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Times Advocate, 1995-12-28, Page 8ge Times -Advocate, December 28, 1995 IT'S TIME TO START PLANNING NOW FOR A FINANCIALLY SUCCESSFUL 199h Insurance - buy term and invest the rest "Buy term and invest the rest," may make a lot of sense - if you really do invest the rest and if your investments work out well. Whole life insurance provides permanent protection for a level premium. As the result, the initial premium outlay is nigher than for term insurance, which provides protection for a limited period of time only. Endowment insurance is more expensive than whole life or term because, for a level premium, it guarantees not only that the face amount will be paid at death, but that a certain amount - usually the same as the face amount - will be paid at a specified date (in twenty years, at age sixty-five, etc.). In other words, it is an insured savings plan, and it should be used only where a savings objective takes pri- ority over the need for insurance protection. Unfortunately, a lot of confusion has surrounded the nature of the whole life contract because more life insurance salesmen have been trained to explain it as a contract which is split into a protection por- tion (the death benefit) and a sav- ings portion (the cash surrender value). It is true that a cash reserve is created to meet the commitment to provide permanent protection for a level premium. But that cash re- serve is available to the insured only if he gives up all or part of his protection, either permanently or temporarily. Term versus permanent - the continuing controversy A popular argument in favor of term insurance is that your need for life insurance coverage really isn't permanent. As you get older, pay off your house, and watch your kids leave home, you need less in- surance protection. In the meantime, say the propo- nents of term insurance, if you in- vest the difference in the cost of the two kinds of coverage, you should be able to earn a better return than you will get with the whole life pol- icy, thereby accumulating enough money to replace your term insu- rance when it runs out. Besides,.if you ever decide that you need permanent life insurance, you can usually convert your term insurance when it runs out. The counter -argument is that, even if insurance is not permanent- ly necessary, it is a permanently de- sirable part of your estate. It allows your survivors to keep what you have accumulated and still have money to pay funeral expenses, le- gal costs, and taxes -- without hav- ing to liquidate investments or as- sets, possibly at substantial losses ;n value. Although it is possible to convert most term policies, the proponents of whole life point out that this will require a dramatic increase in pre- mium. That kind of extra expense can be a burden for people who are retired. The fact that people are liv- ing longer means that they are more likely to outlive their term insu- rance contact. Because women are living longer than men, the chances are increasing that a widow will need income for a longer period of time after her husband's death. The majority of death claims are on people over sixty-five. But the real crux of the argument between advocates of the two poli- cy types still goes back to the rela- tive rate of return on the extra pre- mium you put into permanent insurance and how much you could earn investing the same amount separately. The rates of interest stated in .your permanent insurance policy are low. But they are the minimum rates required by government in es- tablishing actuarial reserves and bear no relationship to the return the policy may yield. Although the effective rate will vary from policy to policy and company to company, it is fair to say that molt policies will earn from 5 per cent to 6 per cent compound. The rate of return is smaller than you can get on guaranteed invest- ments in the market, but other fac- tors have to be considered when comparing results. On normal int - vestments interest is generally fully taxable in the year it is earned. The cash -value element in a permanent life insurance policy is taxable only when the policy is disposed of priur to death, and then only where the cash proceeds are greater than the total premium dollars paid into the policy. This deferral of income tax liability becomes increasingly im- portant as your income grows and your marginal tax rate escalates. But even where you can earn a greater net return on non -insurance investments, you won't earn it un- less you actually make those invest- ments and stay with them. A lot of people don't. Instead of following the policy of "buy term and invest the rest," they "buy term and spend the rest," which at the end of the line may become "bye, bye tern, and regret the rest." The fact is that most Canadians still arrive at retire- ment with only minimal savings. The best rule is to listen carefully to both sides of the argument, then make your own decision based on your total financial picture and your particular investment opportu- nities, and abilities. For most people, the right deci- sion involves buying a combination of the two kinds of policies. Terns coverage is ideal for some specific purposes such as paying off your mortgage at death. You can buy policies that decline in value as the outstanding principal on your mort- gage at death. But using whole life policies to provide permanent level premium protection and a cash re- serve for emergencies still makes sense for most Canadians. Preserving your RRSP funds at death Most people name their spouse as the beneficiary of an RRSP. If the RRSP is in the payout stage and the payments are to continue after death the spouse would receive the continuing payments. The tax on the payments would be paid by the beneficiary for each year that the payments are made. if the spouse is not named as beneficiary, the full vaiue of the remaining payments, if any, is taxable in the final return of the deceased. If the RRSP is in the accumulation stage and the owner dies, the income tax legislation provides that if the spouse is named as beneficiary, the spouse can transfer the full value of the plan to his/her RRSP on a tax-deferred basis. The funds will then accumulate in the survivor's plan and not be taxed to the deceased. But what happens if you name your estate as beneficiary or die without a Will? Are all of your RRSP proceeds taxable in your final return? The legislation provides tax relief in such circumstances provided certain conditions are met. If the conditions are met, your spouse and your legal representative or administrator can file a joint election designating that the RRSP proceeds pass to your spouse using Revenue Canada's form T2019. The effect of the election is to re -direct RRSP proceeds away from the estate and to your spouse so that the tax-deferred transfer of your RRSP proceeds to your spouse's RRSP would be available. This legislation was added because many situations had arisen wherein RRSP proceeds became taxable to the deceased because his or her estate had been inadvertently named as beneficiary or because there was no Will. Even though relief is available, we suggest you name your spouse as beneficiary if you want the proceeds to pass to him/her. This avoids the necessity of relying on certain conditions being met in order to effect the tax-deferred transfer. • Compliments of Mutual Life of Canada and mutual Investco Inc. Investing the child tax benefit Revenue Canada and Revenue Quebec have a policy of allowing a parent to invest the child tax credit for the benefit of a child. The inter- est earned on the investment may be considered the income of the child and not of the parent. When the parent receives a T5 for the interest in his or her name, the parent need not include the amount in income, but may include it in the Tax Re- turn with an expla- nation written on it to the effect that the interest is from a child tax benefit investment. Since the amounts are relatively small, it's unlikely the annual inter- est income will exceed the child's personal credit. Thus no tax return need be filed on behalf of the child since there was no tax payable by the child. The upshot is that no tax may be payable on the child tax benefit earnings. The upshot is that no tax may be payable on the child tax benefit earn- ings. . Trus# H ec IR BLOCK ■ We provide thorough and accurate service. ■ We are reasonably priced. ■ We are conveniently located. 476 MAIN ST. EXETER • 235-1153 LONG DISTANCE 1-800-524-0231 CLOSED UNTIL JANUARY 22 96 It's Why Canadians return RRSPs - easy answers to common questions By M.H. Parmu Are you one of the 70 per cent of Canadians who have bought at least one lottery ticket this year in the hopes of funding your retirement? If you are, why gamble your money away when you can invest it in a Registered "Retirement Savings Plan (RRSP) and make it work for you. RRSPs are government - registered savings plans which en- courage you to save for your retire- ment. Why should t buy an RRSP? In addition to helping you pro- vide for a retirement income, there are two important tax benefits. 1. An RRSP reduces your income tax at the time you make a contri- bution. 2. The money earned by an in- vestment in an RRSP is not taxed until you withdraw it. These points are impressive! Ca- nadian RRSPs are the most gener- ous tax breaks for working people in the world. What more can you ask for - you save on income tax every year you contribute and you accumulate tax-deferred savings for your retirement. "One of the advantages to receiv- ing your RRSP proceeds at a future age in the form of "retirement in- come" is that you will probably be in a lower tax bracket," says Vic Anderson; a RRSP specialist with The Co-operators insurance and fi- nancial services. But what about the government pension plan? It's no secret that the government is making a number of cutbacks to our social programs and the Canada Pension Plan is no exception. By the year 2010, more than 50 per cent of the population will be over the age of 65. What this means to you is that with fewer people work- ing and contributing to the govern- ment pension plan, there will sim- ply not be enough money to finance your retirement. That's why it makes sense to prepare for your re- tirement now with an RRSP. I'm young. Why should I buy an RRSP now? Saving for retirement is some- thing everyone knows they should do, but keeps putting off. There is no better time than now to buy an RRSP. The combination of time and compound interest make RRSPs a very wise investment. How much can I contribute? Each year, Revenue Canada will notify you of the amount you can contribute for that year. To be eligi- ble for this tax year, contributions must be made no later than 60 days following the end of the year. I never seem to have money at RRSP time. This is a common problem. But there is an easy answer to this di- lemma! Many institutions allow you to contribute to your RRSP in regular monthly installments, rather than in a lump sum payment once a year. Not only is this easier to bud- get for, it increases the value of your RRSP compared to contribu- tions at the end of the tax year. And you don't have to wait for your in- come tax refund'. "When you make monthly pay- ments in an RRSP, you can obtain forms which will allow the govern- ment to reduce the income tax de- ducted from your pay cheque, rath- er than receiving a lump sum return the following year," says Anderson. Can I set up an RRSP for my spouse? Yes. You are allowed to contrib- ute to a plan your spouse owns and deduct these contributions from your taxable income, provided your total RRSP contributions do not ex- ceed your own RRSP limit. This al- lows both of you to maximize your combined pensions at retirement and qualify for the annual pension tax credit. Should I buy an RRSP through a life insurance company? - There are several benefits to pur- chasing your RRSP through a life insurance company? 1) You have the option of con- verting your RRSP to a lifetime an- nuity. This option guarantees an in- come for as long as )iou live. 2) Protection Against Seizure: In most cases, if you name a spouse, child, grandchild or parent as bene- ficiary, the benefit, is free from claims by your creditors. 3) In the case of death, the funds will pass directly to your named beneficiary, thereby avoiding costly and lengthy delays. 4) Most companies are members of The Canadian Life and Health Insurance Compensation Corpora- tion (CbmpCorp). CompCorp ad- ministers the Consumer Protection Plan which was instituted to pro- vide protection to tilt policyholders of member companies. RRSPs are covered by the Consumer Protec- tion Plan. 'To help you with your retire- ment planning, The Co-operators has produced a retirement booklet with valuable advice on how to plan your retirement budget, infor- mation about RRSPs, inflation fac- tors and more. For your free copy, please write to: The Co-operators, Retirement Booklet Offer, Priory Square, 8E, Guelph, Ontario NIH 6138. More land for principal residence The legislation provides that your principal residence and up to one half hectare of surrounding property (this is roughly one and a quarter acres) isnot subject to income tax on capital gains. As well, the excess of land over one-half hectare can be free of tax if if you can establish that the additional property is necessary for the use and enjoyment of your residence. In the past, some municipalities have passed legislation introducing minimum lot sizes well in excess of thrTine-half hectare limit. The result has been that certain taxpayers have been required to pay a tax on capital gains on property in excess of the one-half hectare limit because they could not establish that it was necessary for the use and enjoyment of the residence -- indeed, the only reason for the additional land was to satisfy the municipal requirements. This rule was seen to be . restrictive and annoyed a taxpayer to the extent that a case was pursued through trr the Federal Court of Appeal. As a result of the taxpayer winning the appeal, the Minister of National Revenue has instructed the Revenue Canada Assessors to consider the minimum lot sizes imposed by municipal authorities when determining if a property qualities as a principal residence. • Compliments of .Mutual L,fe of Canada and ,nunw! investco Inc. Air Sofsfaced• 43 Financial Need Analysis ,i Insurance Planning (Life, Group and Disability) itz Group RRSPs and Pensions G.I.C.'s Gill 1ME1. ti PNM. / Tax Deferred Savings Plans (RRSPs, RRIFs and Annuities) tt� Retirement & Estate Planning ,4 Investment Funds In today's financial environment, things can get very confusing. More and more people appreciate the assistance of an experienced professional to understand their life insurance and retirement options and help them reach their financial goals. Take a few moments and see for yourself. Then, you decide. MARK J. MCLLWAIN Account Representative 0Mem (519) 235-1344 183 MAIN STREET SOUTH, EXETER, ONTARIO • 34-1 H omuth, Taylor & Partners Chartered Accountants Our firm can ensure your financial strategies are tax effective by being part of your team of advisors. Effective tax planning incorporates your personal circumstances and needs with prevailing government tax legislation. We can assist in the selection and installation and training for your computer accounting system and financial records. In addition we provide professional advice to clients in developing effective financial business and estate plans, and regularly act as a sounding board for our clients on the decision required to be successful in today's changing business and financial environments. HAVE A SAVE & HAPPY HOLIDAY SEASON PART['BRS Stu Homuth, C.A. Brian 'Baylor, C.A. Ken Pinder, C.A. John McNealy, C.A. Ron Godkin, C.A. > t raft re 71 Main St. N. Exeter, Ontario NOM 1S3 (519) 235-0101 - Fax:235-3211 • • A