Insurance companies are smrt

Dear Mr. Reynolds


We have returned the enclosed application due to a lack of Void cheque with which to set up the automated banking, please provide a void cheque and return to our office at your earliest convenience

You mean like the one I stapled to the application, like the one which someone in your office, removed, stamped "received" and then taped to the back of the same page? You mean like the one that was plainly obvious in the package you just returned to me as soon as I looked at it. You need a void cheque just like that one? Hmm, I'm stumped, I don't know where I will ever find a cheque like that... FML

Big Brother

So my dad, Rick, got the following email from Standard Life today...

Hi Rick,

I've just been in touch with your assistant Kate. There has been some positive conversations here at Standard Life as a result of something your son wrote in his blog. I would very much like to discuss this with you when you are able. I would also like to introduce myself to you as one of your primary contacts at Standard Life.

My phone number is: XXX-XXX-XXXX

Best regards,

Tim Madokoro

At first I was worried I might have said something Standard Life considered libelous, and that I was going to be sued by their pack of hungry lawyers, then I re-read the email and found the words "positive conversation" and I felt a little better, but confused. 

Apparently, Standard Life uses Google to tracks every time the words "Standard Life" appears on the internet. This was in regards to my post on Transamerica seg funds, which was just a quick post I made on my iPhone while waiting in the ferry lineup. I had a nice chat with Tim, who basically just said thanks for the recommendation and that I have been "noticed" by head office. A tiny blog post about a competators product, with a one line recommendation which had another competator listed first gets me noticed. I can only imagine what this post will generate as I have mentioned Standard Life, like a dozen times.

I'm not sure if this is awesome, or a little bit creepy. I'm being watched. Rest assured dear loyal readership of....um... Mom...? That I shall remain impartial and unbiased, unless I magically qualify for that upcoming convention in Prague. /sarcasm

Standard Life is a good company, it's nice to see they do take notice of what the advisors on the ground think and say. Most insurance companies are deaf and dumb when it comes to listening to their sales teams' advice. Now if only they would add the inception date and maturity guarantee dates to their investment statements. *waves* Hi Tim, Standard Life Head Office and Google.

Benefits Plan Taxation

Benefits are typically tax preferred, the government likes private insurance because it takes strain off of the public plans. Canada Revenue encourages businesses to provide benefits by making them cheaper thanks to tax writeoffs and exemptions.

I have a handy article I include in all my group renewals, which provides all the taxation info you might need for your benefits plan. Taxation of Benefits

		Employer paid premiums	Benefits received by Employee
Health Care		Tax Deductible	Non-Taxable
Dental Care		Tax Deductible	Non-Taxable
Critical Illness*		Tax Deductible	Non-Taxable
Life Insurance/ AD&D		Tax Deductible	Taxable
Short and Long Term Disability		Tax Deductible	Taxable

*Critical Illness is currently being treated as a "Health Care" benefit  Canada Revenue has not ruled on its official tax status and while we believe this tax treatment will be honored Canada Revenue could change their mind in the future.

Life Insurance and Disability Insurance benefits are considered Taxable by CRA, because they are paid as income. If an employer paid any portion (even 1 cent) of a disability premium, the benefit becomes taxable. For this reason we always recommend that the employee pay 100% of their Life and Disability premiums. This is usually fine if there is a 50/50 cost sharing arangment unless health and dental waivers are involved, see example C in the attached article. In that case you can add the required amount to an employees T4 as "extra income" and make the benefit non-taxable. 


In cases where benefits are 100% employer paid, we will increase the disability benefit to adjust for taxation. Usually this means increasing the benefit formula from 66.7% of pre-disability income to 75% of pre-disability income. The after tax benefit amount will be similar, however, this is a more expensive method as it involves higher insurance volumes therefore higher premiums. 



Taxation of Benefits 

E.O.&E.

Disability Insurance Stats

I got an interesting marketing piece from Canada Life today, I just wanted to share some of their Disability Stats. I use a lot of Great West Life disability policies, which are essentially identical to Canada Life, as Canada Life was purchased by Great West Life a few years ago and their product lines were merged.

As you can see a huge proportion of claims are from Mental Disorders, primarily Depression/Anxiety. The other massive group is Musculo-Skeletal, which are usually injury related, mostly back injuries.

A few more examples of typical claims. 

Disability can effect people of all ages, in all occupations, for a large variety of reasons and for a number of years at a time. I think Disability Insurance is really important, and often gets overlooked.

Google analytics says

People are finding my blog while searching for info on Transamerica Segfunds, specifically if they are safe.

Some back story. Transamerica sold a LOT of seg funds right before the dot com crash. Those funds are all negative over the last 10 years. Seg fund maturity guarentees are 10 years. So all those NASDAQ funds are now at maturity, which means Transamerica has to pay back 100% of the original deposits. Ouch for Transamerica but great for clients.

So if you own a dot com era Transamerica seg fund you might be in for a nice maturity guarentee cheque.

Transamerica has had to reserve a lot of capital to pay these guarentees so they might not be the best place to invest. They still have Assuris guarentees of $100k per account, so they are safe, but they might get bought out or merged if they keep taking big losses. Personally, I would get my maturity guarentee and invest the money somewhere else. I like Industrial Alliance Pacific and Standard Life.


- Posted using BlogPress from my iPhone

Thank god I'm covered

I have been doing a lot of Disability Insurance quotes lately. I think it is related to the recession, specifically the unemployment numbers. I beleive people are seeing all of these layoffs which gets them thinking about their own job security. It is not a big stretch to go from worries about being laid off, to worries about being disabled and being unable to work even if you have a job.

Disability Insurance comes in all sorts of flavors, all different price ranges and have a wide variety of options. If you are thinking about disability insurance I can certainly help you find the right fit.

I work with small business owners and sole proprietors a lot, I have been doing a lot of policies set up like what i will describe below.

Policy : Great West Life - BossPlus Non-Cancelable Disability Policy
The policy is underwritten by Great West Life, which has an office in town, a lovely Living Benefits specialist named Helen Murphy, who can solve any problem and helps tremendously getting difficult policies placed. Great West Life has solid rates, which easily compete with the likes of RBC, and Manulife, two other companies with strong disability products.

The BossPlus policy has a lot of good features built in and is designed for business owners. One of my favorite built in features is the cashflow benefit. It is hard to just jump right back into your business after being disabled for possibly years. You have to let your clients know you are back, or find new ones. Those first months back are going to be tough. Great West Life will pay you a portion of your benefit for the first few months while you are returning to work to make things easier for you.

The Optional Features that I try and add to every policy are:

Enhanced Partial Disability
Either Regular Occupation Extention or Own Occupation Extention.

The Enhanced Partial Disability benefit pays you a pro-rated benefit if you suffer a partial loss of income or if you can only work part time due to disability. Often business owners will still answer the phone, do the books and try to manage from afar even if they are totally disabled, without this option, if they work at all they loose their benefit. But, by adding this option the business owner can keep their business alive while we pay them a prorated benefit to make up for their loss of income.

Regular Occupation and Own Occupation, have their differences but their goal is the same, keep your benefit coming even if you can do another job. With Regular Occupation, if you can work in another job but choose not too, you still get your benefit. With Own Occupation, you can work in another job, as long as it is a different career than before, earn a salary and STILL receive your benefit. I like Own Occupation for a business owner, because often they might be able to do another job, but are unable to run their own business. With this option they can take a job they might enjoy, earn a living, and still receive a benefit simply because they are unable to run their own company.


Premiums
Pricing, is influenced by the options above but mostly is tied to benefit amount, elimination period, and benefit length. Obviously the larger the benefit the more its going to cost.

The Elimination Period is the length of time you must be disabled before the benefit starts, it typically ranges from 30-365 days. Most employee's set their elimination period to 120 days, as EI runs out at 119 days. This way they jump right from EI to LTD so they never go without an income. Business owners don't have EI coverage, so the choice isn't as simple. I typically recommend 91 day elimination periods, most people can go 3 months on savings, or drawing from the company. 91 days is also the sweet spot for premium, dropping to 61 days adds 30% to the cost, waiting the whole 120 days only saves about 3%.

Benefit length is also up for debate, but most business owners love what they do and don't want to do anything else, most of them choose coverage to age 65. If the benefit is going to last more than 10 years I also add a Cost of Living Adjustment (COLA) which increases the benefit amount with inflation.

So whats it all add up too?

Name: John Doe
Age: 40
Gender: Male
Occupation: Accountant (class 4A)
Monthly Benefit: $5000
Elimination Period: 91 Days
Max Benefit: to Age 65
Options: Cost of Living Adjustment, Enhanced Partial Disability, Own Occupation Protection.

Monthly Premium: $185.54

Sample Illustration

It seems expensive at first but if he were disabled in the first month of the policy, and stayed that way till age 65, the insurance company would have paid him 2.5 Million dollars over the life of the policy. Furthermore, if he is getting a benefit of $5000 a month, he has to be earning close to $10,000 per month to qualify for that benefit, which means the premium is a little less than 2% of his income. Who wouldn't trade 2% for 2.5 Million? especially when you would need it the most.


One last little anecdote. We have a client who kept refusing the buy disability insurance, we finally convinced him he needed it, he was a motorcycle rider after all. About 6 months after getting the policy he was riding his bike down the road, hit a bump, flew over the handlebars, and while in mid air the only thought in his mind, or so he tell us, was "Thank god I'm covered". He broke both his wrists. His policy paid him buckets.


***Edit: I just re-read the post at home. Ugh, so many grammatical errors, I'll fix it later promise.

Enjoy attending those Chamber of Commerce meetings?

What’s that? You don’t go? Then why are you paying upwards of $400 a year for the privilege of attending? Benefits plan you say? Let me show you something...

Most of the businesses I talk to who have a Chamber of Commerce benefits plan don’t go to the meetings, don’t take advantage of the services provided by the chamber, they pay the annual fee just so they can get into the benefits plan.

For a 2-5 employee company the Victoria Chamber of Commerce charges $448.38 per year to be a member. Why pay over four hundred dollars a year when we can do the same thing without a membership fee.

I have a plan which was designed specifically to compete directly with the Chamber of Commerce plan. On average we are 6-8% less expensive than the chamber for exactly the same benefits. We provide 100% pooling just like the Chamber, so you receive stable renewal rates. And no membership fee.

Want Proof?
Behold, Chamber of Commerce Plan (confidential information redacted) actual invoice

Total monthly premium $345.78
Total annual premium $4,149.36
Total annual premium plus membership fee $4,597.74

Sirius Benefits Plan

Total monthly premium $299.46
Total annual premium $3,593.52

You save $46.32 per month

$555.84 per year

PLUS the $448.38 charged by the Chamber for membership.

TOTAL SAVINGS $1050.54 per year, 22% savings.

If you have a Chamber of Commerce plan and you don't go to the meetings,  I can save you a bunch of money. Even if you do enjoy your membership, I can still save you about 13% like the example above. 

Check out my company website www.hmrinsurance.ca or call me toll free 1-888-592-4614

HST and your investments

I received the following bulletin from Mackenzie Financial on the effect of the new Harmonized Sales Tax (HST) on investments such as Mutual Funds and Segregated Funds.

How does Harmonization affect
Canadian mutual fund investors?
Mutual fund investors pay a management fee on their
mutual funds in order to obtain the benefit of professional
money management advice and other services.
Since professional money management is considered a
service, mutual fund investors currently pay 5 percent
federal GST on the management fee and certain
operating expenses of the investment funds. These costs
are included in the Management Expense Ratio (MER) of
each particular mutual fund.
As a result of the HST, investors will now be required to
pay an additional provincial tax on management fees (and
certain other expenses of the MER) where it did not apply
previously. Therefore, this will result in a proportional
increase in the MERs of mutual funds and an additional
cost to investors.
Higher taxes on mutual funds will result in lower returns
to investors. Using Ontario as an example, assume a
mutual fund has a pre-tax MER equal to 2.28 percent1
and earns an 8 percent rate of return.
Under the current rules, the MER is equal to 2.39 percent
when GST is applied2. In this case, the investor would
receive a net return of 5.61 percent. If the HST legislation
is approved, the MER will increase by a further 0.18
percent to 2.57 percent. As a result of the additional
taxes imposed by the government on mutual funds, the
investor’s return would be reduced to 5.43 percent. In
other words, this tax increase imposed by the government
will directly result in a lower net return to the investor.
The following chart summarizes the implications to
investors on investments returns because of HST.

In real dollar terms, assume you have a mutual fund

portfolio with a value of $100,000 and it earns an

8 percent rate of return annually. Using the figures

above, you would be subject to additional taxes

of approximately $194 at the end of the first year,

assuming the fee is charged at the end of the year. In

addition, since the tax is applied annually based on

the market value of the investments, the annual dollar

amount may increase over time.

As the chart below illustrates, the cumulative taxes over

a 10-year period as a result of the HST is approximately

equal to $2,460, assuming the investment grows at an

annual rate of 8 percent per year over 10 years.

TL;DR
HST will eat an additional 0.16% of your investment return
HST will cost you $1,608 extra when using the 10 Year, $100,000 example above.

Original Bulletin

Corporate Insured Retirement Strategy

Who likes paying taxes?

Yeah me neither... In retirement a lot of people are looking for ways to get at their money while paying the smallest amount of tax possible. Income streams are king in retirement, if you can pay less taxes you get more income. Drawing an income from an RRSP or RRIF has a heavy tax burden but is the only option for most people. If you are a business owner you have a strategy available to you that most people don’t have. It takes time to implement so you might want to start now.

Many business owners will retain earnings in their company as a natural tax shelter. Getting the money out can be difficult as it needs to come out in salary or dividends which means lots of tax is payable. Another issue with retained earnings is that once you have $400,000 of retained earnings in your company you have to start paying a “passive income tax” of 50% on that amount. Rather than pay this passive tax we start to deposit retained earnings into a Universal Life policy, the policy provides Key Person insurance which is probably needed, as well as holds a tax sheltered account exempt from the passive income tax.

Let’s assume a business owner shuffles $15,000 a year for 10 years into a universal life policy. At the end of 10 years, the policy has a death benefit of $319,333 and a cash value of $187,699.

Red is your cash, yellow is the growth of your cash, blue is the combination of the life insurance, deposits and growth.

The business owner goes to a bank and asks to borrow $187,699 in the form of a Line of Credit. The bank says it needs collateral, no problem the businessman has exactly $187,699 in his corporate life insurance policy. The company, which he owns, will even sign as a guarantor for the loan. The bank is happy and agrees to the loan. The bank stipulates it will call the loan if it is 90% of the value held in the life insurance policy. Since the investments in the life insurance policy will continue to grow the bank will often agree to extend further credit in the future. Interest on the Line of Credit is capitalized, rather than paid, it is added to the balance of the Line of Credit. You never need to pay an interest payment until the end of the loan.

Now I have fancy software that will calculate how much I can draw each year. The final number depends on life expectancy, rates of return and interest rates. A modest calculation show that starting at retirement, age 66, I can draw a TAX FREE income of $12,451 from the LoC every year till age 90. If all goes according to plan the loan balance will equal $554,233 at age 90, this is 90% of the value of the life insurance policy. At this point the bank can call the loan, this is a good time to die.

Once you kick the bucket, your life insurance policy pays out $709,538 in benefit, the bank gobbles up their half million and your heirs are left with a little over $150,000.

The linchpin of the whole exercise comes back to taxes, income and dividends are taxable, a loan isn’t. The $311,275 you drew drawn from the Line of Credit over the years is 100% tax free, furthermore the interest on the loan is potentially tax deductible (obligatory, refer to your accountant or tax specialist).
Sure you had to pay the insurance premiums and the interest but that is still $158,000 less than the taxes.
The Line of Credit is paid off with the life insurance, which comes in tax free. The income drawn from the Line of Credit was spent tax free, the retained earnings in the company were sheltered from tax in the life insurance policy.

So what is the downside, well risk. If the investments in the life insurance policy underperformed they might not be able to pay off the Line of Credit. If the loan was callable the bank might force you to liquidate other assets or even cash in the insurance policy against your will. You need to be insurable to get the life insurance policy in the first place. Lastly its confusing, its complex and the average person doesn’t want to think about it, a good accountant is often in charge of the whole plan.

While a very effective and intriguing plan, it is complex and requires a long time horizion, usually 25 years to complete. While proven to work, diversity is king, I would never recommend this as a sole retirement strategy, but it can be a powerful part of your retirement strategy.


TL;DR 
1) Borrow a bunch of money
2) pay it off with insurance when you die.
3) ???
4) Profit


EO&E

To pool or not to pool - Small group insurance economics

Pooling is essential for insurance, a large group of people pitch in a little bit of money each, and the result is a large reservoir of cash. Any claims are paid out of this pool, the water level drops a little but soon rises back to the high water mark with the many added contributions.

Group insurance typically pools Life, Accidental Death, Disability and Critical Illness Insurance. Because these claims are so unpredictable, and so large in value there is no way a small group can absorb their cost on their own. Sometimes for small groups, usually 10 or less, Health and Dental Insurance are pooled as well. A more common way of pricing health and dental insurance though, is called prospectively rated, or experience rated. Just like if you are constantly in car accidents or regularly set your house on fire, your insurance rates increase. The same can also be true for health insurance, if you are constantly in the hospital or have higher than normal claims your rates go up. The opposite can also be true, if you claim less you pay less.

Health and Dental expenses are different because they are more predictable than a death or disability claim. You can fairly accurately predict that the average person will go to the dentist twice a year approximately 6 months apart. You can predict that a prescription for the birth control pill will be filled once a month. Because we have a pretty good idea of what is going to happen we start budgeting rather than insuring. The wonderful thing about a budget is that you can come under budget and bank the difference.

I normally like experience rated health and dental benefits because it lets me and the client set out a budget for their claims, if they are over or under budget we have that information and can react accordingly. The client knows that they are paying for only as much as they are claiming. Under a fully pooled plan the client might be paying far more than they are actually claiming, they have no idea if they are getting a good deal or not, the insurance company doesn’t tell them.

A pool is big, stable, and predictable, a small group is just the opposite, volatile, unpredictable. The pool is safe and calm, what little ripples there are you can see coming from across the water. Small groups can seem like river rapids; rates and claims wildly gyrating, swirling constantly changing and never knowing what is coming around the next bend.

I instinctively gravitate towards the river rapids, as I think it is the best value. However, the wild rate changes a group can experience can easily backfire against me. When I have to tell a group their rates are going up 30% next year it is never a good day for anyone. On the other hand, a large pooled plan might only go up 6% that same year, with the same claims from that same member group. It doesn’t mean that group doesn’t deserve a 30% increase it just means other member groups in the pool paid too much and offset my groups high claims.

Fully pooled plans are, by nature, unfair. Some groups pay more than their share, while others profit from it. But in the end everyone gets the same rates. I think as a first step a pooled plan can be good for a client, if they don’t want to worry about the plan, and just want it in place and they can think about it as a true insurance sunk cost. Then a pooled plan will probably be alright, but I will still feel like I’m not getting them the best value, and I lie awake at night worrying that they might be spending too much (seriously, I lose sleep over this stuff, it's a good thing I have those psychologist benefits). On the other hand they could go experience rated and see their rates fly through the roof, that doesn’t help them either as it means their benefits now cost more than the pooled plan would have. That client also can’t get the better pooled rate anymore since they have to disclose their experience to the pool before they join, so even if they did try and go into the pooled plan they will get a higher rate which reflects their past experience.

It is a tough choice, be ignorant of your actual cost but maintain stability in rates, or have transparency and volatility. I am an open information kinda guy, so I choose transparency and freedom of information over closed systems and being in the dark. I know of some clients who would have been better in a pool. But I have just as many that are far better off being experience rated. The choice ultimately comes down to what the client wants and their risk tolerance, If they are willing to accept some volatility in the name of potential savings. Or if they are willing to possibly pay too much to reduce their risk.

Joint First to Die

One of the most frequent life insurance needs I run into is a young family who have just purchased a house. Both spouses need life insurance in case one of them dies. The benefit would be used to pay off the mortgage, provide some income for the survivor and maybe set up a trust fund for the kids. A Joint First to Die policy seems like the perfect fit. This type of policy is one contract on both of the spouse’s lives. The benefit is triggered by the death of the first spouse. Sounds simple enough right?

I have a few problems with Joint First to Die policies, some of which come from experience, others I hope never to experience. Every company words their policies differently and they all have certain... shall we say “quirks” that don’t make any darned sense. I feel I need to preface this entire article with “typically”, “most of the time”, “usually” because the way you think, want, or understand it should work isn’t always how it works. Observe.

Joint Disaster – No, not when the police seize your weed, but a scary way of saying both people insured die at the same time (car crash, plane crash, etc.). Typically to be considered a joint disaster both insured have to die within 30 days. They don’t have to die of the same event, just within the same 30 day window. The first to die of Jack and Jill is insured for $1 Million. If both insured die at the same time, some policies will pay out double, or $2 Million because each life was insured for $1 Million. Some other policies such as Great West Life do not pay a double benefit they will only pay out on the first death and then the contract ends. Don’t you think little Timmy and Tammy should get $2 Million if both their parents die? I do.

Well if the benefit is half it must be cheaper right? Wrong.
Joint policies tend to be a little bit cheaper; Manulife boasts their joint policies are 3% cheaper than two separate policies. True but misleading, every policy has a “policy fee” attached to it. The policy fee usually runs about $50 a year, it is just an administration charge it is not part of the insurance. Since Joint policies cover two people with only one policy you save on the fee, good deal right? Guess what? If I send in two applications at the same time, say for a husband and wife, I can ask the insurance company to waive one of the two policy fees, presto same price.

Separation/Divorce – While most of the clients I talk to are all happy loving couples who just bought their first home and love each other ever so much, the fact is that about half of them will divorce at some point. Splitting a joint policy is a pain in the butt. Divorces can be nasty, ugly, bitter affairs. I have seen cases where the policy is paid out of “that cheating bastards” bank account, so “the backstabbing bitch” won’t sign the papers to change the banking information because it costs “the asshole” money. Hilarity and lawyers ensue...

Aside from the actual paperwork to split the policy, how the policy is split can also be fraught with peril. Two lives, each insured for $1 Million depending on who dies first should be split into two policies worth $1 Million each right? Not necessarily. After the first death the policy usually ends, the insurance company would only have to pay out $1 Million, there is no way they are going to want to double the risk on their books. You each get $500,000, tough.

Joint First to Die policies have a lot of problems and a lot of uncertainty due to the myriad of rules, quirks and annoying little idiosyncrasies. Two individual policies avoid this entire headache, cost the same, are more portable and pay out as expected. Because of this I have stopped selling Joint First to Die policies entirely, you can simply do a better job with two policies instead of one. It means I have to do double the paperwork but it is well worth it for my clients.

EO&E