Don’t Get Ripped Off On Life Insurance – Part 1

InsuranceUmbrellaWhat’s the one thing you buy and never hope to use? Well probably life insurance! But just because it’s something most people should have doesn’t mean all life insurance is the same.  I unfortunately meet clients all the time who were sold the wrong type of life insurance often because either the person selling it wasn’t licensed to offer life insurance (aka Mortgage Insurance) or they were licensed and decided to try and (up)sell them to something more expensive than what they needed (so they could earn a higher commission on the sale).

Mortgage Insurance Is Not The Same As Life Insurance

A lot of clients I’ve talked to about life insurance tell me they are covered.  They got it with their mortgage. This tells me two things; firstly they need life insurance because they are over-paying by having mortgage insurance and two; they really don’t want to talk about life insurance! Well the second reason is definitely common, who really wants to talk about life insurance? But the first thing needs to be addressed. Mortgage insurance has a few fundamental problems.

1. It is hugely over-priced: Life insurance is often half the price

Often more like 1/4 when you factor in the term for the same amount of coverage. (Why? Because Life Insurers do underwriting at time of application, therefore the insurer knows the risk they are taking and can offer a (HUGE) discount over mortgage insurance which isn’t underwritten until time of claim)

2. Mortgage Insurance It is not underwritten until you make a claim

You know those horror stories about insurers not paying out at death? – It’s almost always Mortgage Insurance not Life Insurance where this happens. Life Insurance is underwritten at time of application and it is extremely difficult for life insurance companies to get out of paying claims unlike Mortgage Insurance which is underwritten only after a client’s death.

3. Mortgage Insurance is sold by people who often earn a BIG commission for pushing it.

Mortgage Insurance25Very few people who offer mortgages are licensed to offer life insurance. But everyone that offers mortgages can offer mortgage insurance and they are often paid very well for signing clients up. They have little incentive to become life insurance licensed (thus saving their clients a lot of money) as they would actually get paid a lot less per policy.

How is this possible you might ask? It happens every day. As someone licensed to offer mortgages I’m required to offer Mortgage insurance; however I feel it’s always my duty to offer a Life Insurance quote along side. I’m proud to say to date no one has ever taken the mortgage insurance because Life Insurance is so much cheaper! Honest mortgage brokers will tell you while mortgage insurance is quick and easy to get, it is more costly and less likely to pay out compared to life insurance. I’m sad to say I know of only a few mortgage professionals that give their clients this information. You’ll be irritated when you add up all the extra premiums you may have paid over the years. You could have had your mortgage paid off years sooner. It’s never too late to fix it though!

Stay tuned; next time we’ll talk about getting the right kind of life insurance! There are several kinds!

Market Watch June 2014 – Is The Next Big Crash Almost Here?

RRSP25If you’ve got an RRSP or a TFSA, there is a good chance you’re in the market right now. You might be feeling pretty good since things have generally recovered nicely since 2007/2008 (and you’re likely up a fair bit). I’ll agree people are a lot more optimistic this year about investing than the last few years. But that’s what worries me.
Warren Buffet the stock market mogul has a good saying. “When people are greedy get scared and when people are scared get greedy”. I often change his wording slightly for my own use, but he does have a good point.  A lot of “main street” investors are finally getting the courage to get back into the market (or add new funds into the market). Those who stuck out the last crash have likely recovered (and then some) and all in all people are fairly happy. Some are starting to get greedy thinking this up-trend will continue indefinitely.

Well let me tell you something that likely no investment advisor will (remember I, like other investment advisors, get paid when client’s money is in the market.  Unfortunately we all have incentive to say “it’s always a good time to buy”). If your portfolio isn’t ready for a big drop, you may want to consider either getting out of the market or at least locking in a good portion of your gains in something safer. If you’re inclined to stay in the market, you may want to rebalance your funds to favour funds with downside protection rather than upside potential. It’s been a good run, time to take some money off the table.

Do I know when a crash is going to happen? Nope. But if you look at the S&P 500 index over the last 25 years. You’ll see something extremely frightening.  We’ve just passed both the value we had the last time we had a major crash and we’ve crossed the approximate distance (interval) between the last two major crashes. Does past performance predict the future? No, we can’t always rely on that but we’ve had 5 or 6 years of overall very strong performance.

Another saying I often tell my clients is this. “You haven’t made any money until you sell” (conversely you haven’t lost money until you sell is also true). Investing takes a disciplined approach. You need to have the discipline to sell when times are good and buy when times are bad. Times are good right now. If you’re approaching retirement or in retirement you should very seriously consider if you can weather another major crash. I believe we are in a new investment environment. The last 15 years are very different than the 70’s, 80’s or 90’s.  I think we’ll continue to have major economic events as our global economies are so closely coordinated and like dominoes which are all connected…. We’ve seen it happen twice in the last 15 years.

Mortgage vs. RRSP – Where Should I Put My Money? – Part 1

Serving clients with both mortgages and investments allows me to have this conversation very often with my clients. Now to be fair, the answer I give changes based on many factors that differ greatly between clients.

Couple of things to consider when answering this question:

1. How long until retirement?

Mortgage 10125Are you in your lower income earning years or in your higher income earning year? – Remember RRSP work effectively when you put money into it when you are in a higher tax bracket than when you take it out. Often young people invest in their RRSP when frankly they shouldn’t (at least from a life-time tax perspective). Often these young people will pay more tax in retirement on withdrawals from their RRSP than what they get back now! Young people may want to consider preserving their RRSP room until their higher income earning years. (TFSA are another story for next time)

2. What is your risk tolerance?

I took over a client’s financial plan recently when I helped them with their mortgage. When bringing over their investments, I realized their bank had them invested in GIC’s paying 1.5%. Considering their mortgage was costing them more than 3%, I asked the client about why they were in a GIC. The answer was they didn’t like risk and that what their “advisor” told them to do (remember investment advisor and mortgage providers don’t get paid when you pay down your mortgage). I then explained how every dollar they had in their RRSP earning 1.5% was a dollar they didn’t have working against their mortgage costing them at least 3%. Worse than that, the interest on her GIC would eventually be taxed when withdrawn in retirement! The GIC was costing this client money!!  (not to mention that rate was ridiculous compared to what other companies were/are offering)- Now if they had a high risk tolerance and we were optimistic about the market; yes investing may be better option as you can often earn a higher rate of return than what you’re paying on your mortgage. But again that is if you’re comfortable with the risk and can wait out the next crash.

Stay Tuned; next time we’ll bring TFSA into the mix of Mortgage vs. RRSP

About Mike:

Face1Mike is a Financial Planner, tri-licensed to serve clients with Mortgages, Life Insurance and a variety of Investments including Mutual Funds, Seg Funds and GICs. Mike also holds both a Masters and Bachelor degree in business from Wilfrid Laurier University.

Mike had the privilege of teaching several courses at the university level while working towards his Masters Degree. Mike taught topics including the Canadian Investment Environment, the Canadian Tax System, Corporate Finance, Entrepreneurship, Accounting and Managerial Statistics. Mike also worked at former tech giant Research in Motion (now BlackBerry)

Mike takes a long-term, holistic approach to financial planning and believes in treating people the way he’d like to be treated. His calling is to serve others with honesty and integrity and help educate his clients so they can be shrewd managers of their financial matters and good stewards of what they have.

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