Downtime

I'm off on vacation, see you again in the new year.

Happy Holidays

Got Liability Insurance?

I, like many professions out there, am required to hold current Errors and Omissions or Liability Insurance. If I sell a policy to a client and I made a mistake which causes the policy not to pay out I could be liable for damaged in the amount of the policy. If I sell a million dollar Life Insurance policy you can bet I am going to have a million dollars of E&O to protect my butt in case I get sued. My E&O insurance costs are about a thousand dollars a year, not a small investment by any means. If you are like me, you want to protect yourself and your company from liability. If so, here is a strategy you need to look into, and it won’t cost you a dime.

If your company were to be sued, it doesn’t really matter why, any assets held in the company are up for grabs. Many business owners keep retained earnings in their company for any number of reasons, tax sheltering, rainy day fund, float for large purchases or payday from a profitable project. Whatever the reason, retained earnings held in a bank account are vulnerable to creditors. Retained earnings are an asset of the company and therefore, up for grabs. Some business owners keep their life savings in their company, talk about a huge liability problem.

The solution to this problem is actually very simple. Life Insurance, or more specifically Segregated Funds. A Seg Fund is like a mutual fund, or other investment they can hold stocks, bonds, or even just cash. But segregated funds are also a form of Life Insurance, and life insurance under Canadian law, is creditor protected and exempt from seizure due to bankruptcy or lawsuits.

By depositing your retained earnings into a segregated fund policy, rather than a bank account or savings account your retained earnings are protected. For the even more paranoid, you can designate an irrevocable beneficiary of the funds, say a spouse. When you designate an irrevocable beneficiary, you need the beneficiaries signature and permission to do ANYTHING to the policy, include freeing up funds. As soon as a irrevocable beneficiary is named the company and the business owner now have no control of the policy, they couldn't liquidate it if they wanted too. Any changes to the Seg Fund policy have to be signed off by the irrevocable beneficiary, as long as the beneficiary isn’t a shareholder, the money is essentially untouchable. I hope you trust your spouse.

There is a disclaimer however, (when is there ever not?) this only works if there is a papertrail and proof of regular contributions to a segregated fund. If you have evidence that you have been using this strategy for legitimate purposes, IE: self funded life insurnance, you are safe and the protection will hold up under scrutiny. If on the other hand, you know of an impending lawsuit and you frantically liquidate all of your assets and slam them into a brand new seg fund policy you are NOT safe. There have been court cases where this fraudulent avoidance in the face of a lawsuit have been overruled by a judge, and the creditor protection rendered null and void.

As long as you are playing by the rules and are not obviously trying to scam the system, your money is safe. If you already pay for liability insurance why not take out an extra policy for free? Protect your capital from potential creditors or lawsuits.

TL;DR – Got money in your company? Don’t wanna loose it in a lawsuit? Stick it in Segregated Funds.

EO&E

Pharmacy Dispensing Fee's in BC

Telus Health (formerly Emergis) has published a report showing average dispensing fee's from various pharmacies across BC from January 2009 through June 2009. PDF availible HERE

As is evident from the Table, the average dispensing fee across BC is $9.09 the least expensive pharmacy's are located, shock and awe, at Costco and Wal-Mart.

If your benefits plan uses paper reimbursment the plan is paying for all of the dispensing fee charged by the pharmacy. If your plan has a drug card with no dispensing fee deductible, then again the plan pays for the whole fee. If on the other hand, the drug card has a dispensing fee deductible, the plan member pays the cost of the pharmacy fee.

Using a dispensing fee deductible encourages members to shop where the fee's, and often drugs, are the cheapest. However, members can only be savvy consumers if they know where to shop. Social engineering is going to be the next frontier in benefit plan cost control. Encouraging members to be savvy shoppers, getting them to change their prescription purchasing habits and eventually lifestyle habits. Simply convincing members to shop at one pharmacy rather than another can result in savings of thousands of dollars in unnecessary costs.

Drug Plans

Prescription Drugs are the most expensive part of any benefits plan. Prescription Drugs typically account for 60-70% of all health care expenses, and account for the majority of cost increases. In order to combat the explosive growth in drug costs carriers have come up with several strategies, most of which, revolve around controlling which drugs are covered and which are not.

Brand Name Drugs

Just like the name implies these are drugs made by big name pharmaceutical companies. They fall under brand names like Viagra, Cialis and Levitra. We see ads on TV, brochures in doctors’ offices and generally know what they are called but not what they do. (ask your doctor if is right for you! )
Because of the marketing blitz and patent periods (the time when no other company can produce a similar chemical agent) the big drug companies can charge whatever they want. Brand name drugs tend to be very expensive, not necessarily because they work any better but because they are SOLD better.
Most cost saving measures have targeted Brand Name Drugs. By avoiding brand names plans can avoid the cost of all that marketing and hype, reducing costs substantially.

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Generic Alternatives

Often made in the very same factory as brand name drugs, generics are typically bough in huge bulk orders by either provincial or federal agencies. Because the generics lack the little logo stamp and occasionally use less expensive fillers they can cost up to a half as much as the same brand name drug. Generics are mandated by law, to provide the exact same medicinal ingredients, in the exact same dosages and of the exact same quality as the brand name. Generics, for all intents and purposes ARE the brand name drug, for only half the cost.

While the medicinal ingredients are mandated by law the fillers and binders aren’t; occasionally people will find they are sensitive to side effects from the generic when they are not sensitive to the brand name. This can usually be traced to a difference in fillers or psychosomatic response. For these people drug plans typically allow for a “no substitutions” clause. If the doctor writes “No substitutions” on the script the drug plan will cover the cost of the brand name drug.

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Lowest Cost Alternative (LCA)

A newer and more aggressive plan of attack on drug costs, LCA goes beyond substituting brand for generic form, and actually replaces the whole ingredient with another designed to do the same job. LCA looks not at the drug being prescribed but the ailment being treated. Take depression as an example, Prozac has been around for years, it is inexpensive and effective at the treatment of depression. Wellbutrin is another drug designed to treat depression, however, it is about 5 times the cost of Prozac. Wellbutrin has the added benefits of reduced side effects, fewer drug interactions and less complications, so doctors will often prescribe Wellbutrin over Prozac. A Lowest Cost Alternative plan will look at the problem of depression, and determine that while Wellbutrin is indeed a method of solving the problem it is substantially more expensive than good old Prozac. The LCA plan will decline the claim for Wellburtin, and prompt the pharmacist to dispense one of the less expensive alternatives which are covered by the plan.

LCA plans receive a substantial rate reduction, as well as a huge amount of flack from members. I have on several occasions had employees screaming at me over an LCA drug plan. The fact that they cannot receive the drug prescribed by their physician drives them crazy. Again for these people a plan can have a No Substitutions clause which allows the generic or Brand name drug to be claimed.

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Formulary

 Most plans work on a formulary basis, a formulary is just a list of drugs to be covered. Simple examples of active formularies are drug plans that do not cover lifestyle drugs such as: anti-smoking drugs, fertility drugs, or prescription weight loss medication. More aggressive formularies resemble the Lowest Cost Alternative plans but are even more restrictive, they also tend not to allow a “no-substitutions” clause. That is, if a drug isn’t covered, no amount of fuss from your doctor will get it covered.

Formulary plans are designed to use the cheapest drug possible to treat any one given malady. Typically there is ONE single drug for each medical condition. Members are allowed to purchase a non-formulary drug, however, they tend to either be reimbursed at a lower level, or only the cost of the listed drug is covered, any additional cost is born by the plan member.

A new, kinder, gentler formulary plan is referred to as a Conditional Formulary. Pioneered by Green Shield of Canada this is a very restrictive formulary which has several hoops plan members can jump through to get their drug of choice. You have to play the insurance companies game to get the drugs. The plan starts off very restrictive, most claims occur without incident; however, once a member has a problem with a formulary drug, they can apply for an alternative. Once approved, the more expensive alternative is covered and hopefully fixes the problem with the first drug, perhaps there are lesser side effects. If this second drug still is unsatisfactory a second application can be made for a higher tier of coverage. More expensive drugs are made available at this tier and again the process is repeated until a satisfactory drug of the lowest cost is found. The core idea is to cover the cheapest drug that works. If it doesn’t work you can try a more expensive one until either a working drug is found or you reach the top tier where the most expensive drugs are covered.

By starting at the bottom price wise, and moving up only when necessary, huge costs savings can be found. Administration, paperwork and frustration are the trade off for these savings.

Summary
Which plan is best for your group depends on your budget, your drug claims history and your benefits philosophy. Obviously not everyone wants to put their members into a position of jumping through hoops with a conditional formulary, then again having conditional coverage is better than none at all.

Other than Brand Name drugs, all of these strategies require a drug card. Drug cards are where the plan design and formulary are held. While a drug card increases the cost of a benefits plan due to an increase in claims, the cost savings from drug control are starting to offset the cost.

TL;DR you might be able to lower your drug costs by using generic, lowest cost alternative, or conditional formularies.

Demystifying Renewal Pricing

Group insurance renewals can seem strange and clouded in mystery. While each group, carrier and renewal is different here is a simple example of how renewal rates are set.

1) Past Experience
The insurance company looks at your claims experience and demographics, over the past 12 months, sometimes going back as far as 36 months.

Paid Premium = $20,000
Paid Claims =  $18,000


Paid Claims = 90% of Paid Premium


2) Pricing for the Future
Health care in Canada is getting more expensive every year. Expensive new drugs, an aging population and government cutbacks are causing healthcare costs to increase at approximately 13-15% annually . This increase is called a Trend Factor.

Trend Factor = 14%

3) Administrative Costs
Administrative costs include: processing claims, printing booklets, maintaining phone and internet support, plan enrolment, preparing billings and invoices etc. If a plan has a Target Loss Ratio of 72%, the remaining 28% is used for administration.

Administration Costs of 28% = Target Loss Ratio of 72%


4) Putting it all Together
From past claims experience, known administration costs and predicted increases in healthcare costs we can predict next years’ claims and budget accordingly.

Example #1 High Claims
Paid Claims + Trend Factor – Target Loss Ratio = Rate Change
       90%     +       14%       –         72%             =      +32%

Example #2 Low Claims
Paid Claims + Trend Factor – Target Loss Ratio = Rate Change
     55%       +        14%      –          72%            =       -3%

Often clients feel like they are getting taken advantage of when their claims are at or below their Target Loss Ratio and they still receive an increase. They instinctively feel that if they hit their "Target" they shouldn't have any change to rates. If health care costs were stable this would be the case but, sadly the fact is that health care is getting more expensive each year, so insurance premiums need to increase to keep up. If you wanted to calculate this break-even point, where next year you would see no rate change it would be found by subtracting the current trend factors from your Target Loss Ratio. In the example above with a 14% trend and 72% Target Loss Ratio the "break-even" point for claims would be 58% of premium.

Clients need to understand that administration is going to account for between 15-30% of their premium, depending on group size. Trend factors will, on average increase the cost of  health and dental plans by 15% and 8% each year, respectively.

Why is my Extended Heath Care plan always getting more expensive?

Good question little Johnny, come sit on my knee and I will tell you a story.

Health Care is getting more expensive, therefore the insurance you buy to protect yourself from unexpected health care claims is also getting more expensive. In the insurance industry we call the rate at which health care costs increase a Trend Factor. Over the past 5 or so years, the Trend Factor has been about a 15% increase per year, every year. Costs are doubling approximately every 4 years. That's the "how much" part, for the "why" bit see one of my articles below.

What is a TREND FACTOR?

Trend factors are used when insurers are trying to forecast future costs. Most commonly you will see these at the annual policy renewal when the insurer is trying to determine the appropriate rates for the upcoming year.

Trend factors play a vital role in pricing any group. They take into account a few main factors.

Inflation: The inflation component of a trend factor refers to the increases in the cost per service. For example,

Ø  Escalating ingredient costs, rising research costs, and growing dispensing fees changed by pharmacies have an inflationary effect on drugs.

Utilization: An increase in utilization is an increase in the number of services used per plan member. For example,

Ø  Massage therapy claims are now the second most claimed part of healthcare next to prescription drugs. Five years ago, it was one of the least claimed benefits.

Aging: As the population ages average utilization is generally expected to increase as more treatments and prescriptions are required. For Example,

Ø  A 35 year old plan member claims for 11 prescriptions per year on average, compared to the average 55 year old who claims for more then 25 prescriptions per year.

Changes in Health Services Environment (including legislative changes): Cost shifting from Provincial plans places more pressure on private insurance plans and these costs need to be taken into consideration. Each year sees more offloading onto private sector plans. For example,

Ø  Eye exams are no longer covered by the provincial medical plan for anyone ages 19 to 64. Private plans are picking up the slack where before they didn’t need to provide coverage.

Ø  Hospitals are providing more outpatient treatments such as day surgeries which means costs that would have previously been borne by the hospital (i.e.: prescription medications) are now the employees responsibility and are being claimed on their group insurance.

Deduction Erosion: Year over year a fixed deductible does not keep up with that of average costs increases; as a result the proportion of costs paid by plan sponsors increases each year. The cost of providing the service keeps rising, but the deductible amount required from the employee doesn’t keep pace.

So there you have it Jimmy, Johnny, whatever your name is. Aging, government cutbacks and a general increase in the cost of medical care are all conspiring to increase health care costs. Now go play outside and try not to scrape your knee, our premiums are high enough as it is.

How Do I Know I am Getting "The Best Rate"?

This is what a Life-Guide printout looks like. Life- Guide is the software I use when producing Life Insurance quotes. Life-Guide tracks insurance rates from every brokerage insurance company in Canada. Life-Guide is how I know which companies have the best rates. Every Insurance Advisor should be able to give you a similar printout. I usually try and use one of the top 10 in the list based on price. I don’t always use the cheapest due to various reasons: service, policy wording, renewal premiums etc. but I try and stay in the top 5 as a general rule.

If you broker doesn’t provide you this kind of market survey, ask them for one. If the company they are recommending isn’t near the top price wise, ask them why not. Sometimes it is a good reason, like mine above. Sometimes its commission related and the agent will make far more money placing all their business with one carrier, if this is the case they probably aren’t looking out for your best interest. Or sometimes it is just as simple as they are not contracted with that particular company. As a broker, I am supposed to provide the best price possible, or at very least the best value. Captive agent companies like, Sun Life, Clarica, London Life and Desjardins are often only allowed to sell their parent company products. These companies rarely show up on these surveys and when they do they are often at the bottom of the pile.

You can even check rates yourself by going to

http://www.winquote.net/ 

WinQuote is a website version of Life-Guide. You can run simple quotes and get accurate results.

One tip about WinQuote is that they automatically quote based on “Super Preferred” health status, in my experience only Olympic athletes get super preferred, for a more realistic rate change health risk to Regular

I find that Life-Guide is slightly more accurate than WinQuote so don’t be surprised if there is a slight discrepancy between the two.

Group Savings Plan Returns are NOT the Same as Private Plan Returns

Did you know that Group Retirement Savings Plans, namely Pensions, Group RRSPs, Group TFSA and Deferred Profit Sharing Plans (DPSP) report their gains differently than privatly invested RRSPs, TFSAs or other investments?

In the private or "retail" space, everyone pays the same fee's the only exception to this are very high value clients typically with excess of a quarter million dollars invested. You, me the guy down the street, we all pay the same fee for the same investment fund. Members in the same Group Plan all pay the same fee as each other, but each group plan is different.

Group pensions or RRSPs can easily amass a quarter million dollars, most pensions are measured in  millions of dollars. Because these plans are so large they receive a "bulk discount" on the fees they pay. The fee's each plan pay depend on the invested assets of that plan, each plan is a different size, and therefore pays different fees. There is an obvious challenge in providing each and every group plan with their own specific rates of return, especially in the days before computers, so group returns are reported GROSS of fees. When you see a return from a fund held by a group plan to find your true rate of return you need to subtract your plan specific fees.

In the retail channel since everyone pays the same fee, it is easy to simply subtract the fee from the gross return and post the NET return. Everyone paid the same fee so only one statement is needed.

Lets compare a retail fund to the same fund held inside a pension plan. I manage a pension plan with a value of approximately $6 Million in invested assets. Because of the large dollar amount the fees charged for each given fund are greatly reduced compared to retail funds. I have randomly selected the Great West Life Diversified Fund it is available through both retail channels such as brokers as well as it is currently held inside the pension fund I managed.

Fees

Great West Life Diversified Fund (No Load, Retail)
Management Expense Ratio (MER) 2.78% 

Great West Life Diversified Fund (No Load, Pension)
Management Expense Ratio (MER) 1.535%

The retail MER is nearly double the pension MER. The 1.245% difference is added return for the pension fund member. Remember, it is the same fund, but the person in the pension made an extra 1.245% more this year than the retail investor. A little over 1% doesn't sound like much, but it can definitely add up over time.

Returns

Great West Life Diversified Fund (No Load, Retail)
One Year Return (as at Sept. 30, 2009) =  -1.22%

Great West Life Diversified Fund (No Load, Pension)
One Year Return (as at Sept. 30, 2009) = 1.31%

Now recall that retail fund returns are published NET of fees and Group funds are published GROSS of fee's. Without remembering this fact it looks like the Pension fund has out performed the Retail fund by almost 3%.

To find the NET return of the pension fund we need to subtract the MER from the published GROSS rate of return.

Gross rate of return - fund MER = Net rate of return
1.31%                  -   1.535%   =            -0.225%

Obviously, neither of these funds have performed very well over a one year period, regardless of performance though, the fact remains the person invested in the pension fared better than the retail investor.

The group plan lost only a little less than one quarter of one percent, the retail investor lost nearly one and a quarter percent.

TL;DR Group savings plans have better rates of return for the same fund as retail investment funds, all thanks to lower fees.

How Group Insurance is Funded

There are four ways of funding a benefits plan. They essentially fall along a continuum of risk and reward. Fully pooled benefits are the least risky as if your group has a catastrophic claim, it does not impact your premium at all. The downside is that you have no idea if you are getting good value as your premiums may be much higher than the claims you incur. Prospectively rated benefits plans are the most common, they involve an annual review of claims incurred and premiums paid. Premiums tend to track closely to claims incurred. Rates are more volatile than pooled plans but Prospectively funded plans are often less expensive in the long run. Retention Accounting is more commonly known as Refund Accounting, having lost favor with the insurance carriers Refund is currently only offered by a selective few carriers. Refund provides, in my opinion, the best possible arrangement from the clients perspective. Premiums are calculated similar to Prospectively rated groups, however, if claims are lower than predicted, a refund of the difference is paid to the group. More frequently the refund is help inside a trust account and used to smooth future rate fluctuations. ASO plans offer the most possible savings as there is no "cost of insurance" however, they trade potential savings for certain risk. Only very large groups should consider ASO funding. ASO also brings with it certain other possible problems such as cost sharing, pay roll deductions and the treatment of a surplus or deficit.


FULLY POOLED BENEFITS (Less than 10 members)

The policyholder pays whatever premium is charged by the insurer. The premiums are pooled among all of the policyholders for the insurer, and all claims and administrative expenses are taken out of the pool. All renewals are based on how the whole pool does, each policyholder has no control or input as to how the premiums are allocated. Cost-containment measures available to policyholders are to add deductibles, reduce reimbursement percentages by the insurer, or reduce or eliminate particular benefits. The advantage of fully-pooled plans is that they help spread of catastrophic claim for smaller policyholders. This disadvantage of fully-pooled plans is the lack of control over the allocation of premium dollars.

PARTIALLY-EXPERIENCE RATED BENEFITS (PROSPECTIVELY RATED) (10+ Members)

This method is a hybrid to the experience-rated policy and the fully-pooled plans. Insurers like these
policies because they can use the policyholder’s own experience to determine the renewal rates, yet they do not have to disclose the individual charges in which their premium dollars are used. Partially-experience rated plans can run up deficits, but should expect to face renewal increases to ensure future deficits do not occur. The advantage of the partial experience-rated plan is that the policyholder may run a deficit and terminate without financial repercussions. The disadvantage of the partial experience-rated plan is the limited information provided by the insurer. Although a break-even or target loss ratio is often provided to the policyholder, this does not reveal all of the charges being levied.

FULLY EXPERIENCE-RATED BENEFITS (RETENTION & NON-RETENTION ACCOUNTING) (100+ Members, or $100,000 in annual premium)
Under this method, the insurer works out each policyholder’s premium rating, based solely on the
policyholder’s own past experience for the benefit. At renewal, the insurer takes the paid premium for the year and then allocates various expenses against it. Apart from the actual utilization, there are claims paying charges, administration fees, taxes, insurer profit and agent/broker commissions. There are also requirements to fund reserves to pay for all of the outstanding claims that have not been submitted, or processed, and which must be paid by the insurer. There can also be a claims fluctuation reserve in which the insurer puts excess premium, if there is any. The advantage of the fully experience-rated plans is that all of the charges are fully disclosed. If retention accounting is used, the policyholder participates in the financial results of the group. This means that the policyholder owns both the surplus and deficit over the policy year. On a non-retention accounting basis, the policyholder would not participate in the financial results. The ideal policyholder for fully experienced-rated benefits is generating approximately $100,000 in annual claims, this will ensure that the utilization is “credible”. To protect against catastrophic claims by any individual plan member, the policyholder can purchase stop-loss protection from the insurer.

ADMINISTRATIVE SERVICES ONLY PLANS (ASO) (100+ Members or $100,000 in Annual Premium)

With this funding method, a policyholder pays an insurance company or third-party administrator to provide only certain services (i.e., adjudication, booklets, and wallet certificates). All charges are fully disclosed and negotiable. Stop-loss coverage can be purchased by the policyholder to reduce the risk of catastrophic claims by any individual plan member. The savings being generated may not be substantial in light of the additional resources required to provide the identical level of communication to the plan members, but the policyholder will never forfeit surplus premium. The advantage of the ASO funding method is the amount of control gained by the policyholder. The disadvantage of the ASO funding method is the potential risk of deficit funding. Dental Care can often be ASO funded at a lower level of approximately 25 members or $25,000 in premium. These lower levels are possible due to Dental Care claims being non-catastrophic in nature.

Funding explanations taken from Advocis Best Practice Manual.

Maximum Retirement Income

You have saved all your life for retirement, you have a nice little nest egg of cash and are ready to start drawing an income. How do you get the best bang for your buck while taking a minimum amount of risk?

People at or near retirement are naturally more conservative with their money and investments, they like to color within the lines. Most retirees gravitate towards guaranteed investments like GIC’s. While safe, GIC’s provide poor returns and notoriously bad after tax returns. GIC’s are treated as income, and fully taxed at your marginal tax rate. This can be as high as 43.7% in BC. Why give up almost have of your gains to taxes if you don’t have too.

Enter stage left, the Insured Annuity. Annuities provide a guaranteed stream of income just like GIC’s but, they are far more tax efficient than a GIC and they provide a substantially higher ROI than a GIC.

A brief primer on annuities.

Annuities pay the highest ROI of any guaranteed investment product. An annuity, in a nut shell is a backwards life insurance policy. Instead of paying a small monthly premium and getting a big payout from the insurance company at death, you give the insurance company a big cheque now, and they agree to pay you for the rest of your life. There are lots of options and guarantees which can be added but in its simplest form a life annuity will pay you from today to the day you die, be it next week or decades from now. The catch, if you do die next week, the insurance company keeps all your cash, even if you only received a single payment. Flip side of that coin is, if you live a long time, the insurance company has to keep paying you even after your money is long gone. The people who die young subsidize those who live to a ripe old age. Because some people die before their money is paid back, there is more money to go around, which is why annuities pay such a high rate of return.

An annuity will pay you a big income, but what good is it if you die tomorrow and your spouse gets nothing? Risk of dying too soon, sounds to me like you need life insurance...

Life Insurance, more specifically low cost, permanent life insurance.

Term 100 or minimum pay Universal Life will provide a guaranteed premium, and a guaranteed payout. Remember retiree’s life guarantees! Purchasing a permanent life insurance policy for the face amount of the annuity will allow us to preserve our original capital in the event of dying too soon. There is an insurance premium that needs to be paid of course, we take part of the annuity payment and earmark it for the insurance cost. As luck would have it the insurance costs are about half of what the annuity will pay us.

To summarize, we buy a Single Life Annuity to get the highest income from our capital, we have a risk that we could die too soon and lose our capital before it’s repaid so we buy life insurance which replaces our capital when we die. Still following along?

Now, the bright crayons in the box will be thinking, “why pay all that insurance premium, when I could just live off the capital in the first place?” good job Burnt Sienna, one word, taxes. I have to harken back to the beginning of the post, retiree’s like guarantees. Other than annuities, GICs are the main player, and they are a tax nightmare. The insurance cost pales in comparison to the brutal tax bill CRA is going to exact from your GIC’s.

Math time.

(FYI, current annuity payout as of Oct 26 2009 $46,578.00, current 5 year GIC rate 3.925% so the example above is fairly accurate)

Starting with the same amount of capital, $500,000 we compare an annuity payout to the annual return of a long term GIC. All of the GIC earnings are spent and the original capital is reinvested.

Right off the bat you can see that the annuity provides more than double the pre-tax income of the GIC, $45,668 vs $20,000. This increased payout is due to those people who died young, subsidizing the rest. Other than the superior ROI, the tax situation is very noteworthy. As previously mentioned the GIC earnings are treated as income, and are fully taxable at your marginal tax rate. The Annuity in its “prescribed” form, includes a Return of Capital, which basically means you are spending a portion of your own money (tax free), and a portion of investment earnings (taxable). This greatly reduces the tax bill in the early years of the annuity. Tax payable at the end of the year, $4023 for the annuity and $9000 for the GIC’s. The annuity can produce a net after tax income to nearly FOUR TIMES that of the GIC $41,645 compared to just $11,000.

Carnation Pink has pointed out that while the Annuity has a better cash flow; if you die early you lose all your capital, while the GIC retains its capital every year. When you have a risk of dying too soon you buy insurance. That insurance costs $21,305 in this example, which again is accurate as of today’s date. As long as you pay your insurance premiums your capital will be restored tax free with a death benefit. So while you have lost your original nest egg to the annuity gods, your heirs receive a brand new infusion from the insurance fairy.

What’s the catch? You have to pay your insurance premium, if you let the life insurance policy lapse the whole plan falls apart. If you are uninsurable or have health problems, you can’t get the insurance in the first place; this strategy is not for you.

Lastly, Insured annuities used to be really popular about 20 years ago, they have recently reared their heads again due to the global economic crisis. The reason they fell out of practice for so long comes down to two words, lapse rates. Permanent insurance is only as cheap as it is because some of the policies lapse, people paid premiums but never collected. Lapse rates need to be predicted accurately to know how to set the life insurance rates, problem is; insured annuity strategies necessitate NOT lapsing a policy, which skewed the predicted lapse rates. Insurance companies either lost money or had to increase their premiums. Most companies stopped offering both the insurance and the annuity, as doing both was a losing game; Multi-Company insured annuities were still available but the added complexity, as well as the better performance and taxation of equities made GICs and insured annuities less popular. BMO Insurance (formerly AIG Canada) has recently started promoting Insured Annuities again, they are providing both the annuity and the insurance, their rates for both products are quite good as well. I am not entirely sure how they plan on making a profit given the lapse rate problem I mention above, I can only assume their underwriters and actuaries have accounted for it.

TL;DR – Double your retirement income, guaranteed. Maintain your capital, guaranteed. Pay less tax, guaranteed.

E.O.&E.

And now for something completely different

I, like many people, have an iPhone and use MS Outlook for emails, calendar and contacts in the office. Both are wonderful pieces of technology, but without an Exchange Server they do not like to talk to each other. I wanted to post here on how I finally made the iPhone and Outlook play nice together.

Goal: Real time 2-way sync of email, contacts and calendars between iPhone and Outlook. (for free)

Prerequisites:

IMAP email account

Google Account (Gmail and Calendar)

Nueva Sync account

Soocial.com Account

Step 1: The cloud

Register a Gmail and Google Calendar account if you don’t already have one. Gmail is going to act as the middle man between the iPhone and Outlook, it also provides a great webmail service if you are away from your phone or office.

Push Calendar from Outlook to Gmail

                Download and install the Google Calendar Sync app
 

Push contacts from outlook to Soocial.com
Add a connection for Outlook to your Soocial.com account. Install the outlook add-on and sync contacts to Soocial. Add a second connection for Gmail to your Soocial account; Soocial will now 2-way sync contacts from Outlook to Gmail.

            

Gmail Account setup

                If you go into the "Accounts and Import" settings in Gmail you can add your IMAP email to Gmail. Google will log into your email account and periodically pull any new emails into your Gmail account.

You should now have all of your Outlook data synced to your Google Account. Now that we are talking to the cloud we need to pull it down to the iPhone.

Step 2: The iPhone
Email: I connect to my email directly through the IMAP server, I don’t bother going through Gmail for this, I find going through Gmail adds a 20 minute lag, and sending and receiving directly through the IMAP server works best.

 A copy is still stored in Gmail in case you need it.

Log into your Nueva Sync account and add a connection to your Gmail account. Choose to Sync calendar and contacts, but not email (see above).

Nueva Sync will now pull contact and calendar info from Gmail to its free hosted exchange server. On your iPhone go to settings, and create a new Mail, Contacts and Calendar Account. Choose Exchange from the presets.

 Enter your NuevaSync account information.

Once everything is set up correctly anything you add to Outlook is replicated to Gmail, synced wirelessly to your iPhone and vice versa. I find the contacts and calendar sync is almost instant, I can add a contact to my phone and within 30 seconds it shows up in Outlook. Having everything replicated to Gmail is another nice feature, I have been at a clients house with no laptop and a dead cell phone battery, and was still able to pull quotes I had emailed myself just by logging into my Gmail account from their home computer.

It is unfortunate that to do what should be such a simple task takes no less than 5 different pieces of software. Google has recently added a new Apps Sync tool which accomplishes everything above, but it is not free.

Risk, sometimes it’s worth it.

Insurance is all about risk, more importantly, paying someone to take a risk for you. In group insurance, the risk is that your employee’s might incur a large and costly medical claim. You would then have to pay it, even if you didn’t have the funds available. The insurance company takes the risk of paying for catastrophic claims, but charges a premium on everyday claims. 9 times out of 10 you pay more with insurance than without it. However, it is that 1 out of 10 that saves your butt.

I had a group which had excellent claims history, very stable and very low, especially when compared to their premiums. While I did everything I could to keep premiums down, I eventually reached a minimum premium which the insurance company refused decrease further. The claims of the group still warranted a rate decrease so I began looking for alternatives.

Self insurance came to mind, simply pay the claims, and be done with it. You will never overpay and as long as claims are low you have nothing to worry about. Except risk. Without an insurance company, any large claims are now the responcibility of the business. Risk reward, big rewards usually require big risks.

We needed some kind of insurance, but there must be something out there less expensive than what this client currently had. Their premium was more than twice what their claims were, they were not getting good value.

I found a product called Benaccount from a company I work with regularly, Benefits By Design. Benaccount lets you self insure what you are comfortable with and insure the rest. This way you get the best of both worlds, low insurance costs, but protection in case of catastrophic claims.

Benaccount relies on a health spending account for each employee; each account is funded to $1000 for a single employee and $2000 for an employee with family. This money is the first payor, every claim will reduce this account until the money is gone. The account is used for both health and dental claims. Once the account is empty, the employee switches to an inexpensive stop-loss insurance plan ($8/month single, $22/ month family) the stop loss doesn’t provide dental, paramedical or other small coverages however, it does provide coverage for prescription drugs, hospital, and large ticket medical items like electric wheelchairs etc.

A good way to think of the plan is as a stripped down health plan, with a high deductible of either $1000 or $2000. You take the risk that you might have to pay the deductible yourself, but after that you are protected. Speaking of risk, there is certainly a potential downside here, if every employee maxed out their claims, the total cost for this little 5 life group would have been $7700. When the insurance company guaranteed a rate of a only $6000. Giving up the rate guarantee was a risk the business owner had to agree to take, this plan could cost him more, while not likely to happen, it is still possible.

When agreeing to take on any risk, there needs to be a return involved. The return is if claims are lower than $6000, the company saved money.

At the end of the day, this group claimed, about what they always do, $2205.59 over the year on health and dental expenses. They paid $671.14 in insurance about 10% of their old premium, for the security that if a catastrophic claim occurs they will be safe.

Their total annual cost was $2876.73
Vs. Their insurance quote of $6203.26
The reward for taking a little risk?

$3,326.53 saved.

On nom nom

Happy thanksgiving all.



- Posted using BlogPress from my iPhone

Great West Life - Segregated Funds with NEW Lifetime Income Benefit

I just got a huge package from Great West Life, on their new Segregated Fund product. They have jumped on the bandwagon and added a Lifetime Income Benefit similar to Manulife, IAP, DFS, Sun Life, Transamerica etc.

*BIAS DISCLOSURE*

I don't really like these products no matter who sells them, the fee's are just way too high.

Case in point, please see the MER (Management Expense Ratio) chart for the new shelf.



Lets look at the Mackenzie Financial Balanced Fund, once you add in all the bells and whistles and the Lifetime Income Benefit your MER is 4.01%

Yeah, no thanks.

More to come later.

Private Health Services Plans AKA Health and Welfare Trust AKA Health Spending Accounts

While each of the above names are in fact slightly different they are all fairly interchangeable and they all have the same goal at heart; making medical expenses tax deductible.

Government likes a healthy electorate, so they encourage business to provide health benefits by making benefits tax preferred. Health and Dental benefits are tax deductible to a business, AND non-taxable to the employee. Health insurance is basically tax free!

I use the words Health and Welfare Trust in the image below, it works the same way.

Back in the day, insurance companies would only offer insurance to businesses with at least 10+ employees. This was a problem to most small businesses because it meant they couldn’t offer medical benefits. So along comes Mr. Taxman and creates the Private Health Services Plan (PHSP). A private health services plan is essentially a trust fund set up by a company to pay employee medical expenses. Because the business pays into a trust, it is tax deductible, and because the trust pays the medical expenses for the employee, the benefit is non-taxable. It is NOT insurance, once you run out of money in your trust you are on your own. PHSPs save a heck of a lot of money in taxes.


Some of the rules that apply to all PHSPs is that all claims must be adjudicated by a third party, typically a trust company or an insurance company. There are two reasons for this requirement: First, so privacy is maintained for employees. Secondly, so that all claims are verified eligible. These plan administrators usually charge a small fee, typically 10%, to push the paper and process the claim.

PHSPs are very flexible, they will pay for expenses that no insurance company will touch. Rather than use a plan design, (we will cover 80% of this drug but only 50% of that drug) any prescription, medical device, dental expense or vision care is eligible. What is and is not covered is dictated by the Income Tax Act, the Act is very vague and if you can justify it as a medical expense it is probably eligible.

Sample List of Eligible Expenses (PDF)

With the PHSP now any size business can provide health benefits to their employee’s. Incorporated business are essentially unlimited to how much they want to provide in benefit, unincorporated businesses such as sole proprietors have a few rules to follow.

Unincorporated
If you are unincorporated Canada Revenue has a harder time tracking your actual business income. Because of this they impose some strict rules to prevent money laundering. If you are unincorporated, your benefit cannot exceed the following

$1500 per year for yourself
$1500 per year for your spouse (if any)
$750 per dependent child (if any)

The average family of four gets $4500 in tax free medical and dental each year. Of note is that the money can be spent by anyone in the family, if you are greedy and want to spend $4500 yourself and let little Timmy’s teeth rot, you can.

Incorporated 
If you have employee's you MUST provide a "like benefit" which just means give them a piece of the pie as well. The rule of thumb is that no class of employee should receive more than 10 times the next class. So if you are the owner and want $10,000 your employees should all receive $1,000. If you don't you risk creating a shareholder benefit, which is taxable.



My providers
I use two providers, Olympia Trust and Quikcard. I use two because they suit different needs.

Olympia Trust is excellent for sole proprietors or single person companies. They allow payment to be sent in at the time of claim, rather than requiring a trust fund be prepaid. Downside, they charge almost $400 to set up a plan. Their administration fee is 10% of the paid claims.

Quikcard, has no setup fee but requires prefunding of a trust, this means writing a cheque for $1500 to $4500 at the beginning of the year or making monthly contributions, and letting them sit on it. If you don’t spend the money you can have it back, it is yours after all, but not a lot of people like letting go of that much cash if they don’t have too. Their administration fee is 12% of paid claims.


TL;DR: If you are self employed incorporated or not, with any medical, dental or vision care claims you can save a boat load of tax dollars with a Private Health Services Plan

Edit: April 1, 2011 - I have changed providers away from Benecaid and to Quikcard, as Benecaid has implemented a $95 per year fee which started on April 1, 2011 and they provided very little notice of this change. 

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