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- 1. “Could it happen to me?”Aliakbar Abbasnejad Consultant Are you unknowingly gambling with your family’s future?
- 2. 2 This Presentation Is provided by Investors Group Financial Services Inc. (in Quebec, a financial services firm). Is provided by Investors Group Securities Inc. (in Quebec, firm in financial planning). Written and published by Investors Group as a general source of information only. It is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax, legal or investment advice. Readers should seek advice on their specific circumstances from an Investors Group Consultant. Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Great-West Life Assurance Company (outside of Québec). ™ Trademark owned by IGM Financial Inc. and licensed to its subsidiary corporations
- 3. 3 Agenda You’ll Earn a Fortune It’s Not What You Earn - It’s What You Keep Risks of Life - TO THE PLAN Hedging Your Bets (Managing the Risk) Nest Egg Formula
- 4. 4 You’ll Earn a Fortune! Your most valuable asset today is your ability to earn an income. That income provides all that you have and will have. Is it well protected? Security is always the foundation of a solid financial plan $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 TotalIncome $2,000 $4,000 $6,000 Current Monthly Income 30 40 50 Assumes 3% Annual Increase
- 5. 5 Financial plans are dependent on the management of income to create discretionary income Income GAP = Discretionary Income Fixed Expenses BUT, It’s Not What You Earn - It’s What You Keep
- 6. 6 Everyone’s Dream $$ $$ $$ $$ Go Up Stay SameSame GoGo Down Now Age 55-65 The Dream Target Net Worth @ Retirement
- 7. 7 Everyone’s Dream $$ $$ $$ $$ Go Up Stay SameSame GoGo Down Now Age 55-65 The Reality 1/3 of people will have to1/3 of people will have to access their savings inaccess their savings in order to dealorder to deal with awith a disability, critical illness ordisability, critical illness or need to care for agingneed to care for aging parents.*parents.* Delayed retirement? The Dream Target Net Worth @Retirement *1985 Commissioner’s Disability Table A (experience table); CIA 86 to 92 Aggregate Mortality Table
- 8. 8 Risks of Life All three can adversely affect you and your survivors’ financial foundation! Old Age Without Adequate Income SuddenDisability PrematureDemise
- 9. 9 “Hedging” Your Bets “Hedge” - a protection against possible loss “Hedging one’s bet” - to guard against undue loss from (a bet, investment, etc.) by making compensatory bets, etc. Funk and Wagnalls Standard Dictionary
- 10. 10 The “Nest Egg” Formula Hedging your bets against accidents & sickness Hedging your bets against life-threatening illness Hedging your bets against premature death
- 11. 11 Disability Protection Loss of employment can often lead to loss of your: Home Future Savings and retirement income Credit and/or credit rating Peace of mind and emotional well-being
- 12. 12 Disability Protection Current & Ongoing Expenses Mortgage/rent Food, clothing Transportation Childcare/education Recreation Retirement Planning Emergencies New Additional Expenses Medical bills Rehabilitation Counseling Home remodeling Career retraining What would happen if, one day, you lost the ability to work due to an accident or sickness?
- 13. 13 Disability Protection YEARS AGO, the four leading killers in the 45 to 65 age group were: Hypertension Heart disease Cerebrovascular Disease Diabetes NOW these are more likely to disable than kill! (Source: Heath and Society, 62, No 3, 1984)
- 14. 14 Disability Protection - Your odds Lotto 649 draw Disability before age 65 (90 days or longer) * Average length of a disability which lasts over 90 days * Disability vs. dying before age 65 (90 days or longer)* & ** 1 in 14 million 1 in 3 2.9 Years 9.5 times greater •1985 Commissioner’s Disability Table A (Experience Table) & CIA 86-92 Aggregate Mortality Table. **Based on Age 35
- 15. 15 Disability Protection – Chance of at least a 90 day disability before age 65 Age Women Men 30 45% 40% 40 39% 37% 50 29% 30% 60 12% 15% (Source: 1985 Commissioner’s Individual Disability Table)
- 16. 16 Disability Protection - Options Use savings Surrender RRSPs Depend on remaining family income Take out a personal loan or mortgage your home Sell assets
- 17. 17 Disability Protection - Solutions? CPP/QPP Employer/group plan Workers’ Compensation Employment Group Insurance Have you considered a customized personal disability plan?
- 18. 18 Nest Egg Formula - Sickness & Accident John and Mary - age 41 and 37 (both non smokers) Each earn $40,000 per year Currently have $135,000 in RRSPs Mary has adequate group disability insurance John has adequate critical illness insurance John has an accident at home - doctor expects him to be off work for six months Need an additional $2,000 per month to meet monthly expenses. They do an RRSP withdrawal. How can this affect their retirement plans?
- 19. 19 Nest Egg Formula - Sickness & Accident John and Mary need $2,000 (after tax) each month for six months This results in an RRSP withdrawal of $20,100 (assuming John is in a 40% marginal tax bracket) Total possible cost of RRSP withdrawal - $127,458* Assumes 8% annual rate of return for 24 years - till John is age 65. The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.
- 20. 20 Disability Protection A disability protection plan to keep this from happening could have been designed for approximately $67.34 per month* IS YOUR RETIREMENT NEST EGG WORTH PROTECTING? Assumptions: Male, age 41, non-smoker, standard issue, classification 4A. Based on GWL version 4.8, March 2010 For illustrative purposes only. Actual premium will vary. Benefit Start Date Benefit Period $1,150 31st day To age 65 $850 121st day To age 65
- 21. 21 Nest Egg Formula - Life Threatening Illness Mary is diagnosed with cancer A new treatment is available - but she must travel to the U.S. and pay $50,000 in US currency What’s the real cost of this $50,000 treatment?
- 22. 22 Nest Egg Formula - Life Threatening Illness $50,000 US is about $60,000 CDN (exchange rate 1.20 Canadian = $1.00 US) RRSP withdrawal of $85,700 TOTAL POSSIBLE COST OF THE $50,000 US TREATMENT IS $543,439 IN LOST GROWTH POTENTIAL! Note: If a temporary loan could be obtained for $60,000 an RRSP withdrawal of only $78,000 would result in $46,800 after tax plus a medical expense tax credit of $13,200 to repay the loan. Assumes 8% annual compound growth. The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.
- 23. 23 Critical Illness Protection A critical illness protection plan to keep this from happening could have been designed for approximately $42.28 a month.* IS YOUR RETIREMENT NEST EGG WORTH PROTECTING? *Assumptions: Female, age 37, non-smoker, standard issue. $60,000 Basic critical illness plan level coverage to age 75. Based on GWL version 4.8, March 2010 For illustrative purposes only. Actual premium will vary.
- 24. 24 Nest Egg Formula - Premature Death Two basic questions: 1) Will your nest egg be large enough to meet your estate needs and do what you want for your survivors? 2) What percentage of your income before income tax would you like to continue on to your family?
- 25. 25 What needs arise when someone dies? Final Expenses: Funeral Legal and Accounting Taxes (income, capital gains, RSPs) Debt Elimination Credit Cards, Loans Mortgages Child care and Future Education Survivors’ Ongoing Income needs
- 26. 26 Capital Required to Produce Similar Income $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000 $2,000,000 Capital $24,000 $48,000 $72,000 Annual Income 4.0% 6.0% 8.0% 10.0% Are your survivors assured of this ongoing income? Can they afford to lose their financial security? Simple Capitalization
- 27. 27 Nest Egg Formula - Premature Death Goal is to leave Mary or John with 60% of the deceased’s income or $24,000. This requires $400,000 of capital assuming a 6% investment return (ongoing survivor income needs) The survivor would also require $170,000 to take care of immediate needs (mortgage, funeral, children’s education). Total capital required is $570,000 upon the first death of John or Mary
- 28. 28 Nest Egg Formula - Premature Death Capital currently available Each spouse has: 1X salary life insurance through work $40,000 Mortgage insured through lender $110,000 Non RRSP savings $10,000 Total capital available $160,000 Capital shortfall ($410,000)
- 29. 29 Life Insurance Protection A term life insurance policy to keep Mary and their children in the lifestyle to which they have become accustomed - without impacting Mary’s retirement could have been designed for approximately $53.83 per month*. IS YOUR FAMILY AND YOUR SPOUSE’S RETIREMENT WORTH PROTECTING? *Assumptions: Male, age 41, Female, age 37, non-smoker, standard issue. $410,000 10 year term joint first to die. Canada Life version 11.1, March 2010 For illustrative purposes only. Actual premium will vary.
- 30. 30 Personalized Protection Program For John and Mary, based on the objectives as identified, their hedge against sickness, accident, life threatening illness and premature death costs $163.45 per month* *For illustrative purposes only. Actual premium will vary.
- 31. 31 Questions? “Could it happen to me?” C3227 (03/2010)
Editor's Notes
- (Note to consultant: If you do not have your insurance license this seminar must be presented by your Insurance Manager. Please insert your name, title from your business card and the name of the dealer on the slide. The dealer name under which you present yourself will differ, dependent upon whether you are licensed with Investors Group Financial Services Inc. (Mutual Fund Dealers Association - MFDA) or Investors Group Securities Inc. (Investment Dealers Association - IDA). If you are licensed through the MFDA, you must use this dealer name on the slide: Investors Group Financial Services Inc. (use in Canada outside Québec) Investors Group Financial Services Inc., Financial Services Firm (use inside Québec) If you are licensed through the IIROC, you must use this dealer name on the slide: Investors Group Securities Inc. (use in Canada outside Québec) Investors Group Securities Inc., Firm in Financial Planning (use inside Québec)
- Today’s/This evening’s seminar is to discuss a topic most of us don’t want to think about - insurance. This seminar has been designed to discuss the various major ‘protection’ issues and needs facing younger Canadians, specifically those entering their prime earning years who have young families to support and take care of. Today/This evening we will cover the main protection issues you face - in essence we will discuss what can happen to you and your family should you die prematurely, become disabled or face a life altering illness.
- Most people insure their homes, their vehicles - maybe even their vacations - but fail to properly insure their most valuable asset - their ability to earn an income. Most individuals assume that their coverage through work - known as their group benefit plans - as well as government plans will cover their needs in the event of premature death, or disability. That assumption could be very wrong. When thinking about insurance - you have to remember - you could earn a fortune. What happens if you are too sick, or not there, to earn it for your family. Take a look at the graph on this slide. If you are 30 years of age and earn $4,000 a month - over the course of your career to age 65 - you could earn approx. $3 million. Is that $3 million well protected? Premature death and possibly a disability would bring an abrupt halt to your ability to accumulate assets and provide for your own and your family’s future well being. All dreams, goals and possibilities hinge on an uninterrupted income flow. All financial planning experts agree that security should always be the foundation of a sound financial plan. Only after you have established a secure financial foundation should you look ahead to capital protection and growth-oriented tactics. Is your foundation solid?
- As the title of the slide says - it’s not what you earn - it’s what you keep. Your ability to create net worth for your future depends on your ability to create discretionary income. Discretionary income is the difference between your income and your fixed expenses such as your mortgage, utilities, taxes, and daily living expenses. It’s what people DO with their discretionary income that impacts their overall net worth - now and in the future. So, what do people use discretionary income for? Spending (Immediate Gratification) Lifestyle - entertainment, hobbies, 2nd vehicles, vacations Toys - motor homes, boats Saving (Short and/or Long Term Goals) Home Purchase Child’s Education Business Start-Up Retirement
- Here is everyone’s dream. You work, use your discretionary income to build net worth - and at your chosen retirement date you have a targeted net worth. From there, your net worth can go up, stay the same or go down - all depending on your lifestyle and estate goals.
- But, for 1/3 of people, the dream get’s derailed - the reality is 1/3 of individuals will use their savings - one of the main drivers to increasing net worth, to deal with a disability, critical illness or to take care of aging parents. As Joe Bowie, CEO of Retirement Investment Advisors Inc. said in “Cracks in the Nest Egg” (appeared in Wall Street Journal - October, 2001): “People fail to consider “the non-market-related threats – health care, long-term care – the catastrophic events” that can cause as much harm, or more, to their retirement savings as a volatile market.”
- With respect to your financial future and your ability to create sustainable net worth, you have several risks of life, a few include: dying too soon becoming disabled living too long without adequate funds. All three can impact you and your dependant’s current and future financial stability, hopes and dreams.
- So, what can you do to protect yourself from some of the risks of life - you can hedge your bets. Consultants to read slide.
- I’d like to introduce you to something we’re calling the “Nest Egg” Formula - which basically is our way of helping you hedge your bets. We want to help you: hedge your bets against accidents and sickness; hedge your bets against a life threatening illness hedge your bets against premature death. You are betting you will not suffer an accident or illness causing long term disability. You are betting you will not incur a life threatening illness. You are betting you will cheat death until a very old age. Hedging your bets for these three risks of life can help you build sustainable net worth for your future.
- When we discuss hedging your bets against sickness and accidents, we’re really discussing disability protection. For Canadians, a loss of employment and income due to disability or sickness can lead to several other related, and potentially devastating losses, such as your home; any other assets that have not yet been paid for; leased assets such as your vehicle; your future savings ability, your credit rating, your peace of mind and potentially your relationships with others.
- What could happen if you should become disabled and are unable to work? When an accident or sickness occurs, in addition to ongoing expenses (mortgage/rent, food, clothing, utilities, taxes and other bills), there could be new medical and rehabilitation costs, career retraining, and/or ongoing lifestyle changes that could prove expensive. At a time when the flow of regular income is disrupted by the disability, how are you likely to cope with new additional expenses? How, and more importantly when would you even begin to think about retirement planning in case the disability is long term?
- Advancements in science and medical technology have helped us prolong life but they can not ensure quality of life or financial recovery. Modern medicine has made great strides but it cannot rescue you financially. If the odds of living with a disability are greater today, does it not make sense to plan for that contingency?
- So, what are your odds? You have a 1 in 14 million chance of winning Loto 649, but a 1 in 3 chance of being disabled for more than 90 days before the age of 65. Becoming disabled before age 65 does pose a grave threat to your peak earning years. It also makes disability insurance vital to your financial foundation.
- Here’s another way to look at your odds. These are your chances of becoming disabled for 90 days or longer before reaching age 65 - based on your gender and age.
- So, lets go carefully over your options if and when disability actually occurs and you are suddenly forced into making tough choices: You can use your savings - but are they adequate? How long will your savings enable you to survive and maintain your present lifestyle? Will your savings accommodate additional new expenses and what happens once savings are depleted? If you have any assets - you can sell them. But ask yourself: will I get a reasonable price? How long will the sales proceeds last? What happens after that? You can depend on remaining family income - such as if your spouse has employment income. But would your spouse be able to continue to work if he/she is called upon to assist you? Is the income your spouse earns sufficient? Can it accommodate new expenses? Another option includes taking out a personal loan - but who would be willing to provide a loan if you are not earning an income due to disability? Will collateral be required? How would the loan be repaid? How would the loan repayment impact an already stretched monthly income need? Finally, you can consider surrendering your RRSPs - but how much would be left after tax? How long will the money last? And finally, how will this impact your retirement plans?
- Outside of the potential options listed on the previous slide, what are your other disability protection solutions? Canada/Quebec pension plan does provide a taxable benefit after the 4th month of disability, but it has strict eligibility requirements and is intended for grave disabilities where there is little hope of recovery. The stringent definition of disability excludes most people and the benefit amount is limited. Employment insurance offers a short term (15 weeks only) disability benefit for employees and qualifications are based on strict criteria. For disabilities lasting longer than 90 days, EI is of little use, and self employed people are not eligible. Workers compensation is an employer paid benefit covering work related accidents and sicknesses only. It does not cover accidents or sicknesses outside of the workplace. While the benefits can be substantial (90% of income), the workplace restrictions and the possible difficulty in claiming benefits makes this a limited solution. Employer or group plans can provide cost effective long-term disability benefits if they are offered. All employees are eligible, and if they pay the disability portion of the premium, the benefits are tax free. However, with group plans, benefits are intended for all group members and are not tailored to individual needs. One final option is to consider a customized personal disability plan. This type of plan offers several advantages: 1) A non-cancelable contract that covers both accident & sickness 2) Non-taxable benefits 3) Guaranteed premiums 4) Option benefits (partial or residual benefits, ability to cover future earnings, retirement savings program, and accidental death).
- So, why should you consider a personal disability protection plan. Well, here’s an example. John and Mary, a married couple in their late 30s/early 40s. They are entering their prime earning years. At present, each earns about $40,000 per year, and they have an RRSP portfolio worth $135,000. One weekend, John is at home cleaning out the roof gutters, his ladder slips out from under him and he falls. He suffers a compound fracture to his leg and injures his back. His doctor expects him to be off work for six months. During his time off, John and Mary find they need to supplement Mary’s net income with an additional $2,000 per month to meet their monthly expenses. Their only source of money is their RRSP. How can this situation affect their retirement plans?
- Well, the first thing to realize is that $2,000 after tax does not mean a $2,000 withdrawal from your RRSP. An RRSP withdrawal is taxable. If John is in a 40% marginal tax bracket - he needs to withdraw $3,350 from his RRSP each month - in order to get $2,000 after tax withholdings and setting aside enough of the withdrawal to pay the remaining tax bill when the RRSP withdrawal is reported. If he needs to do this for 6 months, he has withdrawn a total of $20,100 from his RRSP. John and Mary now have $114,900 in their RRSP. But that’s not the total possible cost of the RRSP withdrawal. John is 41 years of age. Assuming he intended to work until he was 65 years of age, John and Mary have lost 24 years of tax deferred investment growth on their $20,100 withdrawal from their RRSP. At an average annual rate of return of 8% for 24 years, a $20,100 RRSP withdrawal means their RRSP is worth $127,458 less at retirement. That is the anticipated cost of not managing risk.
- Let’s now discuss the impact of a possible life altering illness. Mary is diagnosed with cancer - a new treatment is available, but only in the US and for $50,000 US. Mary and John need $50,000 US - where’s the first place most Canadians go to get quick cash in an emergency situation - their RRSPs?
- $50,000 US is about $60,000 Canadian with an exchange rate of $1.20 Canadian per $1.00 US When assets from the RRSP are redeemed, withholding tax will be deducted. Any RRSP withdrawal over $15,000 has a 30% withholding tax. Therefore, in order to net $60,000 of cash immediately available John and Mary need to withdraw approx. $85,700 from their RRSP. But, as shown before, the total possible cost is the lost tax deferred investment growth on the $85,700. Again, assuming 24 years (till John turns age 65) at an average annual rate of return of 8%, the anticipated cost of not managing this risk is $543,439. Even though they are in a 40% marginal tax rate, the medical expenses incurred will qualify for a non-refundable medical expense tax credit of around 22% (will vary depending on province of residence). If John and Mary could obtain a temporary loan for $60,000; then they could subsequently withdraw $78,000 of taxable RRSP funds netting $46,800 after tax and then receive a medical expense tax credit on the $60,000 at 22% of $13,200. The $46,800 plus the $13,200 could then be applied to repay the loan.
- Now let’s discuss premature death. Consultants to go through slides. Indicate the answer to question # 2 is usually 60 to 80%.
- An individual’s needs (upon death) fall into two categories - those that are always present (final expenses, taxes, debts, creating an income source for survivors) and those that apply to certain ages and life stages (for example, younger people need to be concerned with children’s welfare and mortgage protection, older people have estate planning and/or estate equalization needs). So, contrary to popular belief, protection needs do not always evaporate as you get older - they evolve and change shape.
- Let’s take a look at this in a different light. In an earlier slide we showed you that if you are 30 and earn $4,000 a month - you could earn over $3 million over your career. Assuming you die prematurely, how much capital do your dependents need to continue to receive that income? If you earn $48,000 a year, you would need anywhere between $500,000 to $1.2 million to produce a similar income, depending on the investment return you could generate on that capital. That’s a huge amount of money - and this is where life insurance becomes important. By providing a sum of money that can be used to purchase an annuity, or invested to provide an income, insurance is a cost effective way of ensuring your dependants continue to receive on-going income therefore protecting their financial security.
- Let’s go back to John and Mary. John and Mary decide that if one of them is to die prematurely, the surviving spouse will need about 60% of the deceased spouse’s income to maintain quality of life. So, let’s assume John dies. He earns $40,000 per year - 60% is $24,000. Based on the previous chart, to replace $24,000 per year to protect Mary’s income needs, John and Mary need $400,000 of capital (this assumes a conservative rate of return on investment of 6%). Mary and John have determined they also require $170,000 to take care of immediate needs (paying for John’s funeral, covering his taxes, paying off the mortgage, creating an education fund for their children). This means, they require $570,000 at the time of John’s death, to cover immediate needs and to create an investment fund that will produce $24,000 per year for Mary. So, how do they get $570,000.
- Well, first John and Mary have life insurance at work through a group plan equal to 1 times his salary - or $40,000. John and Mary also have mortgage insurance through their lender and will pay off their $110,000 mortgage at John’s death. They also have $10,000 of non RSP savings. This results in total capital of $160,000. You’re probably noticing that their $135,000 RRSP is not included. That’s because John and Mary have elected to rollover John’s RRSPs to Mary on a tax deferred basis, at these RRSP assets will continue to earn tax deferred investment growth until Mary retires. This protects Mary’s retirement. So, they have capital requirement of $570,000 and total capital available of $160,000. John and Mary have a shortfall of $410,000.
- A comprehensive, personalized protection program begins with a systematic evaluation that aligns your current situation with both your own and your survivor’s needs and goals. Step 1 takes into account all of your personal assets (and business assets if applicable) along with existing insurance and government benefits to arrive at a composite safety net of assets that is available to you and your survivors immediately upon sickness and accidents, life altering illness or premature death. This forms the basic risk protection you currently have and can build upon. Step 2 requires a detailed needs analysis be completed to identify all the individuals needs applicable to your situation to maintain quality of life and fulfill goals for you or your survivors. I can help you create this detailed estate needs analysis. As you can see, for John and Mary, peace of mind in knowing their financial foundation is in place, and the tools and strategies to ensure continuing sustainable net worth costs approx. $165.00 per month. The solution discussed in this case study make the assumptions that Mary has disability coverage that may be provided through her employment, as is critical illness for John. In reviewing your objectives, we will want to ensure that any gaps in these coverages be identified, and there are plans that are available that can be implemented to ensure that all financial risks can be met. Let me help design a protection program for you.
- Are there any questions? (Note to Consultant) Ensure you have everyone fill out the Questionnaire (MP1587) and let them know that you will be contacting them later in the week to set a time to meet in person.