Managed Money Reporter Newsletter — Issue 128, September 1997


Editors: Carl Spiess & Allan McGlade



Let ScotiaMcLeod Handle All Of Your
Investment & Life Insurance Needs

By Allan McGlade, CLU

One Stop Shopping At It's Best

With the pace of life getting faster by the day, we believe more and more that people have a keen desire to simplify. One of the ways we can help is to handle all of your investment and insurance needs. While the majority of our clients have a self-directed RSP account, only a few take advantage of the opportunity to use our non-registered investment/savings accounts or our ability to shop the market for the best insurance products.

We have come to the conclusion that the reason for this is that you the client may have not been made aware of our ability to provide expertise in areas other than RSP accounts. We would like to correct the situation by announcing to our clients that, yes, we are willing, ready and able to manage all of your financial planning needs.

Investment Accounts

If you are maximizing your RSP contributions each year and wish to invest additional amounts, an investment savings account should fit the bill. Like a self-directed RSP you can invest in a variety of products such as mutual funds, bonds, GIC's or stocks. Unlike an RSP you are not limited to the 20% foreign content rules. The investment savings account ranks as an excellent alternative to traditional savings vehicles such as bank savings accounts, term deposits or Canada Savings Bonds. You can even set up a monthly deduction direct from your chequing account which provides the benefit of convenience.

Will That Be Term Or Permanent?

An often-overlooked aspect of one's financial picture is the life insurance component. By and large most Canadians are under-insured and/or have the wrong kind of life insurance. Often the extent of life insurance that an individual owns is the coverage that is provided by their employer. Traditionally, the coverage will amount to one or two-times income at most. Today, the average working Canadian with dependents and a mortgage should be insuring for somewhere between seven and ten times income if they want the ones they leave behind to not be adversely affected financially. However, every situation is different and the amount of life insurance should be tailored to meet the needs of the individual.

Once the amount of life insurance has been determined, the mix of insurance type needs to be determined. Like an investment strategy, it often makes sense to spread the risk amongst the different classes of coverage. Essentially, life insurance falls into three different categories. The first and most easy of the three to understand is term insurance. The coverage is easy to understand because it is pure insurance. You pay a yearly premium and for that premium the insurance company guarantees that your beneficiary or estate will receive the amount you are insured for. The upside of this type of coverage is that the initial costs are low. However, depending on the term, the cost of coverage will rise in 1, 5, 10 or 20-year increments. (See table on next page) At some point the cost of the coverage will usually become prohibitive and will be converted to one of the other forms of coverage or dropped all together.

The second type of coverage is the traditional whole life policy or permanent insurance, as it is sometimes referred to. This type of policy provides for level premiums which are higher in the earlier years than what is required. The excess premiums accumulate within the policy and are used to fund the insurance costs in the later years when the yearly premiums are no longer sufficient. The upside to a whole life policy is that the premiums are fixed. Also, the excess premiums accumulate tax deferred and will normally grow at a faster rate than the insurance costs which means there is a cash value that can be accessed, or the death benefit can be increased. Alternatively it is possible to stop paying the annual premiums at some point and have the policy fund itself internally. This is not a guaranteed feature of the contract however. The downside is that the premiums in the earlier years are higher than need be and accessing the guaranteed portion of the cash values must be by way of a loan.

The new kid on the block is Universal life insurance. The product was developed in response to the advisors who recommend buying term and investing the difference and the public's need for greater overall flexibility of their insurance programs. The policy provides for both a minimum and a maximum premium. The minimum is required to meet the insurance costs. Any additional funds over the minimum up to the maximum would be deposited into a tax deferred investment account. This is a key feature to universal coverage. The investment options within the contract range from daily interest, GICs and market indices (TSE 300, Scotia Capital Markets Universe Bond Index, Morgan Stanley World Index, etc.).

The product also provides premium flexibility. If the insured wants, they can stop making premium payments so long as there are funds in the investment account.

A word of caution is that not all Universal contracts are created equally and it is important that you do your homework. Better yet, why not let a specialist shop the market for you.

A final key point, all death benefits from a life insurance contract are tax free.

In the coming months I will provide examples of life insurance being used as a financial planning tool. In the meantime the following table provides examples of the annual rates we are able to offer for $250,000 of ten-year term insurance at various ages. ("ns" means non smoker)

Annual Premiums for $250,000 of Term Life Insurance
Male, 30 ns$237.50Female, 30 ns$167.50
Male, 35 ns$267.50Female, 35 ns$197.50
Male, 40 ns$340.00Female, 40 ns$267.50
Male, 50 ns$810.00Female, 50 ns$532.50

Summary

We are in the business of helping people invest. It doesn't matter if the money is going to an RSP or not, we are confident that we can develop an investment strategy to meet your needs.

If it has been a while since you last looked at the amount and/or type of life insurance you own, why not give us a call and we will be happy to do a needs analysis for you, or simply explain to you what you may already own. The analysis will result in one of three conclusions: one, you are over insured: two, you are under insured: or three, you are adequately insured. We look forward to helping, so call us at 416-862-3066 or 1-800-387-9273.

Fund Commentary - Look for 10 year returns to improve shortly

As we examine the long term mutual fund returns over the last 10 years, a few items are worth noting. First, there are very few funds which have lost money over a 10 year period. Also, if we remember the events of October 1987, shortly, we will see 10 year returns improving considerably. Once we drop off the market highs of August & September 1987 and start calculating 10 year returns from lower levels, 10 year numbers will begin looking even more impressive. Look for the fund companies to start focusing on their long term performance once November rolls around.

Editors

 



Contact Us

T.  416.863.RRSP (7777)
     1.800.387.9273
F.  416.863.7479
E. carl.spiess@scotiawealth.com
    allan.mcglade@scotiawealth.com

ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.

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The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.