What will you do with a large lump sum of money?

Retirement Planning
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Canadian Investor

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March/April 2005

Commentary - Hans H. Mathisen

What will you do with a large lump sum? - LIFE LETTER for March deals with a situation most people wish they were in: A sudden windfall, such as a lottery jackpot or an inheritance. It's sound advice not to spend more money than one takes in.

Should you buy this insurance from the bank? - Canada's banks offer insurance to their customers. LIFE LETTER for April deals with Critical Illness Insurance. The same drawbacks also apply to Life Insurance and Disability Insurance purchased from the bank: The coverage is structured to benefit the lender, not the borrower - you and I. Most of us like to have control of our own financial affairs. And that we can get when insurance policies are taken out on an individual basis. At the time of a claim, you are in control. You decide how the proceeds of the claim will be disbursed. Please call me for details.

THE STOCK MARKETS - The first quarter of 2005 favored investors in Canadian equities. The major indexes as of March 31 performed as follows: The TSX Composite +3.96%; Dow Jones -2.59%; NASDAQ -8.10%; S&P 500 -2.59%. The major European indexes are all on the positive side, from a low of +1.66% in Britain to a high of +6.45% in France. Hong Kong is at -5.01% and Japan's NIKKEI grew 1.57%.

WALTON INTERNATIONAL - Properties within the city limits of Calgary are now available to Saskatchewan investors. The 25 year track record for Walton investors is that their money doubles every 4 years. I will be pleased to put you in touch with Mr. John Chomyn, our Walton representative. Please call soon, as these properties sell out quickly!

Here's the bi-monthly update on 4 of my own mutual fund portfolios:
PORTFOLIO #1: March 7, 2003 to March 31, 2005: the return is 33.2%
PORTFOLIO #2: April 28, 2003 to March 31,2005: the return is 37.7%
PORTFOLIO #3: Nov. 29,2004 to March 31,2005: the return is 7.7%
PORTFOLIO #4: Nov. 29,2004 to March 31,2005: the return is 5.5%

My in-depth research of mutual funds is the foundation of my investment strategy.

Should we talk? If you think we should, please call me.

HAPPY INVESTING!
Sincerely,
Hans Mathisen

LIFE LETTER

What will you do with a large lump sum?

Betty won a million dollars in a lottery, a dream come true. She remembers reading about previous lottery winners and the fact that most had little or nothing to show for their luck after two years. Betty was determined to not let that happen to her.

When his mother died. Randy was left with a substantial amount of cash from her estate. His parents had lived frugally all their lives, but Randy is better at spending money. He doesn't want to fritter away his inheritance.

Karyn, a new widow, received almost a million dollars in life insurance proceeds when her husband, Mike, died. It was set up to maintain her lifestyle in just such an event. With two young children, she wants money to be the least of her worries.

Most people who suddenly receive a substantial amount of money are not prepared to handle it. We have all heard about the lottery winners who vowed they would not let the money change their lives, but soon became the best customer at the local auto dealer, travel agency and electronics store.

It can be hard to resist going on a little spending spree. But all too often it is virtually impossible to stop buying until the money is all gone. It is vital to enlist the help of a professional financial advisor.

When someone "comes into some money" like in the examples above, it is important to take some time before making any big financial decisions. This may be a few weeks or several months.

It is critical to set some realistic financial goals. They should include:

Pay off high interest debt With interest charges on credit card balances as high as 20 or more, these should be paid off right away.
Catch up on RRSP deposits. In Karyn's case, she can even maximize her husband's RRSPs, too. This will reduce or eliminate the taxes on his final tax return. She can then roll his RRSPs, tax-free, into her RRSP and keep deferring taxes until she retires.
Review life insurance. It can be tempting to let policies go if there is lots of cash on hand. Your estate will still need liquidity when you die and the taxman will need to be paid. Life insurance is the best way to do this.
Invest most of the money for income. Think of a large amount of money as a cow that gives you milk. The milk, of course, is income. If you eat the cow, it can't produce milk. So, if you spend all the money, it can't generate income.

Betty can still get herself some nice things, but she can buy them on credit and use the income from her "cash cow" to pay the loans. When they're paid off, she still has the income. Part of the planning that Mike and Karyn did included a home free and clear. Karyn can use the income to continue making mortgage payments and she will still have the income when it's paid off. Randy can top up his RRSPs and buy a nice home, paid for with his new income.

Want help with your financial strategies?

Call Hans Mathisen today at (306)242-7042.
or email - hans@mathisen.ca

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LIFE LETTER

Should you buy this insurance from the bank?

Jim and Karen were finalizing their mortgage when they were offered Critical Illness Insurance by their lender. It made sense to have their mortgage paid off in the event of a serious illness and it seemed convenient to get it from the bank. They wondered if a personal plan was a better way to go.

After taking a closer look at the insurance the bank was offering them, Jim and Karen learned:

Who owns the policy?

The critical illness insurance offered by most banks is group insurance. This means the bank owns the policy and is also the beneficiary. The lender has the right to cancel coverage or increase premiums at any time.

Jim and Karen will not be able to choose how any proceeds are used as the bank insurance can only be used to pay off the mortgage. It may be better for them to invest the proceeds instead and keep making mortgage payments with the income. When the mortgage is paid off, they would still have the income from the investments.

What conditions are covered?

Most bank Critical Illness Insurance provides basic coverage for cancer, heart attack and stroke only. An individually owned policy can cover these conditions and many more. See your advisor for a complete list.

How long will the coverage last?

Critical Illness Insurance offered by most lenders ends with the mortgage. When Jim and Karen make their last mortgage payment, the coverage with the bank expires. An individual plan stays in effect until you cancel the coverage, the term ends or a claim is paid.

Is there a better rate for non-smokers?

Most bank plans charge the same premium for everyone. About three quarters of the population are non-smokers, so they get to subsidize the smokers covered under the bank plan. Most individual plans offer lower premiums to non-smokers.

What if you switch lenders?

Most lenders will terminate their coverage if Jim and Karen want to change banks at renewal time. If either has a change in health, it may be difficult or impossible to get coverage with the new lender. An individual plan is completely portable and most have premiums that are guaranteed for the entire term of the contract.

How much coverage is available?

The only amount Jim and Karen can get through their lender is the amount of their mortgage and the benefit decreases with the debt. They can get just about any amount they want on an individual plan and the coverage won't decrease with the mortgage.

They also learned that there are no restrictions placed on the use of an insurance payout from an individual plan. It's up to Jim and Karen - pay-off the mortgage or other debts; seek medical treatment in another country; pay for extra medical expenses; take a vacation or time off work; replace lost income; modify their home or vehicle if necessary; maintain their independence. Jim and Karen said no to the bank insurance and yes to more flexibility.

Want to know more about critical illness insurance?

Call Hans Mathisen today at (306)242-7042.
or email - hans@mathisen.ca

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Email: hans@mathisen.ca