Mortgage Insurance - July/August 1999 Commentary

Affiliated with Sentinel Life & Sentinel Financial Management Corp.

July/August 1999

Commentary - Hans H. Mathisen

    LIFE LETTER for July explains How to get Cheap Dollars to Pay the Tax Man. It's worth keeping in mind that sometimes dollars can be purchased for pennies a piece. Let me show you how.

    The August LIFE LETTER asks: "Is Mail Order Life Insurance a Better Deal?" After reading this you are in a better position to decide for yourself.

    And the Bonus LIFE LETTER from the veteran financial expert Donald F. Pooley asks the question: "FIRE YOUR BANK?" This is a crucial question because Canadians are accustomed to life insurance contracts containing certain guarantees. These guarantees are not always found in-life insurance coverage purchased from banks and other lending institutions. I'll be pleased to explain how you can get coverage with all the guarantees you must have. You deserve to have the best coverage available, especially when that coverage costs less than you pay for the bank insurance without guarantees.

THE STOCK MARKETS - By the end of August, the Canadian stock market's 12-month performance is barely positive. The money you invested in the TSE 300 Index a year ago has "grown" by 1.6%. Just a touch better than keeping your money under the mattress!
By comparison, the Dow Jones Index grew 23.8%, the Standard & Poors 500 Index increased 22.0%, and the NASDAQ is up 45.2% for the same 12-month period. Way to go!
And you can now have all your RRSP money outside Canada without having to worry about the 20% Foreign Content rule. Let me show you how this can be done. I want you to be a winner, while at the same time lowering the risk factor of your portfolio.

HAPPY INVESTING!

Hans H. Mathisen

LIFE LETTER
Cheap Dollars to Pay The Tax Man

    Bob and Betty, now in their fifties, realize they've done quite well financially. They own their own home and summer home, debt-free, and have accumulated a nice sum in their RRSPS. They also realize that Revenue Canada will gobble a big chunk of their achievements when they die.

    The cottage cost them about $75,000 and their estate planner projects it to be worth about $200,000 at their life expectancy. As the increase in value will be treated as a capital gain at death, 75% ($93,750) of the $125,000 growth will be included in the final tax return.

    Their RRSPs will grow to about $1 million by the time they retire and their RRIFs will still have about $600,000 in them at their life expectancy. This money is fully taxable at death adding at least $600,000 to the deceased's taxable income. As there will be other income this $693,750 total will most likely be taxed at the highest possible rate, about 50% in most provinces. So $350,000 cash will then be needed for Ottawa.

    Bob and Betty don't have a problem while they are both alive, or even if one of them dies. Thanks to some good estate planning advice, there won't be much of a tax grab on the first death, as everything goes to the survivor. Assets can pass tax free from one spouse to another on death, thus postponing taxes until the second death. The big tax bite will occur on the second death, because the income tax on deemed capital gains and RRSPs has been postponed until then. That's when about $350,000 will be needed, in cash.

    Their executors choices will be limited. They can sell property. But Bob and Betty want the family home and cottage kept in the family for use by future generations. They can borrow the money, but loan payments have to be repaid with after tax dollars, which, with interest brings the cost well above 100 cents per dollar of death taxes. Besides, they don't want their children to remember them by leaving them with a huge debt load to pay the taxes on their inheritance. Or the executors can cash in the RRSP/RRIF, and pay the taxes at 100 cents on the dollar, probably the cheapest of these three alternatives.

    There is another answer that requires mere pennies on the dollar, but it has to be set up in advance. A unique type of joint life insurance policy that is more economical than usual because it doesn't pay off until the second death. A joint-second-to-die policy is ideally suited to Bob and Betty, because it will deliver tax free money at the exact time that it is needed. And the annual cost is only a penny or so per $1.00 of future taxes.

    So Bob and Betty can pay their inevitable future taxes at 100 cents (or more) on the dollar by doing nothing. Or they can pay them with pennies on the dollar by taking action today. Which would you do?

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LIFE LETTER
Is Mail-Order Life Insurance a Better Deal?

Chris received his Visa statement in the mail with a brochure pitching mail-order life insurance. No need to see an agent - just complete and sign the application, pay the premium and, if he's accepted, he's insured.

    Sounds like a good deal, but is it really? The experts say "NO".

    William A. McLeod, an outspoken critic of the insurance industry says in his book, The Canadian Buyer's Guide to Life Insurance, "You would think that, by eliminating the sales person, companies could sell their policies at a lower rate than the competition, but such would not appear to be the case."

    Chris discovered a number of reasons that mail-order insurance isn't such a good deal. The insurance companies must pay the credit card companies for mailing their pitch pamphlets with the statements. After all, postage isn't free and the credit card companies are always looking for ways to offset their costs. Also, the insurance companies expect more claims from mail-order life insurance. Some companies reduce their premiums by not covering certain causes of death or not paying benefits if death occurs in the first two years.

    It's easier for a company to reject a claim when the original applicant is dead and there is no qualified, objective witness to the true state of his health at the moment he signed the application. It's not so easy when an agent helped him to complete the form, witnessed his signature to attest to the validity of the answers and completed a report on the applicant's condition. And is also there to help the widow through the claim process.

    The sole advantage of buying mail-order life insurance, not dealing with an agent, is also its disadvantage. If Chris wants the insurance company to pay up without quibbling, then he should deal with a licensed agent. After all, the reason he's buying life insurance is so that his family can avoid financial hassles when he dies.

    George Brett compared costs of mail-order life insurance with that obtained through agents in a Dollars and Sense column in the Toronto Star. His conclusion was that you can get a better deal from an agent. He also said, "Rather than getting a one-sided sales pitch from a pamphlet, why not get an insurance professional to explain the choices available to you?"

    There is a cost to distributing any commodity, including life insurance. When costs are the same from different suppliers, the shrewd purchaser looks for added value. If one choice includes the services of a qualified advisor and ongoing financial advice, while the other doesn't, which one is really the better deal?

Copyright © 1999 Bowen Financial Inc. and Donald F. Pooley, Inc. All rights reserved. Illegal to copy without written permission

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LIFE LETTER
FIRE YOUR BANK?

    While a Mississauga firm negotiated its line of credit the bank "pressured us to have our corporate lines life-insured by them. 7here was the implication that if it were not done the line wouldn't be there. We have since fired this bank. I know darn well that I can get the identical product for at least 35-45% less from any one of 20-25 major Canadian life companies. "

    This businessman is right. Bank insurance is expensive. As a customer explained to his bank, "Your letter states that you have 'negotiated a highly attractive life insurance package'. You further state 'because this is group insurance prices are extremely attractive'. After looking at comparable rates per 1,000 for my age, I find that instead of paying $3.84 for one year, $5.52 for 5- years, and $ 7.80 thereafter, I can buy term insurance with a large insurance company for $2.3 7, and that premium will remain constant for a full 10 years. How can you say your rates are competitive let alone attractively priced? This is distorting the facts. Is this the kind of thing we have to look forward to if the banks are allowed into the life insurance business?"

    But the Mississauga businessman is wrong in thinking it is "the identical product". It isn't, as a B.C. couple discovered a few years ago. They had been banking at the same branch for over 15 years, and had a 5 year mortgage, life insured by the bank, which they kept renewing. At each renewal new medical evidence was demanded for the insurance. Just before they renewed their mortgage for the third time the husband was diagnosed as having cancer, and the bank refused to renew his life insurance. When he died there was no insurance to pay off the mortgage.

    Despite this apparent shortcoming bankers love their life insurance. You pay the premium and they collect the death benefit. It also locks you in as their customer. Its sole advantage to you and your family is that it will pay off the debt, if you die while you are still insurable.

    Is that really an advantage? Or would your family be better off if they collected the insurance, and then decided whether to pay off the debt? If it's a mortgage, and they decide to sell the house, isn't it easier to sell it with a mortgage? What happens if you increase your mortgage, or sell your present home to buy another with a higher mortgage? Or decide to switch banks? You need new life insurance. But, what if you can no longer get it, like the B.C. man?

    The answer is to have a policy which belongs to you instead of the bank, which is paid to your beneficiary rather than the bank; and which also does not require new medical evidence every time you renegotiate a loan, switch to another bank, or buy a new home.

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Mathisen Financial, Inc.
335 Redberry Road
Saskatoon, Saskatchewan S7K 4W5
Bus. (306) 242-7042 Fax. (306) 242-4314
Email: hans@mathisen.ca