The below was an article that ran Jan 18, 2011 in which I contributed

BY DONNA GLASGOW – THE INSURANCE AND INVESTMENT JOURNAL

Since the federal government launched them two years ago, a couple of things have become clear about Tax Free Savings Accounts: Canadians like them, and they are confused about them.

A recent survey by BMO Financial Group indicates that while 36% of Canadians have opened a Tax Free Savings Account (TFSA), they know little about the wide range of investments that can be held within these plans.

The survey, which was conducted by Leger Marketing and released Nov. 9, found that only 20% of respondents knew that mutual funds could be held within TFSAs and only 26% knew that GICs could be included. Meanwhile 37% of those surveyed had no idea what investments are eligible. The survey included 1,513 Canadians who were surveyed between Oct. 25 and 27, 2010.

“While the adoption rate has been swift, we are seeing some uncertainty and confusion among Canadians when it comes to how to make the most out of a TFSA,” commented David Heatherly, Vice President, BMO.

Gordon Pape, author of more than 40 books on investment and money management, including The Ultimate TFSA Guide, and a columnist for The Insurance and Investment Journal, thinks the adoption rate of TFSAs by Canadians “is remarkably good considering these plans have only been available for two years. RRSPs have been around for more than half a century, but according to the CRA only about one-third of taxpayers contribute to them each year.”

Given TFSAs quick popularity, what explains the lack of knowledge about investment options? Mr. Pape says the confusion is due in part to the name Tax Free Savings Account. “The inclusion of the word “savings” seems to have given some people the impression that only savings-type securities were eligible. we should have called them simply Tax-Free accounts. Also, the plans were (and are) heavily promoted by the banks, which understandably focused on savings accounts and GICs.”

Data collected by Investor Economics, a financial services industry research and consulting group, indicates that Canadians who open these accounts at a retail bank branch are primarily investing their TFSA contributions very conservatively, even though these plans offer the opportunity of tax sheltering potentially higher returns from other investments.

This data, collected from surveys of 15 retail bank branches and branchless institutions, shows that as of June 2010 a total of $21.3 billion had been contributed into 5.2 million accounts. Of these assets, $12.2 billion or 57% of TFSA contributions went into savings deposits while another $6.3 billion or 29% went into term deposits (see inset tables on page 8). Mutual funds only garnered 12% of contributions. The data does not include TFSA deposits with life insurers.

Sandeep Gosal, Senior Analyst with Investor Economics explains that the number of accounts opened at the financial institutions surveyed does not necessarily reflect the number of TFSA clients. This is because Canadians are not limited to one TFSA. “Clients can open multiple accounts and they can also do so at multiple institutions… So it’s really difficult for us to determine how many Canadians actually have TFSA accounts,” he explains.

Mr. Gosal also notes that 8.2% of the accounts opened had a balance of zero, which could partly be explained by clients opening more than one account and not contributing to one. Close to half of accounts contained $5,000 in assets or more.

Investor Economics also collected data on the financial institutions’ online discount brokerages and full service brokerage operations. These channels had opened just over a one million TFSAs and collected more than $7 billion in contributions as of June 2010. The breakdown of assets by product for this channel was not available.

Larry Laurendeau, a financial planner with BMO Financial Group based in Vaudreuil-Dorion, Quebec believes that putting TFSA contributions into low interest earning products defeats the purpose of these plans as tax shelters. “You’re not going to defer a lot of taxes on today’s interest rates.”

Earning one per cent interest isn’t going to be detrimental to someone’s tax situation, he continues, especially at $5,000 per contribution. What clients need to understand is that if they want to take some risk in investments with higher growth potential – while remaining within their risk tolerance – the TFSA is the place to do so, he says. This doesn’t necessarily mean equities. Even a bond paying 5% or 6% could be placed within a TFSA. “Anything that’s yielding a good interest or unit return, then a TFSA would definitely be the place to put it.”

Mr. Laurendeau believes the financial services industry is partly to blame for the fact that Canadians are generally using TFSAs as savings accounts.

He says that during the first year that TFSAs were introduced, Canadians were very unclear as to what they could invest in these plans due to name which he considers misleading. Canadians thought TFSAs were bank accounts and financial institutions started catering to this misconception by promoting higher rates of interest in TFSA daily interest savings accounts, he says.

As a result, many people believed that “the TFSA was a product as opposed to being the basket that holds the product… Not too many people know that anything you can put in an RRSP you can put in a TFSA… Everyone kept the focus that it was a daily interest savings account.”

A new name could help clarify the situation, he adds. “I absolutely believe the name should be changed. I think the word ‘account’ is very misleading.”

Doug Frain, a Burlington/Oakville-based financial planner and principal with Millcroft Financial Group, says the economic environment is another factor that has likely led Canadians to put their TFSA contributions primarily into savings accounts. “Part of it I think is the market. Perhaps people are a little bit shell shocked…and a two per cent guarantee looks good…”

Another factor is simply the average person’s lack of financial savvy, Mr. Frain adds. The typical person probably doesn’t spend more than one hour a year reviewing their personal finances, he estimates. “They’d much rather plan a day at the beach than look at their finances. So, they may have heard about this TFSA, but they don’t really know what it is about.”

Mr. Frain says banks’ extensive reach is a third factor explaining the TFSA savings account trend. The banks are filling “a very good role” in getting droves of clients to act on opening TFSA accounts, but bank tellers will advise opening a savings account, he explains.

Mr. Frain has also heard from a number of clients that their accountants have told them to invest their TFSA contributions in savings accounts. The reasoning behind this strategy is that 100% of interest income is taxable, whereas only 50% of capital gains earnings are taxed. What he tells clients is that it is better to earn 8% in a TFSA on capital gains earnings than 2% on interest income.

On the other hand, he adds, if the client plans to use their TFSA for short-term goals, then the savings account approach makes perfect sense.

Mr. Frain says TFSA investing can serve more than one financial planning purpose. Because multiple accounts can be opened, the client may first want to start with a savings account to be used as an emergency fund.

Then money in a second TFSA account, earmarked for long term investing, could be invested in products such as mutual funds or segregated funds.

What can advisors do to help reduce their clients’ confusion with respect to TFSA investment choices? Mr. Pape says education is the key. He suggests sending a letter to all clients at the beginning of the year explaining the range of investment options available. “A client who does not have a TFSA with an advisor may not be aware of all the options and may be motivated to open a new plan when he/she has all the facts.”

What does he think are some of the best investment options for a TFSA? Mr. Pape says this depends on the objective of the plan. “If the account is to be used for emergency savings, the investments should be highly liquid and low risk. If the goal is to maximize the tax savings, aggressively managed mutual funds are a good choice.” In his own TFSA, Mr. Pape has held Front Street Growth Fund, Bissett Microcap Fund and Dynamic Value Balanced Fund.

Does he consider segregated funds as a good option for TFSAs? “Yes, provided they carry a reasonable MER and historic returns are comparable to or better than the category average,” he adds.

Mr. Laurendeau says one way to educate clients is to clearly include it as a key component of a financial plan. Traditionally, advisors have developed client proposals or financial plans that break down investments into registered and non-registered investments. “There should be the third category added to every financial plan which is Tax Free Savings Accounts.” Some people include TFSAs in the non-registered component of the plan, but these should be separate he advises.

Finding the funding

Another way that Mr. Laurendeau is encouraging his clients’ to contribute to TFSAs is to adopt an investment strategy based on maximizing their RRSPs and then using the tax refund to fund their TFSAs. “Essentially you’re having the government fund your TFSA. From there we select the investments according to their risk tolerances and time frames…”

Many clients might choose balanced portfolio mutual fund products for their TFSAs while some will go for riskier investments. Mr. Laurendeau, who holds a securities license, has some clients who put various kinds of stocks into their TFSAs. “When it does grow, or if it splits or if it makes a lot of capital gains…none of it will be taxed.”

Meanwhile, he adds that some clients with significant non-registered assets feel that $5,000 TFSA contributions are not worth bothering with. He cautions these clients that in the years to come their TFSA accumulation room will grow considerably and begin to have a big impact on their financial plans. “We’re going into year three and it is already at $15,000 starting Jan. 1.”

Starting 2012 the limit is $20,000

Those individuals that work in industries such as paving, roofing, landscaping to name a few face the dilemma of being relegated to the ranks of second class citizens.  While they may have workers compensation protection while they are working. They lack coverage off the job (24 hours a day) and for sickness.

In fact the vast majority of injuries occur off the job so WSIB is hardly financial peace of mind!!  Depending on ones life style and occupation in your mid 40’s sickness claims out weigh injury claims.

Association or group plans require full time employment to qualify! Association plans also can be modified, changed without your input and often have very tight definitions so coverage tends to be limited.  Group plans cease when you are laid off in the off season.

There are a few providers that do offer plans that provide protection on an individual or group basis suited to seasonal workers.  Their only requirement is a minimum of 35 weeks of employment. They will use T4 earnings, net business income or gross revenue in calculating qualified income for benefit purposes.

While many people believe their house is their biggest asset – in fact your ability to provide an income is. Assuming a $60,000 income for a 30 year old. Not taking wage increases or inflation into account – their earning power to age 65 is over $2.1 million! You insure your home 24 -7.  Insure your ability to produce an income 24 – 7. This includes on and off the job protection for injury and illness!

A Seasonal occupation does not have to mean no disability income protection!!

By making the right financial moves, you can help make life a little easier for yourself and your loved ones.

We can’t always escape the sad events in our lives, but we still need to carry on. Obviously, for a married person, a divorce or the death of a spouse is a traumatic event. But if either event happens to you, you’ll need to make some financial moves to keep your life on track.

One step you’ll need to take is to examine your income stream. Will you be able to collect spousal support or life insurance proceeds? If so, you’ll want to factor these proceeds into your overall financial strategy. And if you’re employed, and you don’t have disability income insurance, you may want to consider it, because if you should become sick or injured and cannot work, you could face difficult times. Your employer may offer a short-term disability policy as an employee benefit, but it might not be sufficient, so you may need to consider adding additional disability coverage on your own.

Of course, even as you consider your cash flow needs for the present, you’ll still have to plan for your future — including your retirement. When you were married, you may not have been contributing as much as you could afford to your RRSP, particularly if your spouse was fully funding his or her retirement plan. If your spouse had an pension plan, you might not have felt the need for one, either, but now that you’re solely in charge of your own financial destiny, you’ll need to consider putting as much as you can possibly afford into your RRSP or other employer-sponsored retirement plan, along with your own RRSP. Since a RRSP offers significant tax benefits, they are a great vehicle in which to save for retirement, so you should consider taking full advantage of them.

Speaking of your RRSP or other investment accounts, you may now need to change the beneficiary designations. These designations may even supersede the instructions on your will, so it’s important to keep them current.

Apart from taking these steps, what else should you do to make sure you position yourself to meet your own goals? For one thing, you may need to review your overall investment mix, both inside and outside your retirement accounts. When you were married, you and your spouse may have established a portfolio based on a combination of your risk tolerances and time horizons. But now you’ll need to determine if your existing asset allocation truly reflects your needs, preferences and aspirations. A professional financial advisor can help, so if you don’t already work with one, now might be a good time to start.

One final suggestion: If you have children at home, make sure your life insurance coverage is sufficient. You’ll want to help make sure your children will be provided for, should anything happen to you.

There’s no sugarcoating the pain and difficulties that can accompany the loss of a spouse through death or divorce, but by making the right financial moves, you can help make life a little easier for yourself and your loved ones.

So in summary:

-  Figure out your total income

- Start saving for “your retirement”

- Check your current investment policy statement and beneficiaries.

- Make sure you have proper disability and life insurance for your "new independent self"

Get a Financial Advisor your feel comfortable with and you trust.

The Important Details

It’s unfortunate that so few people are educated about Whole Life insurance. There are so few companies still offering participating whole life because there is more profit in Universal Life Insurance. Thus most advisors are poorly educated on the value of a participating whole life policy because they companies they deal with have long abandoned the product. Those with the product knows little or nothing about there policy. If people had more information they could make a more informed decision on what makes the most sense for there situation. I am one of those who tout whole life insurance with no apology, as this policy has it's place in the insurance portfolio of many people. This policy fits some needs that term Life insurance or Universal Life insurance simply cannot fulfill.

Permanent Life Insurance
 The whole life policy can be described as permanent life insurance. This suggests that you can keep this policy for as long as you choose, even if it is to age 100. A term life policy simply cannot guarantee that.


Cash Values
 Whole life, or ordinary life insurance, have what is called " guaranteed cash values". Some people like this idea because they may choose to use these values as a sort of saving to assist with the college costs or even for a supplemental retirement fund.
Whole Life Insurance Dividends
 All whole life policies are not the same. Some life insurance companies have a great history of paying dividends to their policy owners on a very regular basis. This does not say that they always will be in a position to pay a dividend. Dividends are not guaranteed although they do vest with the policy (they cannot be taken away or have anegative year) There are some life insurance companies that do not perform very well.
(30 year return of 9%+ with very little fluctuation) 
There are several options that you can choose from but most people have a tendency to apply their dividends to the purchase of "paid up additions". These are little single premium whole life insurance policies.
The other available dividend options are as follows: – leave your dividends to accumulate interest or use them to reduce premiums – take them in cash each year.


Why Cash Values And Dividends Are Important
 If at some time in the future you should need to put your hands on some emergency cash and that money is available through your cash values plus dividends you may take a percentage of this in the form of a policy loan. Even though you decide how you repay this loan you need to keep in mind that there is interest charged on this loan. In addition the death benefit of your policy is reduced by the amount owed and any unpaid accumulated interest. Another thing to note is that if you have an outstanding loan on your whole life insurance policy the amount of dividend paid will also be affected.


Non-forfeiture Values
 Another important consideration when buying permanent life insurance policies are non-forfeiture values. These options allow you to protect yourself from loss in the event you are unable to continue premium payments. 
Automatic Premium Loans
- With most whole life insurance policies if a premium payment is missed the automatic premium loan is timely activated to prevent the policy from going into a state of lapse. In other words, you do not lose your insurance as long as there is sufficient cash value to keep it in force. Interest is charged on this amount just like any other premium loan. 
Extended Term Insurance
- Instead of using an automatic premium loan to keep your whole life insurance policy in force you may choose to use what is called Extended Term Insurance to keep the policy in force. This is a Term Life Insurance policy for as many years as the cash value of the policy will purchase. If you should die during this period the full face amount of the policy will be paid to your chosen beneficiary. The only disadvantage is that with this option your cash values plus any dividend earned will dissipate over time.
 Reduced Paid Up – Policy
 Another option you have if you are unable to pay the premiums for your policy is to elect to keep a reduced amount of life insurance in force rather than the full amount you initially purchased. This policy, though for a reduced amount, will be fully paid up and you will never pay a premium again. The reduced death benefit will be paid upon the death of the insured. 
Cash Surrender Value
- You may also surrender your policy for its cash value plus any dividends as another option. If there is any outstanding indebtedness on the policy it will be deducted from the amount you receive.


Waiver Of Premium Rider 
When purchasing your whole life insurance policy you have the option of adding the "waiver of premium rider" an a very minimal cost. You may find it beneficial as if you should become disabled the life insurance company will waive your premiums for as long as you are disabled even if it is for the rest of your life. You must, however, be disabled for a minimal period of time, usually six months. Whenever you are able to return to your job you continue payments of your policy. Nothing is owed for the period you didn't pay. 
Accidental Death Benefit
 Another valuable rider you can add to your whole life insurance policy is the "accidental death benefit rider". If you should die in an accident the life insurance company will pay twice the face amount to your beneficiaries. Some life insurance companies allow you to purchase an additional unit of the accidental death benefit rider. In other words, your family would receive three times the face amount of your whole life insurance policy if you died in an accident. Whole life insurance premiums are higher than term life insurance premiums. If you feel the above-mentioned benefits are worth the additional cost this type of life insurance may be for you.

I often describe a whole life policy as your own personal financial tsunami protection plan.  When everything else does poorly it just keeps chugging away and is there when you need it the most!!!  Lets face it who wouldn’t want a cash infusion in their retirement years or make sure if they passed away there was some money to make up for the loss as a result of the reduction in there company pension, CPP and elimination of there OAS.  If its not needed then what a great way to assist your kids or grand kids with some legacy $$’s.

If you should need the $$ there are some very tax efficient way to get $$ out of your policy in your later years.

Let me know what you think or ask me any questions that you may have regarding your situation.

In the past, many people depended on employers to provide some type of life insurance as part of the employee benefit packages.  With a number of employers choosing to reduce or even do away altogether with these types of benefits, the task of evaluating and choosing a life insurance plan now falls to the individual.  Some are choosing to put off this important task while focusing on pay off debt.  This can be a very costly decision; especially if there is relatively little money in a savings account or other account that a spouse or partner can draw upon when you pass away.

Life insurance can provide a significant amount of security for loved ones in the event of your untimely demise.  The proceeds can be used to pay credit card debts and other obligations, as well as ease the burden of any end of life expenses that may be present.  Any amount that is left over can then go toward helping with education or other options that will make life a little easier for your survivors.  For this reason alone, having term or whole life insurance is a must.

Finding the right Life Insurance coverage depends on a number of factors such as age, income level and life expectancy.  This means some consumers can secure a higher amount of insurance than others.  Even if all you can afford right now is a basic plan that will provide enough to settle the expenses you leave behind, talk with an advisor that will take the time to do a proper needs analysis today.  Many policies are more affordable than you think; choose a plan that is right for your circumstances. For example and standard Ten year term, 40 year old male, non smoker with $500,000 death benefit is ~$35 per month. A female is even cheaper. Why wait or rely on your employer – don’t you want to own and control this important piece of financial security for your family? 

Doug Frain, CFP, Principal 
| Millcroft Financial Group 


You maybe surprised to hear that in most cases your largest asset is not your house or business – but your ability to earn an income.  You insure your house, business, car, jewelry – what about your income!!
The younger you are – the greater your financial risk!   Consider a 30 year old earning $50,000 / year – their remaining income potential is $1.75 Million. (not taking into account inflation and merit or promotion increases) $3.5 Million if earning $100,000 per year.

Disability Income Replacement:
Why would you not protect that in the event of an accident, injury or illness.  Especially if you have children, parents or a spouse depending on you financially.   Government benefits are very limited.  UI is only for 15 weeks and CPP benefits are Maximum $~1,000 / mth.   Worker compensation is only for a work place accident!!  That is only partial coverage.  You need 24 hour protection as accidents don't just happen at work!
Even if you have coverage through your employer a review of the coverage can reveal that you don’t have enough, or can identify potential benefit limitations. 
While no one plans to become disabled, you can be prepared with an income replacement plan.  There is no right or wrong decision – other than to do nothing!!!

Do I need it?

Ask yourself the following questions. If your answer is no to all three, then you need some form of Income Protection:

• Will your employer continue to pay you a percentage of your salary indefinitely if you are off sick?
• If not, and you are part of a couple, could you pay all the bills and live on your partner’s income indefinitely?
• If not (or you are single) do you have savings you could live off indefinitely?

If you found this information helpful or have any questions – send me a note.

I am a Certified Financial Planner in the Burlington to Mississauga area.

I am a full Service Financial Planner,  Life Disability & Critical Illness needs Analysis and Insurance. RRSP, RESP, TFSA, High Interest Savings accounts, Tax sheltered / tax deferred investments and Estate Planning.

This concept should be used when you do not have the cash flow to fully fund both your annual registered retirement savings plan (RRSP) and tax-free savings account (TFSA) contribution room. It will help you decide which type of investment you should contribute to first: an RRSP or a TFSA. The better choice depends on your needs, as well as your current and future tax rates.

Generally, if your are likely to be in a lower tax bracket after retirement, contributing to an RRSP first is still the right option. However, if you will be in a higher tax bracket after retirement, you should maximize TFSA contributions first. In reality, when income allows, most people will eventually want to consider contributing to both to attain their long-term retirement goals.

Contributing to a TFSA provides you with a flexible way to earn investment income (including capitals gains) tax-free. Any unused contribution room is also carried forward to future years, which means your tax-saving potential grows annually. Plus, if you need to make a withdrawal, it’s tax-free and you gain back that contribution room, unlike those from an RRSP. 

If you expect to earn more income in the future, it may be a good strategy to contribute to a TFSA now, when they’re paying less tax, and contribute to an RRSP later when you will be subject to a higher tax rate and your RRSP contribution will generate more tax savings.

Lastly – just because it is called a Tax Free SAVING ACCOUNT does not mean it cannot be an investment account.  Talk to your advisor or myself which type of investments make the most sense in your TFSA.

Doug Frain, CFP

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