Insurance Insights
Advice from Brian Poncelet, CFP

A number of people have read the popular book by Pamela Yellen. The problem is there some differences on taxes between the US and Canada and the whole policies take a bit more time to have any cash value in the first 8 years.

Having said that over time the policies in Canada are better over the long run.

To really make this work one need a complete financial plan and how this works towards retirement as well.

If you are within 30 minutes of Oakville (my office) and are between 35 and 45 years old married, good income ($150,000 plus) feel free to drop me a line. I can give you a 20 minute ViewPoint which helps to see where the gaps maybe in your Financial Development, income protection and estate organization….from your point of view.

Currently TD is offering only term 10 life insurance which is more expensive than what can be bought elsewhere. Example is a 48 year old male non-smoker TD’s rate is $73/month others as low as $65/month.

Can you convert their term polices into permanent? No! There is talk that this may happen later this year.
What about term twenty? Currently this is going through Transamerica. Again, limited choices and maybe not the best.

Bank on yourself by Pamella Yellen is a popular US book on how to fund purchases like cars, trips etc. In Canada this idea works, but there is some different tax rules you should be aware of.

We use Wealth in Motion which takes consideration of things like wills, real estate, TFSA, RRSPs, Vehicle insurance, liability insurance, disability, and much more…the software is about years ahead of any software used by Bank on yourself software in the US. This concept Protection, Savings and Growth has been around since 1980!!

The concept is still sound, though not as holistic as what we do. Any here is a review from amazon.com on the book.

This review is from: Bank on Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future (Hardcover)
Others may say this is hype and an infomercial but in reality it is a different way of looking at how money works. You have to get over the fact that this is a whole life insurance policy. When you really look at whole life insurance without its name (one of my good friends sales used cars that doesn’t make him a bad person) it is not so bad.

The book points out we finance everything either we pay interest to others or we give up interest on our money to an institution (ie banks). I have done this with an advisor and know others who have as well and there are no complaints (try surveying people that have been in the market for the last ten years and see if they ALL are happy with thier decision). The key here is that your money is always working for you and how the insurance company treats your loan seperate from your account.

-So if your cash value = $50,000 and you took out a $20,000 loan for a car the company still gives you dividends on the $50,000 and charges your loan the going interest rate.

-So first off you are being credited interest on $50,000 instead of $30,000 like a bank.

-Lets say the bank is paying net (after taxes) a rate of 3% and the insurance company (insurance companies costs are lower since they don’t have braches/ATMs on every corner of your city) is paying 5% and your loan rate is 7%

-In the bank you only receive interest on the $30,000 or $900
-In your insurance policy you receive $2,500 ($50,000 at 5%) – $1,400 ($20,000) or $1,100 or 22% More

-In the next year (say you paid off 20% of your loan or put back $4,000 in your savings account)

-At the bank you receive 3% on $34,900 or $1,047

-In your insurance policy you receive $2,625 ($52,500 at 5%) – $1,120 or $1,505 or 44% more!

This does not work with mutual funds because they are too volatile (we never really know what we are going to have in the future), we don’t know how we will be taxed, and we have to sell assets to get to our money.
This does not work with 401k/qualified plans because we have to wait until age 60 for no penalty (if the govt doesn’t change the rules), most 401ks are full of mutual funds, we again don’t know our tax rate, and again you have to sell off your assets

There probably are two reason people get hung up on this topic: one being that it is a whole life policy and the other is rate of return argument. People forget it is not about rate of return but rather money in your pocket. I’d rather have 2% of $100,000 than 10% of $10,000.

Although the concepts are similar there is some tax differences one should be aware of, here is some reasons one would look at this idea.

Is your principal protected during a market correction?No loss of principal due to a market downturn.

You don’t need to pick the right stocks, funds, real estate or other investments – Bank On Yourself lets you focus on other, more fun things and worry less. Imagine not having to know the best way to invest money and not having to figure out how to bump up your returns.

Should I continue funding my RRSP? Maybe. Do think taxes will be higher in the future? Does the government have control? If you get sick or are disabilied for six months or more will your bank or broker fund your RRSP for you up to age 65?

Can you use your money without selling your assets? TFSA can not work like this. For example lets say you have $10,000 in your TFSA you take out $9,000 to buy a car. How much money is earning interest? That’s right only $1,000! What if you pay yourself back the $9,000? How much interest do you get now? The $10,000 (total). Under bankonyourself for Canadians you would get the $10,000 interest as if you never took the money out!

Can you use your money without selling your assets? Yes see the above example.

Are your assets protected from creditors and lawsuits? Yes (call for details)

Call me for a different book which covers more material and is more Canadian friendly.

Wow! Long title! If you go to http://federal.votecompass.ca/ you may find the party you thought you liked is the party that really does reflect your values!

Term life insurance is like that too. Buy the cheapest and save! Right, no wrong and here is why. We all need coverage if you have a family…rather want coverage. What happens to all the money you put in the insurance policy? Like rent it is gone, and the the insurance company is off the risk…why because as you get older the rates rise and becomes too expensive!

How about getting better coverage, getting all your money back plus interest?! Look at my illustration (under free financial tools) Person A vs. person B.Better still drop me a line and I will ship you a book which gives you an idea how to do this…better coverage getting all your money back plus interest, having more money in retirement more protection and paying less TAX!

We had a call from a mother who has a daughter (age 21). To get an evaluation she was told it would take 10 months or more to see a physiatrist to see see if her daughter has Obsessive Compulsive Disorder (they feel she may have had since 8!)

There is only two banks in her town, TD and Scotia Bank the family’s debt is not properly covered by life insurance! Even though they do business with both banks.

If something happens to the breadwinner in the family how does the mother and daughter get looked after? Who is giving tax advice or financial advice here?

Human Life Value concept was founded by Dr. Solomon S. Huebner, the founder of ‘The American College of Life Underwriters’, in the 1920′s. HLV concept is used by various professionals like Underwriters, Courts, etc. for determining the economic value for a Human Life. For the victims of the ‘Terrorist attack of September 11, 2001′ on the twin towers, courts decided the amount of settlement based on this concept.

 Another method of insurance calculation is by applying a fixed multiplier on the annual income. Multiplier based on the age of the individual.

 
Age range Multiplier

20 – 30 20

31 – 40 18

41 – 50 15

51 – 60 10

So for example, a 41 year old making $100,000(male or female)
can get 1.5 million or more of insurance.

Really when you think about it here is a few factors to consider:

1. Annual Income of the life

2. Balance of active earning period till retirement

3. Personal Expenses

4. Inflation

5. Future increase in salary

5.5 Benefits (often the bread winner has benefits like dental, medical for the family covered by the company he/she works for…this may be gone at their death costing hundreds every month to get as a seperate coverage!)

6. Education for childern/income (support for disabilied dependents)…and many more I have not listed here.

Ok, this is a big statement, to get started we have to understand some eroding factors which take our money every day.

Who takes our money?

Financial institutions

Government

Corporations

Financial Institutions

They build financial products, intended to protect, store, or grow your money.  These institutions are profit making businesses.

Corporations

Make consumer products you need and want.  LED HD TVs, iphones, cars, etc.

Since there is always something better, you need to replace things. TVs are  an example.   I weill never forget a Doctor I saw (not saving enough) with a large flat screen TV by the kitchen table and asked him what happen to his TV.  “Nothing, I got a bigger one.”  He pointed to a new much larger TV that seemed to take up half his wall!

Governments

We all know property taxes go up every year!  How about HST  in Ontario? User fees?  For your income tax 2010 CRA says inflation only went up by .6%!   Personal amounts only went up by .6%?!  You are getting poorer as long as inflation goes higher that what the government is prepared to allow you! 

More to come soon!

If you want a free book that explains how you can start now to regain control of your money send me an e-mail  the book is called LEAP by Robert Castiglione.

When you buy life insurance through Canadian Tire you lose in many ways.

One: you pay too much!  As an example, a 50 year old male non-smoker, with $250,000 coverage pays $92/month…and this goes up every 5 years!!

With other companies like Equitable you can get more coverage – e.g. $300,000 level premium for 10 years which costs about about $52/month!

How about this:  30 year old male, non-smoker, $250,000 coverage – with Canadian Tire $42.63/month

Other companies:  30 year old male, non-smoker, $300,000 coverage  – with Empire, Transamerica,  or Canada Life (direct through me) costs between $20 to $21/month for ten years!

Two: You buy through a middle man!

Three: You can not convert the term into permanent!

Four: They cut you off!  At age 71 they reduce your coverage by 20% a year and by age 75 it’s gone!  Thanks for your money!

Five: You can’t use their Canadian Tire money for the policy! (sorry, I just had to say it).

There are plenty of better options – contact me for a policy that’s a much better fit!

Many insurance “experts” will tell you to save money buy term ten.  This is true at the start but will cost more over the long run.

First off 10 years flies by!  If you are lucky enough to get a preferred rating and need and want coverage after 10 years you have to prove your health all over again!   If you are like me you can’t run as fast as you could ten years ago and may weigh more too!

A longer level term coverage costs more but protects your current health status and insurability.

Here are some examples:

Diabetes could easily double the premium a person pays

MS is the most common neurological cause of debilitation in young people and affects about 500,000 people in the United States. Worldwide, the incidence is approximately 0.1%. Northern Europe and the northern United States have the highest prevalence, with more than 30 cases per 100,000 people.

MS is more common in women and in Caucasians. The average age of onset is between 18 and 35, but the disorder may develop at any age. Children of parents with MS have a higher rate of incidence (30–50%).  Cost, increase… triple the cost at least!

Cancer:

Five-year relative survival rates for ages 15–99 were highest for prostate cancer (87%), followed by breast cancer (82%), colorectal cancer (56% among men and 59% among women), and lung cancer (14% among men and 17% among women). Age-related patterns of survival vary by cancer site. Men with prostate cancer and women with breast cancer had poorer prognoses at the youngest and oldest ages. Five-year relative survival was 81% for men with prostate cancer under 55 years and 67% for those over 85 years. In comparison, men between the ages of 55 and 74 had survival rates of 89%. Breast cancer relative survival was 73% for those under 40 and 78% for those over 80 years, whereas women from 40–69 years of age had a five-year survival of 83% and those 70–79, 86%.

No coverage until five years after cancer has been treated.  New cost 3 to 5x cost or straight decline.  So 35 year old male instead of paying $27 for $500,000 term ten may pay $81 or $185 per month or unable to get coverage at any price! In ten years the renewals would be well over $400 to $925 per month at age 45!

Here is one example 35 year old male $500,000 term 10 coverage (regular non-smoker)

$27/month.  Later, in ten years he gets, high blood pressure, cancer adds weight etc.  New (age 45) cost $161 per month!

At age 55 trying to put his daughter through university needs coverage $385/month!  Note in twenty years $500,000 coverage is worth only $270,000 after 3% inflation!

Next post how to get all your money back (if you want plus interest) on life insurance.

I don’t normally beat up on insurance companies but I will  let the facts speak for themselves.  Primerica’s history from their web site:

“Primerica’s roots date back to 1977 when the company embarked on a revolutionary crusade to transform the life insurance industry. Primerica’s “Buy Term and Invest the Difference” philosophy encourages middle-income families to purchase affordable term life insurance so they can have more money to invest in their family’s future. Today, Primerica has expanded its crusade to address the number one financial disease facing families today: debt. Primerica offers solutions to help families eliminate crippling debt from their household finances and save more of their hard-earned money for the future.”

The problem is women pay much higher rates with Primerica than almost any other insurance company in Canada.  Some examples:

female born 25/01/1988 (22 years old) (preferred rating)

Term 30 $500,000 coverage

Unity Life $42.30/month
BMO Life $44.10/month
primerica $81.23/month

The rates are not even close.

What female wants to pay more (a lot more) for less coverage?  Another:

Female born 01/18/1982 (regular health) 28 years old
term 20 $500,000 coverage

Equitable $26.55/month
Western life $27.07/month
Canada Life $27.45/month
Primerica $54.63/month

For $1,000,000 coverage term 20…
Here is what she can get:

Equitable $47.70
Manulife $47.99
Primerica $101.18

So double the coverage, more options for less money vs. the $54.63/month for only $500,000 of coverage.

If she wanted to be covered be covered for life. UL/T100

$500,000

Transamerica $96.25/month
Desjardins $98.03/month
BMO $99.06/month

————————————————————————————————————————–

Female (Born) June 15th 1970 non smoker term 30 (regular health) (40 years old)

$500,000 coverage
Unity life $76.95/month
BMO $83.70/month
Primerica $108.30/month

Female (born) 06/15/1985 (25 years old) (regular health) Term 20

$500,000 coverage
Western Life $25.82/month
Equitable life $26.55/month
Primerica $54.63/month

So why promote buy term and invest in the difference when women pay much more?  One primerica representive was quoted was saying “ It doesn’t matter that there may be lower women’s rates out there…”

Many who work for Primerica work part time.  Do you want someone who works part time or full time?  How about selling only one product?

The problem is many in the media like the idea that Primerica promotes, which is buy term and invest the difference, and suggest that those who sell permanent are ripping people off.  Primerica’s term policies are non-convertible.  If one gets cancer (as an example) and wishes to convert it into permanent insurance this is not possible.

Something to think about the next time you hear “buy term and invest the difference.”  There may be merit to the idea but you have to be conscious of who you’re buying from.