It's Your Money  

Save money on insurance

Whether it’s being used to protect against lost income, business debts, a mortgage or any number of other reasons, most Canadians will require life insurance at some point.

While the monthly cost for this coverage is typically not that much, cutting even a few dollars off the price can have a significant impact when you pay these premiums for many years.

Here are a few tips to help you get the best deal on the coverage that’s right for you:

Consider paying for your policy annually instead of monthly 

Almost all insurance companies offer a discount for those who pay once per year and this discount, for an average sized policy, is usually around eight per cent which equates to almost one month’s premium!

Quit smoking

Depending on your age, your life insurance premiums will roughly double if you smoke. For example, a policy that would cost a non-smoker $75 per month will cost those that smoke around $150. Over 25 years, that extra premium will amount to an extra cost of $22,500.

Most companies consider you a non-smoker if you haven’t had any tobacco products for 12 months so there’s no better time than now to quit! But don’t wait an extra 12 months before you apply – it’s better to apply now and pay smoker rates for one year and then have the policy adjusted to non-smoker rates when your 12 months is up.

Buy term insurance and skip the permanent stuff

While whole life and universal life (the two main permanent insurance types) both have their places and can be excellent options for the right person, most people really only need term coverage.

Term insurance is far cheaper and you can more easily afford the amount of insurance you really need to provide proper protection. When selecting term coverage, it’s critically important to get the right length of term so that you don’t face a costly renewal.

If you need insurance for 20 years, buy a 20-year term instead of buying a 10-year term with plans to renew it. Terms can be purchased from five to 40 years and can also be bought with a fixed “term to age 65” depending on your needs.

Make sure you shop around

There is no good reason to consider buying insurance from an advisor that works for one specific insurance company or bank. 

No matter what you are told, there is no one insurance company who will have the best price all the time. In reality, each insurance company attempts to even out their books with a similar number of policies for people in each age group and they adjust their prices accordingly.

The company who will have the best deal for you is always changing.

An independent adviser can and should give you a print out that shows every Canadian insurer’s price quote for the type of coverage you’ve decided on. From there you can look at the top couple of quotes and review the features and benefits of these best priced plans.

Purchasing life insurance is not an option or luxury but instead a necessity of financial security for most Canadians.

Make sure you take the time to fully understand the different options out there and select the one that’s right for you.

While you’re at it, make sure you use these tips to get the best possible price.           

Paying for university

Should you pay for your child’s university education?

If you have the resources to do so, many parents simply assume that it’s the right thing to do.

But it may not be that simple.

  • Is simply paying outright for their education the best method?
  • What will it teach them about financial responsibility?
  • Will they take their courses seriously if they’re not footing the bill or will they just do the bare minimum to get by and party the rest of the time?

University should be partly about getting out into the world, having some fun and earning some valuable social skills but the financial aspects should not be too easily ignored.

The cost itself can be pretty staggering. The average four-year degree program including books and living expenses will run close to $100,000 right now if you’re not living at home.

For a child born in 2013, this cost will climb to around $140,000 by the time they’re ready to start their post-secondary educations.

But what if you have the funds available?

Let’s say you saved diligently in your RESP plan and have enough money set aside or if you simply have the disposable income on hand to foot the bill?

Paying your child’s full way still might not be the simple solution.

Whether you have the funds or not, that degree is going to cost a fair bit of money and your child should be taught to understand the significance of the investment you’re making in them.

So what should you do?

One option that I particularly like is to have your child take out student loans, even if you have the funds available.

Their student loans will attract no interest until after they’re done their program and they can be paid back in full at any time. Not only that, you can hold onto the RESP or investment funds for four more years and can earn some extra growth during that time.

RESP money can be drawn out of the plan while they go to school, but can be reinvested in a TFSA or other non-registered plan to keep growing.

But here’s where the financial education part comes in. Sit down with your child and discuss the terms for using the education money you’ve set aside to pay off the loans.

This might be as simple as saying that you’ll pay the loans off in full once they earn their degree but if they drop out part way through, the loans are theirs to pay back. Or you might base the loan repayment on the marks that they attain as well.

If they achieve a 4.0 GPA, you’ll pay off 100% of their debt. A 3.5 or higher might warrant a 90% loan repayment and so on.

The terms that you settle on are up to you but some variation of this suggested structure would go a long way in teaching your child financial responsibility and help to ensure that they take their course load seriously.

For those parents fortunate enough to be in a position to pay for their child’s education, take some time to think about exactly how you want that process to play out.

Simply paying their education costs as they come up may not be the best course of action but having a well thought out plan is.         

Too good to be true?

People regularly ask me about a piece of investment advertising material they’ve come across that seems too good to be true.

Before I even look at what they’re referring to, I can usually assume it has some relation to an Exempt Market Product or security.

What are these Exempt Market Products (EMPs) and are they something you should be considering?

An EMP is a security issued in Canada that is exempt from prospectus requirements and they require less disclosure than a prospectus offering.

To sell an EMP, the issuer must ensure that the investor qualifies under a specific “exemption”. Common exemptions include only selling to an accredited investor or only selling them to family, friends and business associates.

Depending on the exemption relied upon, these products often don’t have detailed disclosures and it’s up to the investor to perform much of the due diligence themselves.

Unfortunately, due to a lack of oversight, many unqualified investors are still being sold these products.

EMPs carry many serious risks that the salespeople often don’t explain.

The main concerns are:

  • Lack of liquidity – Many EMPs are illiquid and investors can’t access their money if they want to.
  • Not insured – Unlike traditional investments, they are not protected by the Canadian Investor Protection Fund, the Investor Protection Corporation or Assuris.
  • Inadequate disclosure – Their offering documents are not reviewed by regulators for completeness and it can be difficult to find out what you’re really buying until it’s too late.
  • Subject to key person risks – Exempt products are generally smaller operations and the loss of a single individual involved could create significant losses in the values.
  • Conflict of interest – Unlike regulated products, there may be significant conflicts of interest that are not being disclosed to the investors.

Not long ago, the Ontario Securities Commission concluded a year-long review of firms selling EMPs. They found a range of deficiencies in many firms, primarily around selling EMPs to investors who did not qualify.

The OSC said that 75% of EMP dealers had inadequate processes for collecting and maintaining know-your-client information.

In the rest of the country, the situation is not any better. But the much bigger problem in all this is that even if an investor is eligible to purchase an EMP, is the product actually suitable for them?    

Many of those who sell EMPs try to tell investors that their products are actually less risky than standard investment options since they’re not subject to the normal market volatility. But from a regulatory point of view, exempt product are high risk.

Many investment dealers (the “back office” responsible for compliance oversight) go so far as to require that advisers under their umbrella can’t work in the same office as someone who sells EMPs.

They are very fearful of lawsuits that regularly result from these high risk investments and they don’t want to be associated with them in any way.    

To be fair, there are legitimate firms and dealers that operate in the exempt market space but it’s up to the consumer to decide which ones are legit and the majority of Canadians aren’t properly informed to make an informed decision.

It’s your money and you can invest it in whatever you want but be sure to think twice before taking part in any exempt market plan.

When something sounds too good to be true, it usually is.    


2 main priorities

Two of the main priorities for many retirees are to:

  • make sure their retirement income is sustainable
  • second pass on a legacy to their children or other charitable priorities.

To fund these aspirations, many conservative investors opt to stick with bonds, GICs and other lower risk investment options as these vehicles meet their safety and capital preservation requirements.

The problem is that the low rate of return these investments generate may result in not reaching their retirement goals and/or not having enough money left over to leave to their chosen benefactors.

There is an alternative option that provides a tax-efficient, guaranteed lifetime income while simultaneously provides a guaranteed, tax-free payout to the retiree’s beneficiaries when he or she dies.

The Insured Annuity strategy provides a guaranteed income for life and upon death pays your originally invested capital directly to your beneficiaries without the usual estate-related hassles and costs.

There are two approaches to this type of strategy.

In the traditional Insured Annuity, your retirement capital is used to purchase an annuity. Part of the monthly annuity payment is used to pay for a life insurance policy that has a fixed cost for life.

This insurance policy will then be set up so that upon your death, the benefit amount will be paid directly to your beneficiaries tax free.

The remainder of the monthly annuity payment amount is also guaranteed for life and is used to fund your retirement expenses.

The alternative strategy has you pre-pay for the full cost of the insurance policy up front with some of your retirement savings.

The remaining capital is used to purchase a life annuity which provides your monthly living expenses. By utilizing this alternative option, you further reduce your tax bill and help to avoid claw-backs of OAS benefits.

For an example, let’s take a look at “Jane” who is 72 years old and has $500,000 in GICs in addition to her pension and RRIF assets.

She currently has a total income of $94,050 per year that comes from her pension ($57,000), CPP/OAS ($18,750), RRIF ($5,800) and her GIC account earning 2.5 per cent ($12,500).

She is required to repay $3,464 of her OAS each year due to claw-back.

If Jane were to set up a $500,000 life insurance policy and purchase a life annuity with the GIC money, the annuity would pay out $38,340 per year.

Only $2,113 of this would be taxable instead of the full $12,500 of GIC interest and her tax bill would drop by $3,979 each year.

After paying the annual life insurance premium of $19,375, she would be left with $18,156 of after-tax income instead of $7,713 with the GICs.

The net result for Jane would be that her taxable income would drop from $94,050 to $82,881 and her OAS claw-back would drop to $1,789 each year.

At the same time, her retirement income would increase by $10,443 per year and her beneficiaries would be guaranteed to receive the full $500,000 amount tax free!   

While not for everyone, this strategy is a good option for those who are between ages 60-85, risk adverse, dissatisfied with the low interest rates we currently face and are also in good health (in order to qualify for the life insurance).   

An Insured Annuity strategy can preserve the value of your estate, minimize income taxes and most importantly, guarantee a lifetime income stream for your retirement with no stress of watching your portfolio move up and down with the markets.

For those conservative investors who want to increase their retirement income without increasing their investment risk, this strategy is definitely one worth considering.

Feel free to email me if you want to see a quote on this type of strategy and how it would compare to your current retirement plan.              

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and will take over as board chairman in June. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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