Managed Money Reporter Newsletter — Issue 130, November 1997


Editors: Carl Spiess & Allan McGlade



GICs With Guts, Fee Elimination, Quicken Update, LSIFs Tax Savings & Insurance Info

By Carl Spiess, MBA

The Potential for Stock Market Gains with all the Security of a GIC

As you build your investment portfolio, consider Stock-Indexed GICs! With a rate of return tied to the performance of the Toronto 35 Index[TM], or other G7 World Market indices, the Stock-Indexed GIC offers you all the security of a GIC plus the upside potential of the stock market.

These investments offer a safe way to potentially higher growth. You have security of capital as your principal (the amount you initially invest plus any interest earned until the issue date) is secure. Repayment of principal is guaranteed by the issuer and covered by Deposit Insurance.

Lets look at the BNS 2 year Indexed GIC. The return on your Stock-Indexed GIC is based on the increase in the Toronto 35 Index[TM] over a two-year period, exclusive of dividends. You will receive a rate of return equal to the higher of 0% or the percentage increase of the Toronto 35 Index[TM], to a maximum of 20%, over the two-year period from the issue date to the maturity date.

We can also help you make your own. Buy a $10,000 2 year stripped bond for $9,300 today. Invest the remaining $700 in an aggressive equity fund or long term call option, and you will have the same result: guaranteed principal, and upside potential.

On the GIC though it is all conveniently packaged. Principal and any growth earned will be paid in full at maturity. Since the payment counts as interest, these are better held in a RRSP or RRIF. As mentioned, we have several variations of these GICs available, so please call us for more information.

Switch Fees Eliminated!

Effective December 1st, ScotiaMcLeod is waiving the nominal $50 fee we previously charged to discourage mutual fund switching. Clients can now switch between funds within the same fund family at no charge. ScotiaMcLeod still reserves the right to charge up to 2% in certain circumstances as outlined in fund prospectuses to discourage unnecessary switches.

The $20 fees for swapping securities into and out of a RRSP or RRIF from a cash account have also been eliminated.

We will be using these new no-cost services to help make minor changes in investors' accounts to make sure that your portfolio is properly balanced.

View Your Portfolio Online Using Quicken 98

As mentioned last month, if you have internet access and Quicken 98, you can view and download your SMI accounts on-line. Visit http://www.scotiacapital.com/English/PrivateClient/AccountAccess/ for details. New users also get a free month of Bellcharts fund software. We are proud to be the only brokerage firm currently offering this access through Quicken.

Annual LSIF Review

Looking for an extra $1,050 to save from your taxes? Consider a labour sponsored fund this year. Once again, we have enclosed our annual review of labour funds. These funds are quite appropriate for up to 10% of your total account value. Please call us at 1-800-387-9273 or 863-RRSP or e-mail us for details.

Will That Be Term Or Permanent?

By Allan McGlade, CLU

In September's MFR we informed you that we are capable of taking care of your life insurance needs. Since then we have received several calls for insurance reviews and/or quotes. Invariably, the question of whether term insurance or permanent insurance is the better product is raised.

Depending on who you talk to, you can hear convincing arguments for either product. As with most things, the situation is the boss.

The answer to this question is not straightforward, as it depends on several factors. In determining which product is appropriate you need to consider why the insurance is being purchased, how long you expect to own the insurance and your overall financial position. Your tax bracket is also a consideration. The higher the marginal tax bracket, the more attractive permanent insurance becomes.

Pay Me Now Or Pay Me Later

Initially, premiums for term insurance are always lower than the premiums for permanent insurance. However, as time passes the premiums for term insurance increase, eventually exceeding the annual premiums for permanent insurance.

Another consideration is that typically, term insurance is not renewable beyond a specific age. Eighty seems to be the magic age with most policies, however some do provide coverage for longer periods.

How then do you determine which coverage to buy? The solution is to perform an interest adjusted cost analysis of the expected future premiums and future cash values, if any.

Example

Our clients, Jim & Gail are in their mid thirties. The female spouse has a need for an additional $250,000 of coverage to replace her income contribution to the household. The youngest of the two children is three, therefore chances are good that the coverage will be required for at least twenty years to satisfy their estate liquidity needs and perhaps even longer to satisfy future estate preservation goals.

Gail's health is excellent, so she will be able to qualify for any insurance company's preferred rate.

A leading life insurance company will insure our client with a ten-year term policy for an initial premium of $260 with renewal premiums in ten-year increments of $595, $1,332.50 and $3,365. The premium for the permanent insurance in this instance (we used a Term to 100 product) is $780 per annum.

If we assume that the difference in the premiums can be invested in an alternative taxable investment at 6% for example, and the clients top marginal tax rate is 41.3%, the break even point for the two policies is age 67. So if our client is planning on maintaining some or all of the coverage beyond age 67, a permanent policy will provide better value in the long run.

Another option for our client is to compare the features of a Universal Life product against a term plan. If the client wants to 'quick pay' the policy or shelter investment returns from annual taxation on non-registered money, a Universal Life policy just might fit the bill. What is meant by 'quick pay' is depositing more premiums in the policy in the early years than are required to fund the immediate insurance costs. The excess funds then accumulate within the policy, usually on a tax deferred basis. At some point in time the accumulated funds in the policy will generate enough income to cover the future insurance costs, and new deposits can cease. A real benefit to this strategy is you begin to use pre-tax dollars to fund the insurance expenses versus after-tax dollars. The time frame can be as little as three years depending on your rate of return and the structure of the insurance costs.

Companies will not guarantee the payment period under this concept. However, if you choose a company that has guaranteed their policy's expenses, and you use a conservative rate of return the concept of 'quick pay' should work without any unwanted surprises.

The interest adjusted cost analysis is also appropriate when comparing the concept of 'quick pay' against the purchase of a term plan.

We will introduce other concepts in future issues. In the meantime, why not let us advise you on your personal life insurance needs. We will be happy to shop the marketplace for the product and premium that makes the most sense for your situation.

 



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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