The question is, should you purchase this coverage through your lending institution or from a life insurance company?  A good rule of thumb to follow when searching for advice?  Ask an expert! 

So, while it might be convenient when completing the paper work for your new mortgage to just sign one more form, be aware that it might be a costly decision. 

8 reasons to purchase your mortgage coverage from a life insurance advisor

Cost

Term life insurance available from a competitive life insurance company is usually cheaper than mortgage life insurance provided through the lender.  This is especially true if you qualify for non-smoker rates.

Availability 

If you have some health issues, the lenders mortgage insurance may not be available to you.  This may not be the case with term life insurance where competitive underwriting and substandard insurance are more readily attainable.

Declining coverage 

Be aware that the death benefit of creditor/mortgage insurance declines as the mortgage is paid down.  Meanwhile, the premium paid or cost of the coverage remains the same. 

With term life insurance the death benefit does not decline. You decide how much coverage you want to have.  This gives you the flexibility to reduce the amount of coverage and premium when the time is right for you.  Or keep it should another need arise or in the event you become uninsurable in the future.

Portability  

Term Life insurance is not tied to the mortgage giving you flexibility to shift it from one property to the next without having to requalify and possibly pay higher rates.

Flexibility

Unlike creditor/mortgage insurance, term life insurance can be for a higher amount than just the mortgage balance so you can protect family income needs and other obligations but pay only one cost-effective premium.

When you pay off your mortgage you will no longer be protected by creditor/mortgage insurance but term life insurance may continue. Also, unlike mortgage insurance, you are able to convert your term life insurance into permanent coverage without a medical.

The beneficiary controls the death benefit

With creditor/mortgage insurance there is no choice in what happens to the money when you die.  The proceeds simply retire the balance owing on your mortgage and the policy cancels.

With term life insurance your beneficiary decides how to use the insurance proceeds. For example, if the mortgage carries a very low interest rate compared to available fixed income yields, it might be preferable to invest the insurance proceeds rather than to immediately pay off the mortgage. 

Can your claim be denied? 

Often creditor/mortgage insurance coverage is reviewed when a death claim is submitted.  Creditor/mortgage insurance allows for the denial of the claim in certain situations even after the coverage has been in effect beyond that 2 year period.

Term life insurance is incontestable after two years except in the event of fraud. 

Advice 

Your bank or mortgage broker can advise you on the best arrangement to fund your mortgage but advice on the most appropriate way to arrange your life insurance is best obtained from a qualified insurance advisor who can implement your life insurance coverage according to your overall requirements.

Your mortgage will probably represent the single largest debt (and asset) you will acquire. Making sure your mortgage doesn’t outlive you is the most prudent thing you can do for your family.  

Contact me if you think it is time to review your current insurance protection or please feel free to use the share button to forward this to someone you think may benefit from this information.

• A life insurance advisor in California recently placed a $201 million dollar life insurance policy on the life of a tech industry billionaire;

• Well known music executive David Geffen was life insured for $100 million;

• Malcolm Forbes, owner of Forbes Magazine, was insured at the time of his death in 1990 for $70 million
• While life insurance is most often looked upon as a vehicle to protect ones family or business, the question that springs to mind is why would individuals with wealth need life insurance?  

The most common factor connecting people of wealth is that they have a substantial amount of deferred income tax that must be paid upon death.   In addition, they often have a strong desire to make a substantial donation to a favourite charity or educational institution. 

“Life insurance is an efficient way to transfer money to your heirs.” – Malcom Forbes 

In Canada, individuals are deemed to have disposed of all their assets at fair market value when they die, which often results in taxable capital gains and other deferred taxes coming due.  Paying premiums for insurance that will cover these taxes is almost always less expensive and more efficient than converting assets.

When allocating your investment dollars, it is helpful to understand what investments have the highest exposure to income tax. 

Fully Tax Exposed 

Investments which are taxed at the highest rate of income tax: 

• Interest bearing instruments such as bonds, savings accounts, guaranteed investment certificates;
  
• Rents;
  
• Withdrawals or income from registered plans such as RSP’s or RPP’s.

Tax Advantaged

Investments which are taxed at lower rates of income tax:

• Investments which are taxed as a capital gain;
  
• Dividends;
  
• Flow through share programs;
  
• Prescribed annuity income.
  

Tax Deferred

Investments on which income tax is deferred until the asset is disposed of or the investor dies:

• Registered Savings Plans;
  
• Individual and Registered Pension Plans;
  
• Investments producing deferred capital gains.
  

Registered plans, in addition to having the growth tax deferred also have the added advantage of the contributions being tax deductible.

Tax Free

Certain investment assets are totally free of income tax:

• Principal residence;
  
• Tax Free Savings Accounts;
  
• Death benefit of life insurance policies.
  

Life Insurance as an Investment

While the death benefit of life insurance policies is tax free, it is important to recognize that this also includes the investment gains made on the cash value portion of the policy. With this in mind, many investors have discovered that by allocating a portion of long term investments to a Universal Life or Participating Whole Life policy, the results can be significant when compared to tax exposed or tax advantaged investments. 

Life Insurance for Estate Planning

One of the main objectives of estate planning is to maximize the amount we leave to our families or bequeath to our favourite charities.  What many wealthy families have learned is that one of the easiest ways to accomplish this is to reduce the portion of the estate which is lost to the government to pay taxes at death.

While this helps explain why many individuals of wealth maintain life insurance, it also underscores the advantages of life insurance to anyone who will have taxes or other liquidity needs at death.  In addition, using life insurance as part of a charitable giving strategy can provide significant benefits to both the donor and the charity.   

As Malcolm Forbes alluded to, for providing capital to protect your family’s future financial security, paying taxes at death and creating a charitable legacy, nothing is more efficient or effective than life insurance.  

Please feel free to share this article with anyone who may find it of interest.

Here’s the good news – it doesn’t have to be an either or choice.  Why not do both?  Below are the features of both plans to help you understand the differences.

Tax Free Savings Account (TFSA)

• Any Canadian resident age 18 or over may open a TFSA. Contribution is not based on earned income.  There is no maximum age for contribution.

• Maximum contribution is $5,500 per year. 
  

• There is carry forward room for each year in which the maximum contribution was not made. For those who have not yet contributed to a TFSA, the cumulative total contribution room as of 2017 is $52,000.
  

• The deposit is not tax deductible, but the funds accumulate with no income tax payable on growth.

• Withdrawals may be made at any time on an income tax-free basis.  Withdrawals create additional deposit room commencing in the year after withdrawal.

Registered Retirement Savings Plan (RRSP)

• No minimum age for contributing, but must have earned income sufficient to generate RRSP contribution room.

• Maximum contribution is 18% of earned income based on your previous year’s earnings to a maximum of $26,010 (for 2017). The maximum contribution for 2018 is $26,230.

• There are carry forward provisions for years not contributing.

• Contribution is tax deductible from earned income, and the funds accumulate on a tax deferred basis.

• All withdrawals are taxable as income at top rate of tax based on earnings in the year of withdrawal.

• RRSP ends in year contributor turns age 71, when the RRSP must be converted to a Registered Retirement Income Fund (RRIF) or life annuity and taxable income taken.

The advantages and disadvantages of both

• Both programs provide for no tax on the earnings on the contributions, no difference there; however, only the TFSA allows for tax-free withdrawals.

• A good habit to get into is to reinvest the tax savings from your RRSP contribution. This maximizes your retirement savings with additional tax-deferred growth.  

• Or you might want to consider using your tax savings or refund created by your RRSP contribution to fund your contribution to your TFSA.

• Be careful not to over value your RRSP balance.  The total value of your RRSP will be reduced by the tax payable upon withdrawal.  Tax is also payable upon death if the beneficiary is anyone other than spouse.

• RRSP works best for those people who will retire in a lower tax bracket. 

The bottom line?

Unless the tax savings from the RRSP are routinely reinvested, at the end of the day, there is little or no difference between the results of a TFSA or an RRSP.  

Want maximum results?  Take your RRSP tax savings and reinvest it to have great impact on your retirement savings.  

Consider this:  

• If you invest $5,000 per year in an RRSP for 20 years at 5% compound growth, tax-deferred at the end of 20 years you will have $173,596.

• If you were to invest the $1,750 tax savings (based on a 35% tax bracket) for 20 years your RRSP will grow to $234,355.  That is an additional $60,759 in your retirement savings!  

• Of course, you could choose to reinvest the RRSP tax savings of $1,750 in a TFSA where it will accumulate tax free to the same $60,759 but the advantage here is you can withdraw this without tax.
  

Please call me if you want to discuss how you can optimize the use of both of these retirement vehicles.  As always, feel free to use the share button to share this article with a friend or family member.

Here’s the good news – it doesn’t have to be an either or choice.  Why not do both?  Below are the features of both plans to help you understand the differences.