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Everyone knows that a book should not be judged by its cover. The same can be said for the unique segregated fund, an investment product that at first glance has some real flaws but when digging deeper, can prove very powerful.
This type of fund provides an opportunity for someone to invest in the stock market and if the market rises, they get the gains. If they want, they can lock in these gains. If the market falls, they keep their initial investment. If the market falls after they have locked in their gains, the investor gets to keep not only their initial investment but also the locked-in gains.
The key is using segregated funds in a way that is appropriate in the current market. Let’s start with what a segregated fund is.
According to some people, a segregated fund is just like a mutual fund but with higher fees. So far, it doesn’t sound too promising and in many cases it isn’t.
Segregated funds are like mutual funds, but they also have an insurance component that provides these added benefits:
• There is usually some form of 10 or 15 year guarantee that you will at least get your principal back if you hold the fund for that period of time.
• There is some creditor proofing so that funds held in a segregated fund are not accessible if someone were to sue you.
• When someone passes away, you can name a beneficiary so that the assets pass directly to that person and avoid probate fees on these assets.
• In some cases, there is a ‘death’ guarantee whereby if the owner passes away while owning the funds, there is a 100 per cent principal guarantee.
• In some cases, there is also an ability to ‘lock in’ a new base for a principal guarantee. This means that if you put in $100,000 and the account is now worth $110,000, you can lock in $110,000 as your new guaranteed amount. This means that if you hold the fund for 10 or 15 years or pass away and the value is less than $110,000 at that time, you will get $110,000.
It is these last three features that are extremely valuable – especially in a volatile stock market. It is ideal for someone who is in their 70s, and possibly not in the best of health.
Here is a way to use this opportunity.
Take 5% to 10% of a portfolio that has meaningful non-registered holdings. Let’s say $100,000.
Invest this money now in uncertain markets into 100% stock segregated funds with the greatest chance of meaningful gains. If the portfolio goes up, then we lock in the balance. Let’s say $108,000. This is the new guaranteed minimum. The account will continue to move up and down with the market. If it goes up further to say $115,000, then we would lock it in again. If the portfolio drops below this minimum, you would hold on to it, because you have the guarantee. If it goes higher, you can always take the funds out and invest it elsewhere or spend it, or simply lock in a new floor. In Ontario, the other benefit is that the funds will not be part of the estate. They go to the beneficiary and avoid probate fees. In most cases this would be 1.5% in Ontario.
If someone is 50 years old this can still work, but the likely principal guarantee period might be 15 years. This is a long time to simply break even. Assuming they make money – which is the likely scenario over 15 years, the higher fees will erode some of the benefit.
The reason this makes more sense for someone much older is that it isn’t unreasonable that a 77-year-old will pass away in less than 15 years. This shorter guarantee period, along with the ability to lock in a new minimum, and the ability to take bigger investment risks with little downside is a powerful combination.
For this situation, you don’t want a safe investment. This is where you would take the most aggressive part of your portfolio to invest but with the safety net of the guarantee.
Despite a segregated fund being insurance, there is no health test or physical required.
If someone is 77 and has an illness that will shorten their life expectancy, they could shift some of their investments into segregated funds with a 100 per cent death guarantee (which means that they either gain or get their money back over a short time period) and avoid probate fees.
In the right circumstances, this strategy is only a piece of the overall picture but it is a unique and powerful piece.
It is an example of how you can’t judge all investments by their cover.
Prepared by Ted Rechtshaffen – TriDelta Financial
With all the occupying going on, and dissatisfaction everywhere, I thought I might do my part to give the movement some direction.
Last I checked, one of the best ways to influence a corporation is to impact its bottom line.
With the ability of social media to influence behaviour, there is now greater power than ever for consumers to quickly support one company over another. Is there a way for investors to get in front of the curve on this?
I believe there might be, but first we need to understand how a company can be affected by being seen as a ‘good’ company versus a ‘bad’ company.
If you want to see this influence in action, check out Goodguide. This site has been gaining a lot of attention from the media and from large, multi-national companies, as it rates consumer products on their “degree of sustainability practice compliance,” against their competition. The site and others like it can potentially have a huge impact on sales by educating shoppers about the ramifications of buying a particular type of soap, shirt, car, investment, or other good.
 Photo by schmopinions
Now that these types of sites or social movements can act so quickly and in such scale, a smart company might start focusing more attention on ways to make their products and services more sustainable – in a way that this large segment of the market will approve of. If as an example, the “Occupy” movement, believes that Bank A is the best of the big banks and Bank B is the worst, based on how they treat employees, how they treat the environment, the companies they partner with, and other measures, there is a real possibility of Bank A gaining market share. This can apply to grocery stores, gas stations, deodorant makers, and car manufacturers. Almost any consumer-related business. Keep in mind that these opinions can now take shape very quickly.
So what is sustainability and how might it impact how one invests?
According to David Wright, a leading sustainability and brand expert, “Sustainability not only looks at how an organization impacts the environment, but it also looks at its human resource policies, its social and community support initiatives, what company it keeps in terms of partners, and how its business efforts will influence others positively or negatively.”
Mr. Wright is president of Toronto-based Corbrico Consulting, and works with Canadian companies on their sustainability strategies, branding and implementation. “Sustainability has gained significant traction in Asia, Europe and the U.S, but has been slower to take hold in Canada. This is starting to change in a big way,” Mr. Wright said.
Of particular interest to investors is the growth of sustainability indexes across the globe. In Canada, there is the Jantzi Social Index, and globally you would find the Dow Jones Sustainability Index, the NASDAQ OMX CRD Global Sustainability Index and the FTSE4Good Index (U.K.), with all at differing stages of maturity.
As an example, the Dow Global Sustainability Index (DJSI) has been in existence since 1999. On their 40-company North American index, you will find six Canadian companies (Bank of Nova Scotia, Manulife Financial, Potash, Royal Bank of Canada, Suncor and Toronto-Dominion Bank).
Now to the bottom line for investors. Does sustainability lead to investment performance?
Certain studies claim that corporate sustainability practices correlate positively with investment return. Why might this be? Here are some potential reasons:
Well, so far in many cases, the numbers have not clearly shown outperformance.
For instance, the DJSI-United States Index has had a five-year performance of -1.56 per cent. versus the Dow Jones Industrial Average which performed at -1.4 per cent over the same period.
The DJSI-World Index, has had a 10-year performance of 3.79 per cent in U.S. dollars. While the Average World Stock Fund returned 4.75 per cent over the same period, according to Vanguard.
Over the past five to 10 years, the numbers wouldn’t suggest any investment magic, but I think that might be changing. With greater awareness, and most importantly the speed of Twitter and Facebook to alter public opinion, I believe that sustainability can be a tool for outperformance in the future.
Companies that want to impact what is important to a growing segment of their market, will be placing more time, resources and attention in this space. Of course, the service industries and web-based businesses that support the sustainability movement may be some of the best places to invest your money.
If the “Occupy” movement wants to focus its efforts on impacting share prices – they may just have the ability to do so. Then they will have definitely Wall Street’s attention.
In this Globe and Mail article, Shelley White writes about whether you should consider life insurance for you children. She speaks to our vice president of Estate Planning, Asher Tward, as well as Tom Drake of the Canadian Finance Blog to present different sides of the issue:
Does your child need life insurance?
By: Shelley White at the Globe and Mail (October 19, 2011)
“In the first week of September, I received a surprising handout from my kids’ school – a pamphlet about getting life insurance for your children.
I tossed it into the recycling, thinking why the heck would I ever get life insurance for my kids? It seemed morbid and useless and a waste of money, frankly.
The value of life insurance for children is a subject of some debate. While some financial experts say it’s totally unnecessary, others see it as a useful way to ensure wealth and peace of mind for your offspring.” READ MORE AT SOURCE…
Within the Life Insurance Industry, it has long been known that Life and Critical Illness Insurance (CI) costs would rise, and unfortunately for the consumer, permanently.
The economic realities that we are all facing, as individuals and global citizens, have affected the ability of insurers to continue to offer historically favourable rates and product features, for permanent insurance.
The enduring low interest rate environment has reduced margins and as a result the insurers ability to offer the same level of competitive pricing. We have seen unprecedented permanent life insurance price increases, which are likely to continue for months.
Insurance companies rely on the very profitable ‘term’ insurance. Statistically, there is a very small likelihood that term insurance policies will be claimed given that people tend to cancel their policies as premiums ramp up upon the renewal of each term – i.e. ‘Term 10′ locks in premiums for 10 years and for owners to renew for an additional 10-year term, costs escalate. When policy owners enter their thirties and forties, the costs escalate rapidly.
In most cases, term insurance contracts also expire (without the option to renew) between the ages of 75-85, depending on the insurance company. For short to mid-term needs, term insurance can be cost effective, however for the mid to long term it is inefficient.
For example, a healthy non-smoking Male age 50 takes out a $500,000 life insurance policy to protect his wife and children should he pass away prematurely. His death would result in the loss of his income and savings from that income. Assuming that his age of passing was 85, here is an illustration comparing ‘Term’ with ‘Permanent’ insurance premiums:
Term 10 Life Insurance – renewable to age 85
$860/yr for the first 10 years $7,105/yr next 10 $19,455/yr next 10 $52,800/yr next 5 (to age 85)
TOTAL PREMIUM OUTLAY FROM AGE 50-85 = $581,256
Permanent Life Insurance – Level and Locked in rates for Life
$5,520/year to age 85
TOTAL PREMIUM OUTLAY FROM AGE 50-85 = $193,212
Initially people looking at the pricing in this very common scenario would say $860 vs. $5,520 seems crazy for the same $500,000 policy face amount. However, when you look at matching the right product with the need, sometimes the best and by far most cost effective solution is not what initially appears obvious. When crunching the numbers and looking longer term at the bigger picture, the opposite surprise generally holds true.
A total premium outlay to age 85 of $193,212 (for the Permanent Life Insurance) vs. $581,256 (for the Tem 10 Life Insurance) is dramatically more palatable for anybody, over time.
The other very significant reality of these two scenarios is the fact that if I had made the notional year of passing one year later i.e. age 86, the term scenario would NOT have paid out the $500,000 face amount at all. The reason being that the expiry date on this term policy is age 85 (which is just about the latest expiry possible on a term policy). At age 86, 96 or beyond, the permanent policy would still payout the $500,000 face amount.
No wonder that insurance companies enjoy ‘Term’ sales over ‘Permanent’. Industry experience and statistics bear out the fact that fewer than 2% of term life policies ever pay out; a big boost to an insurer’s bottom line.
The window of opportunity on pricing is rapidly declining.
Our very experienced insurance team would be happy to sit down with you (and your spouse) to do a full, no obligation review of your current insurance coverage. We would look at your existing needs both now and going forward. Taking into consideration what would be the most cost effective and tax efficient solutions, to protect you and your family.
Written by Josh Tward, Director of Insurance Operations
The following is a story about creating unbelievable value with charitable contributions by simply structuring it efficiently. In our case study below we demonstrate how the charity of your choice can receive $1 million donation that will only cost the donors a fraction of this.
We have changed names, but detail a real life example of a charitable contribution strategy we implemented with a client recently.
Joe and Susan were able to make better use of their hard earned money and leave a significant legacy to the Alzheimers Society, here is their story:
The circumstances:
Joe and Susan were heading into a new phase in their life as retirement approached. Their goals:
- 1. Maintain their lifestyle in retirement without fears of running out of money.
- 2. Travel frequently.
- 3. Pay as little tax as possible.
- 4. Help advance Alzheimer’s research to rid the world of this cruel disease.
They approached us to devise an efficient plan, which revealed a few key points:
- They will not outlive their money, but would likely have a $2 million Estate and a lifetime tax bill of $530k.
- They have lots of financial ability to travel.
- The $530k in taxes can be cut significantly with proper planning.
- A good part of the tax savings can go towards charitable causes like the Alzheimer’s Society with the right strategy.
- They can even afford to retire earlier, and potentially spend more time volunteering.
The Strategy:
Joe & Susan contributed $5,000 a year to charity, but after learning how efficient we could structure their situation, they felt they could afford to give more, and wanted to.
We showed how they could substantially increase donations without it costing them much more than they had been contributing. The Alzheimer’s Society would however benefit significantly more with the new strategy.
Highlights:
- 1. We set up a joint insurance policy that will pay out when they both pass away.
- 2. Fund the policy with $11,000/year for 20 years. After 20 years, the policy will be fully paid for.
- 3. Their favourite charity will be the beneficiary of the policy.
- 4. Because of the way it is structured, Joe and Susan will receive a full donation tax credit every year. In their case, every year they get $4,400 back, so their net cost is just under $6,600 a year.
- 5. The charity will receive a $1 million benefit!
- 6. Essentially, Joe and Susan put $6,600/year in for 20 years, a total of $132,000, and the total benefit to their favourite charity will be $1 million.
- 7. If Joe and Susan live to full life expectancy, the AFTER TAX rate of return on this charitable investment will be over 10%, guaranteed. There is not likely a better investment return available – especially given the low level of risk.
Joe and Susan can still give roughly $9,000 a year to charity – either through cash or stock – and help make a more immediate impact.
You don’t need to donate $11,000 for this to work for you. The strategy is scalable and can be structured to match your particular situation.
To get a quick sense of your financial picture and what you can afford to give, use our free online calculator.
Written by Brad Mol, Senior Financial Planer
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