Proposed Tax Changes – “Conversation” with my MP (Karina Gould)

On July 18th, Finance Minister Bill Morneau released a detailed package of tax changes affecting small business.  On July 19th, I wrote to my MP (Karina Gould from Burlington, Ontario).  With only a 75 day consultation period, it took 42 days for my MP to respond.  Below is my email thread with my MP:

1. Initial Email sent to my MP on July 19, 2017

Good afternoon Karina.

We met back in May at the CALU reception.  I am a Burlington native (click here) and we chatted very briefly before going separate directions.
As you already know, the Liberal Government has announced an upcoming tax proposal “for the wealthy”.  
Given the demographics of our city, this topic is going to create A LOT of anger and frustration.  In fact, I have over 2,200 linkedin contacts who are largely business owners, lawyers, accountants and other financial planning experts, and we overall agree that this announcement is absolutely terrible for Canadians.  In fact, I would recommend reading the following article and related comments.
Karina, I’m 38 years old and been doing more advanced financial planning my entire career (15 years now).  I remember back in 2006 when the government refused to give physicians a pay raise, so instead allowed them to dividend sprinkle to family members to ‘stimulate’ savings and earnings.  Here we are 11 years later, and commonly used ‘basic’ planning is under attack.  I have NEVER written an MP, but this measure is going too far.
I’d be more than happy to be the point person for a debate.  I have a strong and very educated network dying for their voices to be heard.

Talk soon.

2. Response from MP Karina Gould on August 29, 2017

“Dear Mr. Laundry,

As the Member of Parliament for Burlington I would like to thank you for taking the time to write to me regarding the ongoing consultations on tax planning using private corporations.

The Government of Canada is working to create and economy that works for the everyone, and where businesses- both large and small- have the confidence to invest, grow, and create good jobs.

Since coming to office, the Government of Canada has taken clear action to support Canadian businesses, the drivers of growth and creators of good, well-paying middle class jobs. We have made critical investments in our infrastructure, and are supporting innovation throughout our economy. We have ensured that Canada continues to have the lowest small business tax rate in the G7

These efforts are having an impact. Canadians are among the world leaders in the number of companies started, per capita. In the past year, the Canadian economy has created more than 300,000 new jobs. The International Monetary Fund has praised Canada’s economic model and predicts we will lead the G7 in growth for 2017. The potential changes being discussed as part of this consultation will maintain this advantage and will not impact the ability of Canadians to invest in and grow their business.

This is why the Government of Canada is consulting on proposed changes to the tax regime. We want to ensure businesses continue to invest in themselves, but close loopholes that are unfairly used. To ensure that this is done fairly, the Government of Canada wants to hear from you. If you would like to submit information to the Tax Planning Using Private Corporations consultation please visit the website found here. This consultation concludes October 2nd, 2017.

Once again, thank you for taking the time to write to me regarding the ongoing consultations on tax planning using private corporations. I encourage you to continue to write on the issues that matter to you. I hope this addresses your concerns.

Sincerely,
Hon. Karina Gould

Member of Parliament, Burlington”

3. My Response, sent August 29, 2017 (11 minutes later)

“I need the government to explain how these are “loopholes”.  The tax policy has been in place since 1972.  In 2006, the Federal Government (Liberals) would not increase the pay of physicians in Ontario.  As a result, the government allowed Medicine Professional Corporations to use dividend sprinkling and other commonly used tax planning strategies (which are being targeted) as a solution to negotiations with the Ontario Medical Association.

Karina, I invite you to my brand new office (located in Aldershot), to sit with myself and 3 other tax experts to explain our position.  I think once you learn about the real-world implication of this poor initiative, you’ll understand how it affects your constituents in Burlington.
My office is 678 Spring Gardens Road (next door to Easterbrooks).  Can we pick a date and time?”
My email from August 29th was opened at 2:01pm (emailing tracking software).  As I write this entry at 4:30 on August 30th, I have yet to get a response.  Let’s assume that Karina is on vacation for the rest of the week (like many of us) and not return to the office until Tuesday September 5th.  That would be 49 days before I had any meaningful response to my invitation to discuss these changes in person.
Moreover, it seems that I received nothing but a template Liberal government response.  Have others received similar (or the same response)?
What a joke!

Insurance Consultants for the Modern Times

In early August 2017, Holliswealth Insurance Agency Ltd. (which is currently owned by Scotiabank) will be transitioning to it’s new home at Industrial Alliance.

Currently, Investment Advisors (IA’s) that work under the Industrial Alliance umbrella of companies (FundEx, Investia, IA Securities, etc.) use National Financial Insurance Agency (NFIA) as their MGA.  Currently, NFIA does not have an Insurance Consultant (IC) team.  With the acquisition of Holliswealth Insurance Agency (HW), NFIA has inherited one of the strongest teams of insurance professionals in the Country.  But what does an Insurance Consultant do?

When I joined Holliswealth five years ago my goal was to meet with as many IA’s as possible and find out why so little insurance was issued to their clients each year.  One of the first things I learned is that IA’s are very uncomfortable speaking to their clients about death, disability and sickness.  IA’s often commented that they can’t “keep up” on the products (too busy managing investments). With those comments in mind, I asked why they chose to not work with IC’s on a regular basis.  Below are some of the main responses:

  1. Transaction based Selling: IA’s feel that IC’s are too transactional.  Traditionally, there was no needs analysis or any financial justification for life products.  Moreover, living benefit products (ie. long term disability, critical illness and long term care) were not being discussed with clients at all.
  2. Concept Selling: IC’s have a reputation for selling an idea or concept.  For example, “do you have any clients with over $200,000 of money in their non-registered account?  If so, let’s show them (insert insurance product)”.  IA’s want their clients to be taken care of, not sold an insurance idea.
  3. No Relationship: IA’s feel that the IC is not available for education, support or training.  When the IA calls an IC, the IA feels that they must commission split with the IC.
  4. Turnover: Given the sales-based approach, these ‘experts’ would be replaced every 2-3 years.
  5. Case Size: IC’s have a reputation of asking to sit with your ‘best clients’.  Too much emphasis on the large case, not the typical family

Times have changed!  What does an Insurance Consultant do?  Specifically, what does my firm do?  Below is a table listing all of the steps taken by my firm for each client.  Ask yourself, do you take the time to do this with your clients?

IC Chart

Naturally, I would expect an IA to ask me ‘how much does this cost”?  The answer is simple.  Insurance Consultants work on a split case basis.  When an insurance application is submitted, the IC and IA split 50/50 on the insurance application.  The IA’s compensation hits their own grid/corporation.  Also, the IA is also named the ongoing servicing agent of record (unless they opt out).

I’m actively introducing myself each day on LinkedIn (I may even call unexpectedly).  If you would like to learn more about the process, the team and how we integrate with your firm, I would love to hear from you.  Kindly email me at blaundry@blfinancial.ca.

*Important: Bill S-201 (Genetic Non-Discrimination Act.)

I know most of you rely on me to be more up-to-speed than you on insurance-based changes/issues. That said, there was much discussion about Bill S-201 that was largely overlooked because of the exempt test changes effective on January 1, 2017.

Here’s the scoop…..on May 4, 2017, the Federal Government passed the Genetic Non-Discrimination Act.

“This law makes it illegal to require someone to take a genetic test or disclose the results of a genetic test as a condition to obtain goods or services, or enter into a contract, such as insurance.”

So what exactly does that mean?  It means that individuals (you, me, clients) can have genetic testing completed and NOT DISCLOSE those results to the insurance company (it’s now illegal). If an insurance company uses/requests this information and it will be fined $1,000,000.

When I was in Ottawa at calu weeks ago, they are lobbying this issue to the supreme court, but as of today, this law is in effect.

The major unintended consequence of this new law is the creation of anti-selection for insurance purposes. What if a client had genetic tests that showed they were a carrier of the BCRA gene (ie. Angelina Jolie)? Currently, it is possible for a client to have a test showing they are a carrier of this gene, then immediately apply for critical illness insurance and not need to disclose this result.

This law will require the insurance insurance companies to (a) increase price heavily (up to 65%) and/or, (b) completely change the structure of critical illness insurance (or stop selling it entirely).

Since I knew that this change was happening, I literally just increased my own critical illness by $825,000 (I purchased a 20 year term with Manulife).  See my summary below:

Laundry CI

It’s important we talk more about critical illness insurance before products start to change. I also encourage each of you to consider adding some critical illness to your own insurance portfolio (if you haven’t already).

BRIAN LAUNDRY: ADVISOR OF THE FUTURE

By Jay Palter

Brian LaundryIn the past year, Brian Laundry has increased his revenue by over 40 percent, while reducing his expenses by a similar amount and putting 25 percent less mileage on his vehicle.

These impressive results stem from his single-minded effort to digitize his financial planning and insurance practice and build a completely paperless operation.

Using a variety of software tools available in the marketplace today, including RazorPlan’s financial planning platform, Laundry has assembled his own customized technology suite that streamlines and automates his business – and the results are compelling. In the past year, Laundry has become a top-producing insurance and planning advisor without hiring a single new staff member.

THE 21ST CENTURY ADVISOR

Laundry has taken a decidedly technological approach to growing his business. While many advisors would invest in an assistant to increase their productivity, Laundry has invested in technology instead.

Laundry’s technology stack includes a customized version of Salesforce CRM in which he tracks his sales funnel and stores all of his client interactions and records digitally. He uses RazorPlan as the foundation for his clients’ financial planning needs and InForcePro for identifying opportunities for servicing in-force insurance policies.

Unsurprisingly, Laundry’s communications are completely digital as well. He uses a web-based platform for his email and calendar, and his iPhone and iPad Pro (in conjunction with an Apple pencil) give him complete access to his customer records and financial plans anywhere – virtualizing his office. Using the screen sharing app join.me and his computer webcam, he can also meet with clients remotely without leaving his office.

Laundry’s investment in technology isn’t just a personal interest – it has helped him solve a pressing business issue. He desperately needed to increase his capacity to manage a high volume of referrals. So he decided he’d no longer write big long reports. He stopped writing cover letters with insurance applications and now attaches a copy of the client’s financial plan produced by RazorPlan to each application. He’s also made a conscious decision to do business with insurers that offer the best electronic applications.

His goal is to be 100% paperless and do everything on the iPad – including signatures. More recently, he’s stopped printing anything at all. But avoiding paper doesn’t mean a lack of documentation. In fact, the opposite is true. “Every single client communication is tracked in the CRM. And I can generate a client summary with the push of a button,” says Laundry.

HOW RAZORPLAN FITS IN THE TECHNOLOGY STACK

Laundry became aware of RazorPlan about a year before he decided to implement it. He was drawn to the philosophy of financial planning on which RazorPlan is based. Namely, that a financial plan isn’t something to be prepared, looked at briefly and then filed away in a cabinet. It’s easier for clients to see the value of planning when they’re more directly involved in the process.

“RazorPlan has allowed me to take those numbers off the page, and bring them to life. And for most people I meet, I’m the only person who’s ever been able to do that for them.”

Before RazorPlan, when Laundry used to do a financial plan for a client, he would send the client his list of information requests and then spend days, often weeks, chasing clients down for their homework, before sitting down to prepare the plan on his own.

Now, instead of doing all the planning and report writing in advance, and presenting his hard-copy plan in a meeting, he invites his clients to participate in the planning process. The RazorPlan software allows him to shape the plan and his recommendations in real time, with instant feedback from the client.

“Before now, financial planning was kind of like the Wizard of Oz. Now I say, ‘we’re inviting you to this meeting, and we’re going to pull back the curtain.’ And the transparency of the process is going to give you confidence in the process, because you can see how it all works.”

After they’ve worked through the plan he sends everything to the client via email, so it’s in their inbox by the time they get home.

What does he say to advisors who insist that their clients require a 50-page printed plan? “I think the advisor needs it more than the client does. It can be a crutch. You can’t tell me that your clients do all their reading and banking on their iPad, but for some reason they need a paper report from you.”

In fact, he thinks it’s disingenuous to write overly detailed plans with illustrations down to the dollar. “As advisors, there are so many assumptions we need to make to come to our conclusions. It’s better to show the client in real time what an increase in inflation or a decrease in savings rate will do to their overall financial picture.”

“It has nothing to do with the complexity of the software – it has to do with bringing the numbers to life. Before RazorPlan, I’d never seen software able to do that.”

 CONCLUSION

Brian Laundry’s website brands him as having “limitless energy” and it’s hard not to agree. He’s smart, passionate about the future, and incredibly hard-working. And he’s generous about sharing his insights and experiences about how he is navigating the increasingly digital world of financial advice.

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Jay Palter | Social Advisory
Find me on TwitterLinkedInGoogle+ and Pinterest
Subscribe to my free newsletter Pay it Forward

 

Manulife first to underwrite eligible Canadians who test HIV-positive.

If you are between ages 30-65 and diagnosed with HIV, you can apply for up to $2,000,000 in life insurance.

I had a conversation with Manulife to determine what criteria needs to be satisfied for coverage to be approved.  Here are the mandatory conditions that must be met at the time of application:

  • Compliant with ART (Antiretroviral therapy) for at least 5 years
  • Under the care of a specialist
  • No co-morbid medical conditions such as heart disease, Hepatitis B or C
  • No history of IV drug use, substance abuse or alcohol abuse

For those who wish to apply, the process has been streamlined.  An application needs to be completed (no medical questions) and an attending physician statement (APS) will be ordered from your doctor.  That’s it.  Depending on the report, Manulife will order additional bi-metrics (blood, urine, etc), which is typical for life insurance.

If you wish to learn more, or apply for coverage, please email me at blaundry@blfinancial.ca.

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Immediate Release From Manulife (April 22, 2016)
“Breakthrough in underwriting disrupts traditional approach to insurance

Waterloo – Manulife today announced that it will now accept life insurance applications from persons who have tested positive for the Human Immunodeficiency Virus (HIV), the first insurer in Canada to do so.

“Manulife was the first insurer to underwrite people with diabetes, and we are continuing in that tradition by making life insurance a possibility for the more than 75,000 Canadians* who have tested HIV positive,” said Marianne Harrison, President and Chief Executive Officer, Manulife Canada. “This is the result of work completed by our Research and Innovation team and working closely with our colleagues in the United States at John Hancock.”

Manulife looked at the latest mortality and long-term survival rates of HIV-positive Canadians and with enhanced analytics, gained a better perspective on individual risk profiles.  As we continue to build on the strength of our analytics, we will rely less on traditional underwriting – leading the industry in providing coverage customized to consumer risk.

Applicants who have tested HIV positive, are between the ages of 30 and 65, and meet certain criteria, can apply for individual life insurance for up to $2,000,000.”

Public Health Agency of Canada: Report December 31, 2012

 

Tax Exempt Insurance Planning (Deadline – January 1, 2017)

This post is directed to all Holliswealth investment advisors.

I work closely with several advisors in Ontario.  With the upcoming changes in the tax exempt legislation, I’ve been very busy explaining the new legislation to clients and their professionals.  I wrote this piece (which I customize for every client) to help better understand the Tax Exempt Structure.  More specifically, I often have a meeting with the client first, they often “understand it” as well as can be expected.  Then I provide them this document as a FAQ sheet so they know what questions they should be asking.

This is complicated stuff and I strongly encourage everybody to reach out to me, or their Insurance Consultant to learn more.

Below is a sample of the document I provide to clients:

PS.  Kindly recommend or forward this article to whomever you think would like to learn about this.  It’s vital that we educate our clients before this opportunity is gone…for good!

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Prepared for: Dale & Chris Sample (1234567 Ontario Inc.)

Summary

Certain life insurance products are commonly utilized as investment vehicles that accumulate assets in a tax-sheltered environment. Quite often, the only reason such a product is missing from an investor’s wealth management program is that the investor is unaware of “tax-exempt life insurance” (referred to as “The Shelter” in this document).

These investment vehicles are permanent life insurance products, which provide life-long insurance coverage and include a savings component. The investment opportunity stems from tax rules found in section 148(3) of the federal Income Tax Act. That’s where it specifies that assets in a life insurance product accumulate free of annual taxation.

In addition to tax-sheltered investing, rules in the Income Tax Act provide for a second tax advantage: Proceeds from the policy, including any accumulated assets, are ultimately distributed to the estate or directly to beneficiaries tax-free. Consequently, this feature makes tax-exempt life insurance ideal for estate planning – especially for those who have significant corporate accumulation.

The government has introduced new tax legislation that’s designed to modernize life insurance exempt testing. The legislation, which reflects the fact that people are living longer and that their insurance policies will pay out later, received royal assent on December 16, 2014 and comes into effect as of January 1, 2017.

Although all existing contracts (up to January 1, 2017) will be grandfathered, this particular tax strategy will no longer be available once the 2016 calendar year has passed.

Assumptions for this Summary

There are many factors that affect the impact of the structure.  Some of those factors are age, the deposit amount/frequency and the assumed investment rate of return.  Below are the assumptions used for this customized FAQ sheet:

  • Chris Sample, non-smoker (DOB: March 13, 1957)
  • Dale Sample, non-smoker (DOB: April 9, 1958)
  • Deposit Assumption: Assumes $1,000,000 lump sum deposit from the corporation
  • Rate of Return Assumption (Min. 1.75% 10 Year GIC) – Although a wide variety of investment options are available, for this illustration an index-linked GIC earning 3.50% will be used for this illustration.

Frequently Asked Questions (FAQ’s) and Information Sheet

1. Who are the best candidates for this type of tax shelter?

Individuals and/or families that have (or will have) accumulated significant non-registered assets.  There does not necessarily have to be a need for life insurance, but rather those who pay significant tax on large investment portfolios.

The concept is especially effective for those who have a corporation(s) that has, or will have, significant accumulation.

Comment: You currently have a corporate investment portfolio that is invested in a bond portfolio.  Your corporate investments are currently exposed to tax (in Ontario, the tax payable on a fixed income investment is 46.17%).  This money can be invested using the same/similar investment products inside of the insurance tax shelter.

  1. What other tax efficient investment vehicles/strategies are available?

Personal and corporate dollars are taxed differently.  In general, investment portfolios (personal and corporate) are taxed on the gains of the portfolio (ie. interest, dividend and capital gains).  Savvy investors often use different investment products to change the tax treatment to deferred capital gains (specifically, Corporate Class Mutual Funds).

Up until March 22, 2016, corporate class investments were a terrific tax deferral tool with great flexibility to switch money between mutual funds without incurring a taxable gain.  Justin Trudeau announced the following unexpected surprise to the investment industry.  Click the following link to read an article from the Globe and Mail dated March 23, 2016.

With the changes of corporate class set to be implemented on October 1, 2016 and the change of tax-exempt insurance changing on January 1, 2017, the tools used by planners are disappearing (or changing dramatically).

  1. Explain to me how/why the tax exempt insurance is better than a typical non-registered investment portfolio?

If you have a personal or corporate investment portfolio, you are currently paying tax on the growth of the portfolio.  This isn’t new news, but CRA is generating revenue from your investment returns.  At second death, there are tax and costs (probate) associated with your portfolio that are eliminated using the shelter.

The Structure allows an investor to have a personal or corporate investment portfolio and shelter all growth from tax (exactly like an RRSP) and eliminate most, if not all, estate costs.

Comment: Below is the projected annual (and cumulative) costs to implement a shelter a $1,000,000 lump sum.

A1

In other words, to avoid paying any tax on the growth of your corporate investments, the cost for the tax shelter is only $6,099 in year #1.

  1. What are the investment options within the contract?

The contract offers over 400 different investment options from well-known mutual fund companies.  CI Funds, Dynamic, Templeton, Mackenzie and Fidelity are some of the companies that you can invest with.  As of the writing of this document, BMO offers a 10 year GIC at 1.75%.

One of the more attractive investment options are Guaranteed Market Index Accounts (GMIA’s) (click here for more information).  These investments offer principal protection of returns linked to equity market performance, but your investment portfolio can never be negative (ie. You can never lose money).

  1. How much does it cost?

The cost to implement the shelter is the cost of the life insurance contract.  In other words, unlike many insurance purchases (whereas you purchase insurance to protect against a financial loss), this structure requires that you purchase the lowest cost insurance possible to shelter the amount of deposit. Moreover, the cost of the shelter will reduce over time, whereas tax will continue to grow as your investment portfolio grows.

The reason why this structure works so well is simple…the cost of the insurance (ie. the shelter) is cheaper than the tax you are already paying on your portfolio.  Also, over time, we reduce the amount of insurance to keep costs low.

Depending on your situation, an individual life contract can be used (whereas there is a need for life insurance on one individual) or; a joint last-to-die contract can be used (whereas there is no need for insurance when an individual dies — joint last-to-die (JLTD) allows for a cheaper shelter, and promotes more investment returns).  Most often, a JLTD contract is ideal.

Comment: Below is a comparison of the tax cost of investing inside of the corporation (3.50%) versus investing inside of the tax exempt contract:

A2

In the first year, the cost of the shelter is 58.5% less than the tax you’re currently paying.  After 10 years, the cost to implement the insurance shelter is 89.3% less than the tax you would otherwise have to pay.

 6. What is the deposit flexibility? What if I can’t commit to a deposit in the future?

One of the most attractive elements of this structure is the flexibility.  Often, the owner of the contract commits to a deposit schedule.  For example: $100,000 for 4 years.  Each year, this structure has minimum deposits and maximum deposits.  Often, the minimum deposit is a small fraction of the scheduled deposit ($11,209 in this example).  As long as the minimum premium is satisfied, the Shelter remains in effect.

The maximum deposit room (also known as Maximum Tax Accumulation Reserve (MTAR)) is the maximum allowed by section 148(3) of the federal Income Tax Act.  In simple language, MTAR is the line that tells an investor how much can be invested in a tax sheltered environment of a life insurance policy.  MTAR is calculated each policy anniversary and will reduce from year 4 to year 10.  It is possible to “maximum fund” a contract where there is no more room available.

To ensure effectiveness of the structure, it is important to determine a deposit schedule at the onset.

Comment: Below is an example showing planned deposits ($1,000,000 lump sum) compared with the minimum and maximum deposits.  For example, theoretically you can deposit $11,209 in year number 1 and have $2,105,445 of maximum room in year 3.  Consider the following:

A3

7. What if I need money in the future, how do I get access to it?

Similar to an RRSP, if you withdraw money from the Shelter, you will pay tax on the investment gains.  It is not advisable to ever withdraw money from the tax shelter but rather borrow against the cash surrender value (ie. this is called an insured retirement program or IRP).

The Shelter is just like any other assets whereas a bank will provide a tax-free loan against the value.  If invested in the GMIA (index linked GIC’s), you can receive a 90% loan-to-value on the cash surrender value (less if you’re invested in equity based investments).

What’s nice about this particular loan is that you don’t necessarily have to pay it back during your lifetime. Since there is a life insurance element, it is possible that you keep the loan and the death benefit will pay back the loan at death (this can be used to maximize CDA planning as well).

For many sophisticated investors, leverage, and the tax-deductible interest on those loans is understood.  The contract provides the exact same benefits.

Important to understand

In the early years, the structure has a ‘surrender charge’.  The surrender charge is the main ingredient that ‘creates’ the shelter.  A surrender charge is similar to a deferred sales charge or fee if you discharge a mortgage before maturity.  If you cancel the contract at any point in the first 10 years, there is a fee.  The policy owner can borrow 90% of the cash value (not 90% of the account value, which is higher the first 10 years of the contract).  After 10 years, there are no more surrender charges.

8. I never plan on using this money. What impact does it have on my estate/heirs?

The shelter is a life insurance contract.  Therefore, the proceeds of the investment portfolio is paid as a ‘death benefit’ for tax purposes (if corporate, the death benefit less the ACB equals a capital dividend credit which is tax free – this is being “neutered in January 2017”.  CDA will be lower moving forward).

In other words, if you are never going to spend the investment portfolio, this is an ideal solution to tax shelter the money, have access vie-to-vie leveraging and enhance the estate with the insurance.

The statement is magnified in a corporate context.  Without the shelter, any accumulation in the corporation would attract 42% dividend tax to your children (at second death).  The structure creates a ‘Capital Dividend Account’ which allows for a tax-free (0%) dividend to the children instead.

Comment: Below is a comparison of a typical corporate investment (3.50%) compared with the same investment inside of the shelter (3.50%).  There is no better estate planning tool than corporate insurance.

A4

9. Why would I not implement this structure? What are the drawbacks?

It is very important to understand 3 key factors for these contracts:

  • Borrowing capacity and liquidity (see #7 in this FAQ sheet). You must understand how to access the cash without triggering tax.  It is NOT fully liquid for 10 years!
  • These contracts cannot handle negative returns. The structure has a monthly cost of insurance deduction (from your investments).  For example, if the investments dip 30%, plus a deduction for the costs of the shelter, it’s tough for the investment performance to recover.  The solution is simple, illustrate a conservative rate of return using GIC’s or GMIA’s.  These investments cannot lose money….ever.  The structure works great when there are no ‘down’ years.
  • You are NOT buying insurance for the typical purposes. You are purchasing low-cost (term/YRT) insurance to create a tax shelter.  Don’t fall in love with the insurance.  It’s great that there is a life insurance component, but remember it is NOT guaranteed cost life insurance (ie. whole life or level cost of insurance/T100).

 10. Does this mean you have to qualify for insurance?

Yes. Given the insurance (net amount of risk) for the insurance company reduces over time, even those with pre-existing medical conditions (ie. heart attack, diabetes, some instances of cancer, etc.) should consider taking advantage of this structure.  An insurance application is necessary to determine actual costs.

11. I’m interested. What are the next steps?

The process to implement any life insurance contract is the same….we need to complete a life insurance application.  Below are the steps:

  • Sign an Insurance Application – 2 signatures (1 signature is to allow the insurance company to share information with your doctor, the other is confirm that you are telling the truth)
  • Sign anti-money laundering/anti-terrorist Forms – These are required at the time of application. Given the inherent cash values that accumulate in these shelters, the insurance company needs to verify your identity (a picture of your driver’s license is needed)
  • Sign Compliance Documents – Anti-spamming legislation and a disclosure document is required at the time of application

 Important considerations:

  • No payment is required until there is an approval and a contract is signed
  • Applications can be withdrawn at any time
  • You do not need to commit to a specific deposit schedule until after an application has been approved

12. How long does this take?

Depending on the complexity of your medical and/or corporate situation, the application can take anywhere between 6 and 20 weeks.

13. Why are your encouraging me to apply today? I’m still thinking about it.

Finance has provided a drop-dead date of January 1, 2017.  Any cases not approved or not delivered prior to this date are gone.  No extensions.

The process often takes several months.  Once summer hits, physicians and underwriters go on vacation.  Things literally stop if the doctor doesn’t provide information to the insurance company.  If we get an application in today, we make sure there is enough time to get an approval.  Once we have an approval, we have ample time to finalize the figures and have a contract issued.

EO&E

“Prescription Before Diagnosis, is Malpractice”

Back in 2012, I attended an education conference in Las Vegas.  Frankly, I was disappointed at how little product and tax education that was being provided.  Instead of education, it seemed that the entire conference was focused on sales strategies (ie. increase sales, increase production, etc. etc.).  Honestly, I was having a really hard time sticking around.

On the second day of the conference, there was a speaker who during his ‘sales-focused’ session, used the phrase, “Prescription before diagnosis, is malpractice.” For those who do not know, I spent the first 8 years of my career working directly with physicians, so I started thinking really hard about what that expression meant in the context of my business (insurance/planning).

This was my conclusion………..in my opinion, the reason so many people hate talking to insurance agents (investment advisors aren’t too far behind), is that traditionally, insurance agents “prescribed” insurance products to their clients.  No time or effort was used to diagnose what insurance (if any) a person/family needed (often, the only insurance discussed was mortgage insurance).  Worse still, professionals have never been required by their governing body for a needs analysis or plan before “prescribing” their insurance and/or investment product to make sure the client was well educated and informed (although things have been changing in recent years).

In the Financial Planning industry, “diagnosis” comes in the form of a financial plan and tax planning.  I rephrased the old expression to read, “Insurance and/or investment products that are sold, before a financial plan and tax planning, is non-compliant”.

My point is simple…..insurance should not be “prescribed” until a financial plan or needs analysis has been complete.  The case studies in this blog are examples of detailed “diagnosis”.

If you have never gone through the financial planning process, or have never had an insurance needs analysis completed, I strongly recommend reaching out to your financial advisor and book a meeting.

How Much Life Term Insurance do I Need? Let’s find out!

For the past several years I have met with hundreds of advisors.  Some of these advisors have a difficult time having the “insurance discussion” with their clients.  Others are only comfortable with the idea of using life insurance instead of mortgage/creditor insurance with their local bank.

There is a very simple method of going through a life insurance needs analysis.  There are two distinct steps:

  1. Do the Math
  2. Do you care?

Do the Math

There are 3 main factors that determine a term life insurance needs analysis.  Never forget these three:

  1. Debt Elimination (mortgage included): This number is very easy.  How much debt do you currently have as a family?  If one spouse were to pre-decease the other, ideally, this expense would be eliminated
  2. Education Costs for Children: The question I ask to every family is, “how much do you think education will cost for your children?” — there is no ‘right’ answer, but based on the education cost calculator provided by MacKenzie Financial, for 4 years of school plus living expenses, based on Ontario costs and inflation rates, will cost approximately $80-100,000/child (present value).
  3. Income Replacement to your Family/Surviving Spouse: Let’s assume that after death, your surviving spouse has no more debt, no need to save for education AND a family without a spouse/parent.  Things are much different. To me, you should want to calculate a certain level of income for as long as the children live in the house (let’s say age 20).  Below is a table that I created many years ago.  The top row is the number of years to replace income and the column to the left is the after-tax amount of income provided.    I literally print this table and allow client(s) pick their own number.

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Let’s do an example:

Bob and Susan have a $500,000 mortgage and two young children (2 & 4).  Susan stays home with the kids and Bob earns approximately $100,000/yr gross (after-tax $70,000/yr).  What happens if Bob dies prematurely:

  • Debt: $500,000
  • Education: $200,000
  • Income Replacement ($40,000/yr for 20 years – see table): $676,000
  • TOTAL NEED FOR INSURANCE: $1,376,000
  • Less: Current Insurance
  • Less: Current RESP’s
  • EQUALS: TOTAL SHORTFALL

Make sense?

Do you Care?

As a professional, my job is to show the math and explain where life insurance fits.

However, as a client, you may not “care”.  You would be surprised how many times I’ve been told that, “we’ll just sell the house”.  My response to that specific objection is, “let’s me get this straight…Dad dies, mom has no husband, there is no more paycheques and the solution is to uproot the family from their home?  Really?”

My job is to make sure we have this awkward conversation and for me to challenge these conventional objections and help better educate.  Not everybody has to be a believer, but ALL advisors should have this conversation with their clients.

A Collaborative Conversation with an Old Friend

Last week an old friend and former colleague of mine (John Cruise) had one of those ‘random and unexpected’ great telephone conversations.  I was driving from a meeting and called John to shoot-the-breeze.  45 minutes, later, I arrived at the office and felt invigorated about our conversation and wanted to share.

By way of background, John is a CFA (Chartered Financial Analyst) and does the same type of advanced financial planning that I do (www.ckwealth.ca).  We were talking about client situations and John asked me the following question:

“When you look at a specific client situation and you had to rank the importance of the following 5 planning items, how would you rank them?  Those 5 items are: Tax Planning, Goal Setting, Investment Selection/Allocation, understanding the behaviour(s) of the client and developing a financial plan?”

There was only one difference between John’s answer and mine, but that’s what made this conversation so thought-provoking.  John told me that his list, ranked most important to least important was:

  1. Goal Setting
  2. Create a Financial Plan
  3. Understanding the Behaviour(s) of the client
  4. Tax Planning
  5. Investment Selection/Allocation

My ranking was as follows:

  1. Understanding the Behaviour(s) of the client
  2. Create a Financial Plan
  3. Goal Setting
  4. Tax Planning
  5. Investment Selection/Allocation

In just about every introductory financial planning meeting that I’ve had, when I ask the client about their financial goals, they always tend to be the same; “I want to have enough money to retire”, “pay off debt”, or “travel more” (in fact, most financial planning questionnaire’s include these as pre-populated answers).  These goals are not only predictable, but they are not specific enough for me to provide any expertise or clarity.  There is no emotion and absolutely no substance or rationale to help me develop a plan.

Instead, my goal for the first meeting is to learn the behaviour(s) of my client and try to understand the psychology of “why” have they amassed a certain level of wealth.  I try to figure out “why” they want to retire (I’ve learned that most don’t want to stop working, but rather work less).  I challenge business owners.  “Who’s going to buy your business?  How much is it worth?”

My goal is to ask a lot of pointed, personal, strange, engaging and otherwise ‘different’ questions to inspire discussion and get reactions (ie. Do they roll their eyes?  Do they get excited/angry?  Do they noticeably pause before answering specific questions?).

My point?  I use the information and emotions that I collected from the first meeting to develop the first draft of their financial plan.  When we have our next meeting, we have a new, more powerful and engaging conversation.  Better questions are asked, more clarity arises and “presto”, we start developing more specific goals based on the financial context to our conversation (ie. they see where their cash flow will come from.  I demonstrate what impact this has on the money left to their heirs, etc.).  The plan often needs to be revised/tweaked, but by then, the solution(s) start to become more obvious (ie. investment selection, tax planning, etc.).

Thoughts?  Please provide some comments.

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