Category: Insurance

Planning for a Disabled Child

Posted on by Chantel Gibbs

Parents of disabled children often spend sleepless nights worrying about what might happen to a disabled child if they are gone. Estate planning is very important for everyone, but particularly for parents of a disabled child because special considerations may need to be made for that child over the other children. This article outlines some of the planning opportunities, depending on what the parent wants to leave for their child’s provision.

Real Estate Property

Property like a home can be left for a disabled child in one of three ways – through the will, in a trust, or through joint title. Often when using a trust, the trust might not come into existence until after the parents pass away, but the details of how the trust will work are already prewritten – usually in the will. The will might also just simply specify that the house is left to the disabled child, giving them full control. A trust is advisable if the child’s disability is a mental one, but if it is a physical disability and they can manage their own finances, then letting the child have full control is fine. The downside of a trust is that it needs a trustee to manage it and it will need to file a tax return separately for every year that it is in existence (typically a $1000 accounting/legal fee yearly).

By far the simplest way to leave a family home to a disabled child is to add them joint on title because then it won’t even need to be part of the parents’ estate and will. This is best if the disabled child is living with the parents, is not mentally disabled, and doesn’t have another property, otherwise the principal residence tax exemption might be partially lost.

Leaving Funds

Funds can also be left for a disabled child in one of four ways – by beneficiary designation, by setting up and contributing to a RDSP, through a trust, or through the will. 

Accounts like RRSPs, TFSAs, segregated funds, and life insurance allow beneficiaries to be named so that those funds are paid out directly on death instead of having to go through the will and the estate. This can be a simple way to give extra to a disabled child while still having the will distribute the rest of the estate equally between all children. Beneficiary designations can be easily updated with the financial institution without having to update the will. 

A RDSP account is a savings accounts for people who qualify for the disability tax credit federally and the government gives matching grants depending on how much family contributes to the account every year. The RDSP is in the name of the disabled child, however, and would be part of their estate if he/she passes away. 

Funds can also be put in a trust, either while the parents are alive or created in the will upon the parents’ deaths. As mentioned earlier, a trust has additional administration and fees to maintain, but is the best for a child with a mental disability. Alternatively, the will can simply leave a higher percent of the residual estate to a disabled child, assuming the child can manage their own finances.

Communication

Whatever strategy you decide to use to provide for a disabled child, it is recommended to have a family discussion, especially if a sibling is expected to be a trustee or expected to help in managing the assets set aside for the disabled child. The only instance where parents might decide to keep it quiet is if the other children might resent the extra that a disabled child gets. In that case, gifting a life insurance policy or funds through direct beneficiary designation is the best way to quietly give extra to one child. Some insurance companies will even allow the death benefit to be paid out as a monthly allowance for the rest of the child’s life – almost like a trust but without the management cost.

If you would like to explore ways to set aside assets for a disabled child, reach out and book a meeting with me today!

What kind of life insurance should I buy?

Posted on by Chantel Gibbs

What kind of life insurance should I buy?

You’ve probably heard about life insurance, but you might be uncertain what the best options are for you and your family. In this article, I’ve put together some general tests to determine what product would be better for your situation. For a brief introduction to the types of life insurance, please look at my prior article The Basics of Life Insurance

The most basic type of life insurance is term insurance that covers a person for a set number of years (though you can get a permanent kind called a Term100). If you are in your prime working years, this is the best way to have affordable coverage for 10, 20, or 30 years at a set premium to cover your income earning potential for that time and protect your family. This is the ideal insurance to buy when you are unable to put much into savings and need to cover debt like a mortgage. A lot of insurance companies like Empire Life, Manulife, and Equitable Life also allow you to bundle critical illness insurance into it for an extra premium. Term insurance is also good for a business owner who intends to retire out of the business or sell at a later date and only needs insurance for a certain number of years.

Whole life insurance is a permanent kind of insurance where the insurance company invests the premiums in a fund and pays dividends to each policy holder yearly based on the performance of the fund and whether more or less people insured died than were expected to die. The dividends are very consistent year over year, making a whole life policy a very stable investment that will far outperform a GIC or most bond funds. In some ways, a whole life policy is like a TFSA on steroids. As long as the cash you invest in the policy stays in the policy, the return on that investment is tax-free. The cap on how much you can put in a whole life policy is quite high, so if you have already maxed out your TFSA and want more tax-free savings, this could be ideal for you. The down side, however, is that it usually takes over 12 years for the cash value of a whole life insurance policy to surpass the premiums you’ve put in – meaning you better not need liquidity from it anytime soon. Also, whatever cash you pull out of an insurance policy directly will become taxable, so when the policy eventually does have a large cash value, the best way to tap into that is to get a line of credit against the cash value. Manulife Bank specializes in these kind of insurance policy loans for a reasonable interest rate.

Many people get a small whole life policy to help pay for final expenses and combine it with a term insurance rider to cover those income producing years. Combining all the insurance needs in one application can reduce policy fee costs and save time. If possible, use an insurance broker who can shop for you among the major insurance providers for the best rates for your age and health status.

If you are a business owner who is saving a lot of your business earnings in a holding company, permanent life insurance can have huge tax benefits. Be very careful to put the insurance in the correct company since insurance cannot be moved on a tax deferred basis between companies like most assets can. Generally, a permanent insurance policy should never be put in the active business company, especially if it is a business you might sell in the future.

Permanent life insurance in a private company is a tax-free investment just like in personal hands, meaning that putting money into an insurance policy instead of a regular investment portfolio can reduce taxable investment income. As of 2018, any taxable investment income over $50,000 grinds down the small business limit for earnings that get to enjoy the lower tax rate compared to the usual business tax rate.

The greatest tax benefit of permanent life insurance for a private business is the death treatment. On death, the majority of the insurance payout becomes an addition to the capital dividend account from which tax-free dividends can be paid out to shareholders. This can greatly reduce the tax on death for the estate of the shareholder who is insured or enable other shareholders to buy out the deceased shareholder with tax-free dollars.

If you would like to discuss the kind of insurance that might work best for your situation, feel free to reach out for a free initial consultation.

 

  • Term insurance is to cover short term needs like income replacement for a family or business.
  • Permanent life insurance can be a great investment for retirement or  a way to pass the family business  along with less of a tax impact.     

 

 

 

 

 

 

The Basics of Life Insurance

Posted on by Chantel Gibbs

The Basics of Life Insurance

There are two main kinds of life insurance and they are suited for different purposes. Temporary life insurance provides coverage for those years while raising a family and needing to protect family income. Permanent life insurance can be both an investment and a way to pass assets on to heirs or pay final taxes.

Term Life Insurance is life insurance that has a set premium for a specific number of years and then renews at a higher amount after that. It can usually only be renewed up to age 85. For example a Term 10 policy is usually very inexpensive for the first ten years, then it renews at a higher premium for the next ten. Eventually, it becomes more expensive than a permanent policy taken out at the same time. That’s why a term insurance policy is best for temporary coverage.

Whole Life Insurance is a permanent kind of insurance with a cash value that grows over time as more money is invested into the policy and the insurance company makes a return on the investment. The policy can be paid for over 10 years, 20 years, or a set premium every year for life. In retirement, the cash value can be leveraged with a line of credit, providing some tax-free income. At death, the insurance company first repays any outstanding loans on the policy and then pays the remaining death benefit to the named beneficiaries. Whole life is a great way to make some tax-free investment returns as well as provide a benefit to heirs on death.

Universal Life Insurance is a flexible kind of permanent insurance. It works best for a person who has a set amount they want received at death and they aren’t looking for substantial growth in the death benefit. It has the flexibility to be minimally funded or funded with more than the minimum premium and invested tax-free to help pay for future premiums. It can in many circumstances be less expensive than a whole life policy.

If you are interested in life insurance, I can help you pick out what would most suit your needs. I also have access to the major insurers in Canada and can provide you a quote with the lowest cost out of those insurers.