Insurance attached to your home loan can be a poor deal, Ellen Roseman explains

Published On Sun Apr 22 2007
Toronto Star By Ellen Roseman Personal Finance Columnist

You’re buying a house and taking out a big loan to pay for it. Now, the bank is asking whether you want life insurance.

Reluctant to leave an unpaid debt when you die, you say yes. Within minutes, your application is approved and the cost is added to your mortgage payments.

For lenders, life insurance is an easy sell. They suggest it at a time when you’re vulnerable and have yet to do any comparison shopping.

And they make you sign a waiver form if you say no, agreeing not to hold the lender responsible if something bad happens to you.

Most people don’t realize that the life insurance sold by mortgage lenders is different from the policies sold by life insurance agents and brokers.

It sounds like a great deal at the time, but mortgage life insurance can be more expensive than insurance sold separately.

Click here to read more: http://www.thestar.com/Business/article/205853

According to the Department of Finance, the following make up the sources of Canadian Retirement Income:

• 28% – CPP/QPP
• 28% – OAS & GIS
• 44% – RRSPs and Pension Plans

What is the Canada Pension Plan (CPP)?

The CPP is a federal program that provides pensions to qualified contributors in retirement. Any benefits paid by the CPP are taxable both federally and provincially. CPP operates throughout Canada. Quebec has its own similar but not identical program, the Quebec Pension Plan (QPP), which is closely associated with the CPP.

Who pays into the CPP?

With the exception of very few, every person in Canada who is over the age of 18 and is working pays into the CPP. Contributions are split equally between employers and employees. If you are self – employed, you are required to pay both the employer and employee amount.

How much do I pay into the CPP?

The amount you pay is based on your salary (self-employed contributions are based on your net business income). You pay contributions on your annual earnings between the minimum and a set maximum level (these are called your “pensionable” earnings). The minimum level is frozen at $3,500 while the maximum level is adjusted each January.

For 2009, the maximum level is $46,300 and contributions are 4.95% for both the employer and employee. As a result, the maximum employee contribution is $2,118.60.

When you file your personal tax return, the federal and provincial governments provide a tax credit for your CPP contributions. The Federal government credit is equal to 15% of your contribution.

When do I become eligible to receive CPP?

If you have made at least one CPP contribution in your lifetime and if you are:

• At least age 65; OR
• Between the ages of 60 and 64 inclusive and
  • Have ceased employment OR
  • Have low earnings

How much CPP can I expect monthly?

In general, your retirement pension replaces about 25% of the earnings on which you paid into the CPP. The exact amount of your CPP pension depends on how much and for how long you contribute. For 2009 – the maximum CPP retirement pension is $ 908.75 per month if taken at age 65. CPP pensions are adjusted for inflation every January.

Should I take CPP early? Age 60? Age 65? Age 70?

In most cases, the earlier you can take your CPP the better.

The age at which you decide to take your pension also affects the amount you receive each month. The normal age to start CPP is 65. However you can start receiving your CPP pension as early as 60 or as late as 70. By opting to take your CPP pension early, the pension will be reduced by 0.5% for each month the start date precedes your 65 the birthday to a maximum reduction of 30% at age 60. If you start receiving your pension before 65, you must have stopped working.

By opting to delay your CPP pension, the pension will be increased by 0.5% for each month the start dates surpasses your 65th birthday to a maximum of 30% at age 70.

Am I able to share my CPP pension with my spouse?

Yes … you are able to share your pension with your spouse or common law partner equally if you are at least 60 years old and have both applied for retirement pensions. This could result in income tax savings if one spouse was in a lower tax bracket than other spouse.

What are other benefits that CPP offers?

Disability Pension – To receive a disability pension from CPP you must be disabled according to the terms of the CPP legislation (physical or mental disability which is both severe and prolonged), under the age of 65 and not in receipt of a CPP retirement pension.
For 2009 – the maximum CPP disability pension is $1,105.99 a month.

Death Benefit – A death benefit up to a maximum of $2,500 may be paid to the estate of a deceased contributor.

Other Benefits -Benefits are available for:

• Children of disabled or deceased parents
• Survivor spouse benefits
• Guaranteed income supplement for low income earners

What is Old Age Security (OAS)?

OAS is a federal government program that provides a basic amount of retirement income to all individuals who meet certain residency requirements. The amount of OAS that you receive is not dependent on your past employment or salary. Any benefits paid by the OAS are taxable both federally and provincially.

Who is eligible to receive OAS?

To receive OAS you must be:

• a Canadian citizen or legal resident of Canada
• at least 65 years of age
• lived in Canada a minimum of 10 years after reaching age 18

How much can I expect from OAS?

From January to March 2009 – The maximum OAS pension is $516.95 per month or $6,203.52 yearly. OAS pensions are adjusted for inflation quarterly. In order to qualify for the maximum OAS pension, you must have lived in Canada (after reaching age 18) for at least 40 years.

If you have lived in Canada for more than 10 years but less than 40 years, you may be eligible for a partial pension.

What is the OAS clawback and when does it apply?

The OAS ‘clawback’ requires the repayment of OAS benefits by high-income earners. For 2009, the threshold at which the OAS ‘clawback’ starts is $66,335. If your net income (including OAS benefits) exceeds the threshold ($66,335), 15% of the amount of income above the threshold is deducted from the basic pension. Your OAS pension will be entirely clawed back if your net income exceeds $107,692. For example, if you had a net income of $90,914, your OAS pension would be reduced by 15% of the amount over the threshold. That means that your annual OAS pension will be reduced to $2,516.67 or $209.72 per month.

For more information, visit the Service Canada website.

If you have questions specific to your retirement and would like a review of your investments and when to take CPP, please contact me at janea@janeabellay.com.

I was pleased to read an article in the Financial Post today if couples (or singles!) should use an RRSP or a Tax Freee Savings Account (TFSA) as a vehicle to save for a new home.

In the past Financial Advisors would recommed to their clients, who were buying their FIRST home, to possibly utilize their RRSP under the Home Buyers Plan. Under this plan, you can take out maximum $25,000 of your RRSP as a loan to purchase your first home, tax free. You must repay this loan starting in 2 years from when you take it out, and must pay it back into your RRSPs within 15 years. This is a great tool for someone who is young enough to repay the loan back and who has some savings in their RRSP.

However, the problems some people faced in the past was repaying the loan from the RRSP back. And it is only available to first time home buyers.

Now, I would recommend saving for your down payment in a TFSA. I like the idea of not touching your RRSPs. Your RRSPs should be set up as a pre-authorized payment each time you are paid (remember: PAY YOURSELF FIRST!) and those savings should be kept specifically for retirement purposes.

EXAMPLE 1: Each spouse saves $400/month and has this amount taken from their account automatically on the 1st of each month. If they put it into a non-risky investment earning 3% interest, at the end of 3 years they would have $30,171.69 saved for a down payment on a new home!

EXAMPLE 2: If the couple decides they can incur some risk and saves it into a riskier investment and if the markets turn around and go back up, they could earn up to 8%. They would have $32,644.64 saved for a down payment on a new home. And they would be able to take out these savings TAX FREE!

The major differences between saving for a down payment in the RRSP Home Buyers Plan, or using a TFSA:

1. You do not have to repay the loan you take out from your TFSA; With a Home Buyers Plan you have to pay it back within 15 years.
2. You can use the TFSA for any down payment or expense; With the Home Buyers Plan you can only use it for first time home purchase, no other purchase.
3. If you earn little or no income you can invest with a TFSA; you must have earned income to invest in an RRSP.

Each individual has a different scenario therefore it is advisable to sit down with an Advisor and find out which route is best for you. Your Advisor will be able to show you which plan is more suitable to your lifestyle!

What can you do to keep investing in your future and take advantage of potential growth?

1.  Pay Yourself First -

Do you have a pre-authorized monthly savings plan set up that follows your pay schedule? Setting aside part of your income, one for savings and one for retirement, even if its small amounts will grow significantly over time.

2.  Realize the advantages of NOT having your money at the bank -

If you have all of your investments with the bank, when you die all of your savings, retirement accounts and chequing accounts will have to go through your estate to get passed down to your beneficiares. This can take MONTHS. And trust me your lawyer will take his fees off the top. However if you have your investments and savings with a licensed agent, when you die your savings and retirement funds get immediately passed to your beneficiaries bypassing your estate. This can take DAYS. No fees. Be a positive person and think of your family, be prepared.

3.  Take advantage of Dollar Cost Averaging -

When you invest on a regular basis such as a pre-authorized monthly payment plan, you are taking advantage of different rates in the market. So for the same dollar, you buy more units when the value is lower and less units when the value is higher, averagining out to a lower cost over time. So although the markets are low right now, this is a great time to start up a monthly plan to start saving money. Take advantage of it now that the price is low.

4.  Chip away at your mortgage -

By putting a few extra dollars on top of your mortgage can drastically chip away at that interest and principal saving you thousands of dollars overtime. Or, have you considered a home equity line of credit? Every month you pay down on the principal and the interest is caluclated at the end of the month. You can take years and thousands of dollars off your interest.

5.  Use credit cards wisely -

Never never never carry a balance. Pay it off every month. If you have a balance, make it a priority to pay it off immediatly. Let’s say you purchase a $1,000 Plasma TV. You put it on your credit card that has an 18% interest rate. If you only make the minimum payments, that TV can end up costing you over $1,640. So not only do you get a poor credit rating but you end up paying almost double for your TV by putting in on your credit cards. Waste of money.

6.  Claim all your tax credit and tax deductions -

Don’t leave any cash on the table. Take advantage of what you can claim and deduct. This may include the Children’s Fitness Tax Credit, your RRSP contributions, Tax Credit for Public Transportation, the Energy Savings Credit. For a complete list of what you can claim and deduct, click here.

With the launch of the new TFSA accounts this year, many are wondering if they should contribute to one and what the benefits are. Let’s explore 10 reasons why contributing up to $5,000 per year to this savings account is the best plan for your short and long term savings goals.

1.  Emergency Funds

Emergency funds or rainy day funds, parked in a high interest savings account, guaranteed investment certificate (GIC) or money market fund, if they are non-registered savings will generate taxable income each year. Save yourself some taxes and keep your savings in the same type of account, but switch it into a TFSA to save you tax money.

2.  High Risk Investment Speculation

TFSAs can be a great place to invest in equities and other high risk assets such as speculative stocks or penny stocks. The entire amount of interest you would gain from these investments would be tax free. What if you lose your investment? Beside the value of your investment, you would lose the ability to claim a $5,000 capital loss.

3.  Collateralized Lending

Unlike RRSPs and RRIFs, you can pledge your TFSA assets as collateral for a loan or secured line of credit, which may lead to a lower interest rate than an unsecured line. This is a great advantage especially if your TFSA builds up value over future years.

4.  Protecting Government Benefits

For Canadians with low and modest incomes, the TFSA can help preserve income-tested government benefits since TFSA withdrawls are not considered to be income. For young people who are receiveing GST credit or the Child Tax Benefit, they can protect these funds by investing in a TFSA and having withdrawls anytime. For seniors receiving Guaranteed Income Supplement or Old Age Security, again the funds can be protected in a TFSA. Neither TFSA contributions nor its earnings affect eligibility for the Guaranteed Income Supplement, Old Age Security, the Canada Child Tax Benefit or other government benefits based on income.

5.  Tax Rate Planning

For Canadians with limited funds who are in a lower tax bracket but who expect to be in a higher tax bracket upon retirement (i.e. farmers, selling a business, etc) contributing to a TFSA may be more beneficial. Ultimately as you get into a higher tax bracket before retirement, TFSA money can be moved into an RRSP, tax-free, moving the individual into a lower tax bracket and restoring TFSA contribution room.

6.  Retirement Planning

Taxpayers who cannot contribute to RRSPs — i.e. someone over the age of 71 or with no earned income or with a large pension adjustment — can use a TFSA to invest for retirement on a tax-free basis with no forced minimum withdrawl.

7.  Education Planning

While RESPs are the vehicle of choice of saving for education because of the federal and provincial grants, TFSAs can be another vehicle to save for education.

8.  Income Splitting with Spouse and Kids Over 18

You are permitted to give your spouse or partner funds to open up their own TFSA without having normal attribution rules for income and capital gains apply. You may also give each child over age 18 money to open up a TFSA. NOTE: You cannot open up an “in-trust for” TFSA.

9.  Estate Planning

The entire TFSA will be tax free upon death if you have named a beneficiary, bypassing estate and savings probate fees.

10. Emigration Planning

Clients wishing to emmigrate from Canada can still hold a TFSA. No future contributions can be made without paying a penalty.

There is no doubt this has been a very difficult year for investors. As the economic situation here at home and around the world continues its bumpy ride, we are all left feeling a bit helpless, and concerned about our own financial security and well-being.

To help reassure you, I thought I would take a few minutes to remind you of some of the steps you have taken to protect your assets.

It is at times like these that the value of having a sound financial plan and a disciplined approach to investing is demonstrated. By having a plan, and following that plan, you are ensuring you are making the right investment decisions for the long-term, instead of reacting to short-term market activity and fluctuations.

Designing your portfolio to help meet your long-term financial goals while taking into account your comfort with risk is all part of that plan. Are you really clear about who you are as an investor and the amount of risk you are willing to take on?

How much could the total value of your investment plan go down before you would feel uncomfortable? 10%? 20%? 30%? If 2008 has taught us anything, it is to make sure you are invested in the right funds that you will feel comfortable with when they go down and when they go back up!

With the right strategy you can put together a great portfolio that will allow you to retire successfully whether you retire in 30 years or 5 years.

To ensure this, our firm completes a Portfolio Optimizer of your risk assesment to accuratly determine which funds will put you in a good position to withstand the downturns of the market, while you can still enjoy the upturns.

For example, a portfolio containing more equities than bonds is much more riskier than one containing more fixed-income assets. Also, we know that every 8 to 10 years the equity markets are going to go through some type of drama. So being well invested years before you retire is essential to a well thought out retirement plan.

Getting expert advice is one way to understand the potential consequences of your investment decisions.

29DEC2009 – Looking back on the last half of 2008, it has been a scary time in the market for investors. Some analysts say this has been the worst bear market since the 1930s. Yet, as the holiday season passes, I still see people spending money like its going out of style, and not concentrating on their future.

For 2009, I encourage people to choose the FUTURE! Set yourself up for success by saving and investing now while the markets are low.

I have included a couple of articles of what the analysts are predicting for a 2009 turn around:

• Financial Post – “Five Themes for 2009 & Beyond”
  
• Faisal Laljee – “Top 5 Life Changing Events in 2008″
• Zacks Investment Research – “12 Things to Look forward to in 2009″
• Kiplinger.com – “6 Reasons to Buy Stocks Now”

An RESP can give the next generation a head start at landing a good job and achieving financial security. The key to growing your child’s RESP is to start early and maximize the government grants each year.

For every dollar you deposit to your RESP, the government will add a 20 per cent matching Canada Education Savings Grant (CESG) of up to $500 annually to boost your savings. The grant formula is even better for low-income families.

Click here to read the full article in the Star Phoenix from November 10, 2008

Click here for the full report

• Cancer incidence is rising in women age 20-39
• On the basis of current incidence rates, almost 40% of Canadian women and almost 45% of men will develop cancer during their lifetimes
• On the basis of current mortality rates, 24% of women and almost 29% of men, or approximately 1 out of every 4 Canadians, will die from cancer

Cancer in children creates a disproportionate impact on health, economic and social welfare systems, as a consequence of the loss of young lives. As well, both child and family are affected by emotional trauma and life-long consequences. Families affected by childhood cancer must often provide care for other young children in the home while attempting, at the same time, to navigate their way through the health and social welfare systems. Parents often work less or stop working altogether, which creates financial stress.

REGINA — Saskatchewan has the longest total surgical wait time in the country, says a report published Tuesday. The median wait time for Canadians seeking surgical or other therapeutic treatment has dropped this year to 17.3 weeks compared to 18.3 weeks last year, but Saskatchewan’s wait time rose, said the Fraser Institute report. Saskatchewan’s surgical wait time of 28.8 weeks was the longest in Canada, while Ontario recorded the shortest at 13.3 weeks. Click here for the full article.