News from The Globe and Mail

Five reasons you should be nice to your insurance agent

By TIM CESTNICK

00:00 EDT Thursday, July 23, 2009 Page B10

Special to The Globe and Mail

A good friend of mine, Greg, works in a high-stress job on Bay Street. In the summers, he and his wife like to get out of the city to go camping in their motorhome. He finds it very relaxing, but this summer they have found their peace and quiet disturbed by well-meaning, but unwelcome, visits from other campers. Greg has devised a plan that pretty much guarantees they will have privacy. Now, whenever they set up camp, Greg places a sign on the door of their RV that reads: “Insurance agent. Ask about our new term life package.”

That does it - every time.

I know that insurance advisers get a bad rap sometimes. But let me say out of the gate that there are some characteristics of life insurance that make it useful as a tax and estate planning tool, namely: Benefits are paid out completely tax free when the insured individual dies.

Further, it’s possible to accumulate investments inside an insurance policy on a tax-sheltered basis - not quite like your registered retirement savings plan, but similar.

Next, if a corporation is the beneficiary of a policy on a life, a portion (often 100 per cent) of the benefits paid out upon the death of the insured individual will be credited to the company’s “capital dividend account” (CDA). Amounts in the CDA can be paid out as tax-free dividends to shareholders of the company. It’s primarily this combination of characteristics that creates many uses for insurance.

The key to buying insurance prudently is understanding three things very clearly: First, what is the purpose of the life insurance you are buying? Second, how much is the right amount of coverage? Finally, what is the right type of life insurance to buy? If you can wrap your mind around the answers to these three questions, you should have confidence in the investment you’ve made in insurance.

Let’s address the first question. There are many reasons why you might consider buying life insurance. These will generally fall into one of five categories:

Provide for Others

If you have dependants who will otherwise face hardship financially if you pass away, it will be important to buy insurance on your life to provide the capital necessary to generate an income for those dependants. In addition, you might want to leave money to others who have needs, such as your favourite charities.

Cover Final Disbursements

When you pass away, there will be costs and debts to pay. Who is going to pay for these? Think about the following types of disbursements: Funeral costs, legal and accounting fees, income taxes, executor fees and probate fees, as well as outstanding mortgages, credit card balances, lines of credit and other loans. You could leave your spouse or others in a bind if you saddle them with the requirement to pay for these things out of their own pockets.

Provide Equitable

or Larger Bequests

If it’s your desire to treat your kids equally, life insurance can make that possible. For example, suppose you leave your cottage to your daughter who uses it, and your investments of equal value to your son. Suppose also that the cottage gives rise to a tax bill on your death. Where will the cash come from to pay the taxes? Potentially from your son’s share of the estate. This could leave him shortchanged. Life insurance can provide the cash to equalize the estate.

Alternatively, perhaps you just want to leave your kids more than you could otherwise without insurance.

Shelter Income From Tax

As I mentioned, life insurance policies can provide tax-sheltered growth. You won’t be taxed annually on income earned inside the policy. Now, there are relatively low provincial income taxes paid by the insurance company on investment income inside the policy, but you won’t see that tax - or feel it much.

You can expect slightly lower returns inside an insurance policy because of this tax, fees and administrative costs, but historically the returns in some of the whole life insurance policies have been quite stable - and tax sheltered. Speak to an insurance adviser about the performance of participating whole life policies.

Maintain Business Health

As a business owner, consider insurance to provide cash for a surviving partner to buy out the estate of a deceased partner, maintain stability in the business if a key person dies, pay off debts of the business if a key person dies, or repay the business for any significant costs incurred (such as pension contributions).

© The Globe and Mail

As the markets continue to climb in recent months, the process of portfolio rebalancing is becoming a hot topic among investors and advisors.  Rebalancing is primarily about risk control, or making sure your portfolio isn’t dependent on the success or failure of one investment, asset class or style.  Rebalancing is the process of restoring your portfolio to its original asset mix or objective. 

You don’t have to do anything to your portfolio for it to change. That’s because some of your investments will go up as other investments go down.  This is the market as we know it. Those investments that have done well will begin to take up more of your portfolio than those that haven’t done so well. And you don’t have to do a thing for that to happen.

But every so often, you need to readjust your portfolio to restore its original balance or mix.  If your investment goals haven’t changed, your portfolio’s mix shouldn’t either. But thanks to market forces it almost certainly will. Hence the need for rebalancing.

And this doesn’t have to feel like pulling teeth.  Follow these steps to an easy rebalance:

Step 1: Figure out your target portfolio mix

This was the blend of asset classes and investment styles that were going to allow you to reach your investment goal.

Step 2: Compare your target mix to your current mix

Compare you cash and bond holdings to your equities.  Evaluate if you’re still on course, comparing risk and returns, as well as types of income for tax purposes. 

Step 3: Determine where your investments are out of line with your original target

Begin by seeing how your cash and bond positions have shifted compared to your equities. Very often, your positions in these areas will shrink relative to equities because, in general, equities as a group outperform cash and bonds.

Then, consider your sector exposure. Although you may not have built your portfolio with a specific sector in mind, you want to be sure that you aren’t overexposed to one industry.

Finally, look at your investments, one by one. Which ones have performed the best? These investments may now be taking up more of your portfolio than you originally intended.   

 Step 4: Readjust

Remembering your target mix, line up your risk and return blend to match your goals and objectives.  Sitting down with your financial advisor can help ensure the proper allocation of assets.

Effective rebalancing doesn’t mean keeping daily tabs on your portfolio. Instead, follow these guidelines:

Guideline 1: Rebalance every year or so. We’re not saying you should only look at your portfolio once a year. But resist the urge to tinker when you do. You’ll save yourself unnecessary labour and possible administrative costs.

Guideline 2: If you rebalance just one thing, make it the equity/cash split. Your cash and bond stakes are vital to keeping your portfolio in check. So if you don’t want to rebalance your entire portfolio on a regular basis, at least restore your cash and bond positions to their original levels yearly.

Guideline 3: Be a tax tactician. Keeping your portfolio in line isn’t satisfying if it means you also wind up with poor after-tax returns.  Try rebalancing less frequently, to avoid gains taxes.  Use new money to top up the holdings that are down, rather then selling the ones that are up.  And if you have the choice, switch securities in the same fund family, rather then selling to avoid capital gains taxes and administrative fees.

Rebalancing can become difficult and ineffective without proper knowledge of the markets, so make sure you understand what you’re doing before making any rash decisions.  A financial planner can help you make the right choices that will help you reach your goals quicker and more efficiently.

Adam Myers
Financial Advisor, Ottawa
PFIP-IPG
Email: adam@pfip.ca
Phone: 613-224-5511   X108
 
www.pfip.ca
www.joinipg.com