain amount of control over the funds and the way they are used.

Another option is to give a 'non-cash' gift - maybe transferring stock to a child, or even the ownership of your family cottage - but, in that case, you will likely be triggering any unrealised capital gains. For example, if the gifted stock or cottage has appreciated significantly in value, most of that value will be subject to an immediate capital gains tax (currently the taxable amount is 50 per cent of the appreciated value).

Selling the 'gift' for $1 does not solve the tax problem and may, in fact, make it worse. When assets are given to someone 'at arm's length', the Canada Revenue Agency (CRA) deems that the donor received Fair Market Value (FMV) for the asset, no matter what it was sold for.

Should I put conditions on the gift? You can - some parents elect to 'gift' assets but only under certain clearly stated conditions. For example, you may want the funds back in the event of a marriage breakdown or if your child predeceases you and you don't want one of their heirs (perhaps a new spouse) to receive the funds. Any conditions like these should be specifically set out in writing. You should also check with a lawyer to ensure your wishes are legally binding.

Can I give a gift to a minor? Yes, and if it's a small gift, that's pretty straightforward. But if the gift is significant it may be wise to wait. For instance, a minor can't invest funds in their own name so future use of the gift can become problematic. In most cases, it's best to make a large gift to a minor in your Will.

If you are thinking of giving while living, you should do it in the context of your overall financial and retirement goals. A professional planner or financial advisor can help you make the best decisions for your situation.

Donate To Your Favourite Charity - And Save Taxes, Too!

Thanksgiving is over and even those we many still have leftovers in the fridge, the attention of many Canadians now turns to the Christmas season. In the spirit of the holiday season, you may think about 'gifting' your favorite charitable organization with a donation. That's a very kind and generous act, especially during a time of the year that can get pretty expensive.

So why not give a little gift to yourself - by reducing your income tax bill while contributing to a worthwhile cause. It's simple: instead of giving cash, give securities and you'll likely enhance the tax benefits of your donation.

Here's how it works: Tax rules make it possible for most donations of securities to registered charities and public foundations to escape capital gains taxation. For example:

You want to donate $10,000 and you have the choice of making the donation in cash or mutual fund units. Let's assume your marginal tax rate is 46 per cent, and you originally paid $4,000 to purchase your fund units which are now worth $10,000.

If you donate the cash, you can claim the charitable donation income tax credit for the entire amount, generating $4,600 in tax savings and reducing the net cost of your donation to $5,400.

You'll still have your mutual fund units, of course - but you'll probably pay tax on capital gains when you sell them. If you sold them now, you will realize a $6,000 capital gain which will generate a tax bill up to $1,380 (50 per cent of the capital gain of $6,000 multiplied by your 46 per cent marginal tax rate.)

Instead of donating the cash realized from the sale of your mutual funds, you donate your fund units to charity. You still get the charitable credit for your donation of $10,000 mutual fund units and the resulting $4,600 in tax savings - but you will have avoided paying the $1,380 in capital gains tax on the appreciation of value of those units because you made an 'in-kind' donation to the charity.

There are other tax-saving/donation options and a professional advisor can help you decide which are best for you. But remember, you need to act before December 31st to claim a tax credit for the 2009 tax year.