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Your Financial Security, Issue 3

Stay on track to help achieve your investment goals

During times of economic and market turmoil, when the headlines bombard you and cause concerns, the advice of your financial security advisor is even more important. He or she can help guide you away from making investment decisions based on emotional reactions to headlines.

Although it’s disconcerting to see the value of your portfolio shift significantly, there are steps you can take to ride out market volatility and improve your confidence you’re still on track to achieve your investment goals.

Reaffirm your risk tolerance

By using a defined process that strategically designs an asset mix and selects the right combination of funds for you, your financial security advisor can reaffirm your tolerance for risk and verify your overall portfolio is correctly aligned with your investment needs.

Realign expectations

It’s important to use reasonable performance numbers when crafting your financial security plan because history has shown you can’t rely on a never-ending series of market gains. Working with your financial security advisor to find a conservative rate of return assumption can help keep short term fluctuations in perspective.

Rebalance your portfolio

Rebalancing makes sure you maintain the appropriate long-term asset mix recommended for your risk tolerance. Depending on your tolerance for risk you may need to change some of the investments within your portfolio to become more aggressive (using more equities) or more conservative (using more fixed-income products).

Reinvest in your plan

Don’t wait to invest. Down markets provide buying opportunities – consider the adage buy low, sell high – because some investments’ prices drop below their value.

During times of economic uncertainty and volatile markets, stay on track and avoid emotional reactions to headlines which can derail you from achieving your long-term investment goals.

Does participating life insurance have a place in your portfolio?

Understanding how different asset classes can be used to your advantage can be a big benefit when creating your financial security plan.

Would you consider life insurance and its cash value to be an important contributor to your net worth?

Consider participating life insurance as a unique asset class

Participating life insurance is a unique asset class because of its mix of immediate estate enhancement, cash value growth and the opportunity for life insurance benefit growth through dividends. This combination of benefits is a mix only offered with participating life insurance and can help you meet your financial goals.

Guaranteed cash value that won’t go down: Unlike most other assets that may be exposed to market volatility, participating life insurance has guaranteed cash values. And policyowner dividend values, once credited to a participating life insurance policy, can’t be reduced except as the policy or policyowner allows (for example, to help cover premiums). Accumulated values are fully protected from down-side market risk.

Tax advantages: While cash value is growing inside the policy, clients aren’t subject to tax on this growth (within legislative limits). And, the life insurance benefit passes tax free to your named beneficiary.

Flexibility: Whether your goal is estate preservation or having access to your policy’s cash value for retirement or other future needs, you have flexibility to help accomplish your personal financial goals.

Professionally managed: The participating account assets backing participating policies are usually managed by an experienced group of professionals.

The assets of the participating account are broadly diversified and the account is generally managed as a fixed-income account. There are specific teams of experts responsible for managing each asset class within the account’s portfolio.

Speak with your financial security advisor today about how you can benefit from adding participating life insurance to your financial security portfolio.

Why children need life insurance

Why would anyone buy life insurance for their children or grandchildren? For some people, it’s upsetting to even think about.

However, there are several scenarios where, in addition to the basic need for life insurance, it can make a big difference to a child’s future.

Helps build a nest egg

Consider the impact on your children’s start into adulthood if they could use the cash value of a permanent life insurance policy as a nest egg – to help pay for their education, as a down payment on their first home or to travel the world.

Compared with other investments, permanent life insurance can help you build a nest egg more tax-efficiently. While the cash value is growing inside the policy*, you’re not subject to tax on the growth, within prescribed limits. As a result of this tax advantage, more of your savings go towards your children’s future, instead of taxes.

When the children turn 18, you can transfer the ownership of the policy to them. They can simply let it grow or, when needed, access its cash value through withdrawals, surrender or borrowing.*

Ensures they can get protection as adults

Some life insurance policies offer options to guarantee your children’s future insurability – regardless of disability, illness, occupation, residency or foreign travel.

Without this, children who develop serious health problems *may not be able to get the financial protection they need when they grow up. Depending on the career they chose or where their travels take them, they may even be denied coverage. This may make it impossible for them to properly protect themselves and their family.

When you buy insurance with an option guaranteeing your children’s future insurability, you help protect them from these financial risks. If your children eventually have children of their own, then you are also helping to protect future generations.

Talk with your financial security advisor

Some people believe life insurance for children is unnecessary. For others, its special benefits (such as tax-advantaged growth and guaranteed insurability option) make it a valuable part of their family’s financial security plan. Talk with your financial security advisor to help decide what’s best for your children.

* Withdrawals will result in lower future values and possible tax implications. Any outstanding indebtedness reduces the death benefit.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of the writer’s knowledge as of the date submitted for publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, obtain advice from the appropriate legal, accounting, tax or other professional advisors. The views expressed are those of the author and not necessarily those of the issuer of any financial products for which the author may act as a distributor.

Changes to mortgage lending rules

The federal government has recently made several changes to mortgage lending rules. These changes could affect you if you’re looking at buying a home or refinancing.

Amortization period lowered
The maximum amortization period for a government-insured mortgage has been reduced to 25 from 30 years. While this move will monthly mortgage payments increase, it will also reduce the total interest you pay on a mortgage.

Here’s how it could work for you:

The following calculation* is based on a $300,000 mortgage with an interest rate of four per cent and an amortization period of 30 years.

Monthly payment	Amortization	Interest paid
$1,426.56	30 years	$213,558.84

The following calculation* is based on a $300,000 mortgage with an interest rate of four per cent and an amortization period of 25 years.

Monthly payment	Amortization	Interest paid
$1,578.06	25.10 years	$173,418.23

* This calculation is an approximation; this is not an approved amount. Actual mortgage applications are subject to approval and London Life lending criteria. Calculated on June 25, 2012.

In this example, you would save $40,141 in interest while your monthly payment would be $152 higher.

New limits on refinancing

The maximum you can refinance against your home also has dropped – to 80 per cent of its value

from 85 per cent. This reduces the amount of equity you may borrow against for such things as

debt consolidation and renovations.

Changes to service ratios

Under the new rules, you can spend up to 39 per cent of your gross debt service ratio on home expenses such as your mortgage, property taxes and heating. You can spend up to 44 per cent of your total debt service ratio on housing expenses and all other debt. This may or may not impact your borrowing ability depending on whether a lender’s maximum gross debt service ratios already fall within these requirements.

Government-backed insured mortgages now are limited to home purchases of less than $1 million. A down payment of at least 20 per cent now is required on mortgage loans for homes priced at $1 million or more.

These new rules took effect July 9.

Download a PDF of Your Financial Security, Issue 3, 2012

Your Financial Security, Issue 2

Cut the cost of your life insurance without sacrificing coverage

Term life insurance is an affordable, cost-effective way to acquire life insurance.

If you currently own a term 10 year policy, and need coverage for a longer period, that coverage can become even more affordable by converting your term 10 year policy or riders to a new term 20 year policy.

Convert for savings

If you currently own a term 10 policy, you have the ability to renew without having to provide proof of health. However, when you renew, premiums increase based on your current age, sometimes significantly.

if you convert to a term 20 policy within the first five years of your 10-year term you lock in premiums for the 20 year period, avoiding a potentially costly term 10 renewal.

In fact, calculated over a 25 year period, assuming conversion during the fifth policy year, you can save up to 35 per cent, depending on your age, sex, smoker status and other factors while getting the same amount of insurance protection.

Add value through conversion

Converting a term 10 life insurance policy to a term 20 allows you to put in place the coverage you need and can afford today to help meet your changing life insurance needs for the future.

How it works

A rate increase after ten years can be avoided if you simply convert your term 10 policy within the first five years of the policy being issued. You are not required to provide evidence of insurability, allowing you to remain in your original risk class, meaning your rates will remain the same as when your policy was first issued.

Term 10 policies and riders must be in force for a minimum of 12 months before conversion and you must apply for conversion before the earlier of the fifth anniversary of the Term 10 policy or the date the life insured reaches age 65. Some restrictions apply to the availability of conversion.

Is conversion right for you?

Converting to a term 20 policy in the fifth year may be right for you if you are sure you want life insurance for more than five years. By converting from a term 10 policy to term 20 in the first five years of your original policy, you could save significantly.

If you are already in the fifth year of your term 10 policy and you’re sure you won’t need life insurance five years from now, when the policy comes up for renewal, converting may not be your best option.

For more information, speak with your financial security advisor.

Staying out of the market puts financial goals at risk

Increase confidence to invest

If you’ve decided you’re better off staying out of the markets, you’re not alone. Many investors still feel uncertain with the after-effects of the economic downturn, and they’re concerned about their savings being diminished. It’s valid concern, especially when headlines today continually reminding us how risky investing can be.

However, staying out of the market creates its own risks.

Many investors still have money in either cash or cashable short-term investments like money market funds, guaranteed investment certificates (GICs), and low-interest rate bank accounts.

These investors are staying out of the market to protect their capital from market volatility. This strategy can have long-term consequences to their financial security. By limiting the growth potential equity markets can provide, low or no interest rate investments mean individuals aren’t keeping up with inflation. This could create a scenario where they may not have enough money to meet their goals.

During periods of market volatility, it’s important to have investment funds with some component of equities, if appropriate, as part of your overall portfolio. By including sound investment principles into your financial security plan, and staying invested for the long term, you’re more likely to meet those goals.

Use sound investment principles

Maintaining a long-term view and being properly diversified are two key principles for managing volatility. A portfolio with a variety of investments – like bonds and equities from various sectors around the globe – that match your risk tolerance is called asset allocation. It’s something your financial security advisor and investment representative can help you put in place.

Having a wide range of investments and a long-term outlook works well with the investment strategy called asset allocation. Asset allocation is a relatively simple concept to explain and a much more difficult one to implement. Done effectively, the result is an investment portfolio designed to create the best return based on a client’s comfort level with risk.

Implementing this model is no easy matter. You have to select the right mix of investments, including diversifying among asset classes, geography, investment management styles and sectors.

Asset allocation funds

Asset allocation funds are portfolios containing individual funds. These portfolios are strategically constructed using sophisticated investment management methodology. They’re designed to help you participate in market upswings while helping to protect capital during downturns. The goal is to deliver stable returns that take risk tolerance into consideration. In addition, the funds are automatically rebalanced so they always match your comfort level with risk. You pick the fund best suited to your needs and participate in equity markets, to your desired amount, without ever getting overexposed.

Asset allocation funds take the emotion out of investing. This can help keep you focused on the long term – even when markets become volatile.

The portfolios are managed by a team of experienced professionals. Investment managers understand the connection between economic issues and market behaviour and how those factors drive returns. They use internal and external research unavailable to most individual investors to make educated investment decisions on your behalf.

All this work is in pursuit of the funds’ objectives and ultimately in the best interest of every unitholder – including you.

Talk to your financial security advisor and investment representative today about how asset allocation funds could help you achieve your investment goals.

Did you know?

Someone with $100,000 invested in a GIC for five years would have $110,408 before taxes, assuming a compounded rate of two per cent. Is this the kind of return you’re looking for?

Take into account inflation and it’s even less. In terms of purchasing power, assuming a modest 2.5 per cent inflation rate over that same five years, the $100,000 would have a relative worth of only $97,525.

Develop your financial security plan with mortgages

If you want to insure your mortgage debt, you might want to consider purchasing personal term life insurance. It’s convertible and pays the beneficiary you name when the insured dies.

On the other hand, with most mortgage life insurance offered by a lending institution, the lender is the owner of the policy and pays off the mortgage when you die. Also, mortgage life insurance usually has decreasing coverage and it’s not transferable. So if you move or change lending institutions, you may need to apply for another policy.

Another point worth considering is if you make additional payments on your mortgage your mortgage life insurance coverage decreases. So the harder you work to pay off your mortgage the faster your mortgage life insurance decreases while your payments stay the same.

Personal term life insurance is about you, not where you live. Some companies allow you to save on the personal term life insurance policy fee for the entire term if you bundle it with a mortgage. You’ll be surprised how insuring you mortgage with personal term life insurance can work to your advantage later on as well.

Say for example you purchased a personal 10-year term life insurance policy and you were able to pay down your mortgage sooner than you imagined by using some of the prepayment options, such as making an annual lump-sum payment. With some companies, you could prepay up to 15 per cent of the original principle amount. If you used an annual bonus, income tax return or inheritance, you could save thousands of dollars in interest while paying off your mortgage sooner.

Plus, once your mortgage is paid off you’ll still have the full amount of your personal life insurance coverage in place to provide financial protection for your family.

A mortgage can be part of the foundation of a complete financial security plan. Once you’ve found the right home, find the right mortgage and the right mortgage life insurance protection.

Download a PDF of Your Financial Security, Issue 2, 2012

Martin Boileau, B.A.A., L.Sc. Compt.

Financial security advisor

Investment Representative

Group insurance and group annuity plans advisor

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