JMRD Market Observer for June 17th, 2016 – Insurance EditionJune 17, 2016
**June 17th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer Market – Insurance Edition
- Insurance Edition
- FED Sidelined by a Softening Labour Market
- Brexit- Yea or Nay?
- Week at a Glance
- Reads of the Week
- Economic Calendar
- Earnings Reports
For some time now in our weekly Market Observer, we have been alluding to the importance of insurance as an integral part of one’s comprehensive financial plan. Whether using life insurance to cover temporary needs such as a mortgage or protection for young families, or whether you wish to utilize an insurance strategy to preserve your estate for your heirs or for tax-efficient corporate purposes, we can assist with implementation.
This week’s Market Observer will focus on some of the strategies above, plus other important areas to consider when incorporating insurance into your financial plan. As always, please do not hesitate to call if you have any questions.
Insurance is as it sounds, a means of protection, whether that be for your car, house, health, or life. We put it in place to preserve our financial wellbeing in the event of personal catastrophe, in effect to avoid derailing our financial plans. As advisors, we use these tools in the planning process to help ensure our clients’ goals can be met. We focus on two types of insurance, those that provide living benefits and those that provide a death benefit.
However, besides protection, we can also use insurance strategies for tax and estate planning and for providing income. Changes coming to the insurance industry starting in 2017 may reduce the tax benefits currently enjoyed with permanent life insurance and annuity income strategies, particularly within corporations. If you are in a position to explore one of these strategies, it will be beneficial to review it as quickly as possible so any policy can be placed before the end of the year.
Death Benefit Solutions
Strategies to protect your family, business, or assets (from debt or from taxes) in the event of your death utilize various types of life insurance. Term insurance, which is typically for 10, 20, or 30 years is designed to provide protection for a need for a specified term, where you hope you never need to use it, but where there is financial risk of not having it. Permanent insurance, including whole life and universal life, are maintained for your lifetime and you expect to be paid the benefit upon your death, or on the second death of you and your spouse.
Term insurance – benefits of coverage
- Mortgage or other personal liabilities
- Funding for future retirement or education needs
- Buyout of a partners share in a business
Permanent insurance – benefits of coverage
- Same benefits as term insurance, plus…..
- Preserve and maximize the value of your estate
- Transfer assets to heirs tax efficiently
- Transfer locked-in corporate assets tax efficiently to shareholders and beneficiaries
- Provide retirement income while preserving your assets
- Fund a tax liability such as the family cottage, secondary properties, farm and business and investment gains
Estate Maximization Strategy
- A permanent insurance solution to minimize taxes and maximize the value of your estate
- Use surplus funds or cash flow, currently invested in taxable investments, to fund a life insurance policy
- Cash values can grow tax deferred inside the policy
- Reduces taxes paid while you are living
- Avoid probate fees; death benefit paid outside of your estate to your beneficiaries
- See the attached article for Estate Maximization Strategy
Improved Retirement Income Strategy
- Use surplus cash to fund a prescribed annuity (pays guaranteed monthly income for life)
- Purchase life insurance to replace the capital (which was used to purchase the annuity)
- Annuity provides tax-efficient monthly income for life
- Annuity payments fund the life insurance policy
- Remaining balance of annuity payments supplement income
- Typically provides income above a GIC, of about 4-7%, with guarantee of capital and income guaranteed for life
- See the attached article for Insured Annuity Strategy
Corporate Investment Shelter Strategy
- A permanent insurance solution to reduce taxes and maximize the estate value from your corporation to shareholders and beneficiaries
- Corporation uses surplus assets or cash flow, currently invested in taxable investments, to fund a life insurance policy
- Increases the size of the estate where insurance proceeds received by the corporation are distributed to the deceased shareholder’s estate
- Cash values grow tax deferred
- Reduces current taxes paid by the corporation
- Proceeds generate a credit to the capital dividend account
- See the attached article for Corporate Investment Shelter Strategy
Living Benefit Solutions
Living benefit solutions include those that protect you while you are living. Benefits are designed to be paid should you become disabled, critically ill, or require long term care.
- One in four people will be disabled for more than 90 days at least once before the age of 65
- Provides income replacement if an accident or illness prevents you from working
- Benefits are tax-free if the policy is paid by you personally
- Helps you maintain your lifestyle and meet debt obligations
Critical Illness Insurance
- Advances in medicine mean more people survive illnesses like cancer and stroke, but recovery can be stressful
- One in 2.2 men and one in 2.5 women in Canada will develop cancer over their lifetime
- 63% of Canadians diagnosed with cancer are expected to survive, 77% of heart attack victims survive
- Critical illness coverage typically benefits diagnosis of up to 28 illnesses, including life-threatening cancer, heart attack, stroke, severe burns, blindness, deafness, MS, and dementia
- The benefit is a lump sum payment that gives you the freedom to focus on recovery
- Funds can be used for anything you wish, including private or out of country medical treatment, lost wages, travel costs, or covering operating expenses of your business
- Most carriers also offer a service that gives you access to the best doctors for expert opinion, diagnosis, and treatment information
Long Term Care Insurance
- This is a newer insurance coverage, brought about by greater life expectancy and the need for living assistance as we age
- Long term care insurance provides you with the support and financial resources necessary to cover the out-of-pocket expenses for care at home or in a facility, when you can no longer care for yourself
- Monthly benefits are paid when you require substantial assistance with two of the six activities of daily living
- You receive your monthly benefit and choose how and when to spend it
- The benefit is not dependent on the actual cost of care; you choose the benefit at the time you purchase the policy
Please contact us if you have any questions about an insurance need or your existing insurance coverage.
FED Sidelined by a Softening Labour Market
As widely expected, the Federal Reserve left monetary policy unchanged. The fed funds rate remains between 0.25% (lower bound) and 0.50% (upper bound). The FOMC acknowledged the softening of the labour market. Yet, the FOMC sounded positive about recent GDP growth, a view supported by the FRB of Atlanta – GDP model now forecasting a 2.8% GDP growth pace in the second quarter of 2016 after the May`s retail sales release. Again it pointed to softness in business investment but mentioned that the drag from net export appears to have lessened. The FOMC made no reference to Brexit but it said it will continue to closely monitor global economic and financial developments The Fed says inflation should remain low in the near term but expects it to rise to 2% over the medium term “as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further”. For a fourth time, the Fed didn’t explicitly state how it views the balance of risks. Esther George, a known hawk on the FOMC was the lone dissenter in March, wanting a rate hike to 0.50-0.75%. She joined with the majority this time. See attachment for more details.
National Bank Financial Geopolitical Briefing – Brexit – Yea or Nay?
Up until recently, the upcoming referendum on whether the United Kingdom should remain a member or leave the European Union (EU) did not raise many alarm bells. The odds of the UK voting to leave the EU were widely considered by the elite to be extremely low. The tightening polls have shattered this illusion.
A British vote to exit would be a blow to an EU already struggling with low economic growth, high debt levels, the Greek economic crisis, an unprecedented migrant influx, the threat of terrorism, Russian aggression in Ukraine and the rise of anti-EU parties on the far right and left of the political spectrum.
This note analyzes: 1) the reasons why a significant percentage of the population supports leaving the EU; and 2) the potential geopolitical impact of a Brexit. See attachment for more commentary.
Week at a Glance
Full report attached.
Reads of the Week
- “The economic consequences” (The Economist) Most estimates of lost income are small, but the risk of bigger losses is large
- “Two Trends We’re Not Excited Enough About” (The Motley Fool) Reasons for optimism
- “Historical Returns versus Investor Returns” (The Irrelevant Investor)
- “NBF Economics and Strategy – US Watch” – While the FOMC continues to peddle the idea that interest rates could rise any time now depending on data, its own forecasts suggest low odds of that happening soon. GDP growth forecasts for the US were trimmed yet again amidst disappointing economic data, meaning the expected output gap by the end of 2018 has now swollen to about half a percentage point at best and to 2.3% under the worst case scenario. True, projections for PCE inflation were raised a bit in line with higher energy prices. But the fact that forecasts for the jobless rate were left unchanged near current levels suggests either productivity growth (which has been missing in action for the last five years) will make a triumphant return or the labour market participation rate will bounce back. That’s another way of saying the Fed doesn’t see much wage inflation ahead. So, we remain comfortable with our view that there will be at most one interest rate hike this year. And don’t bet on too many hikes in subsequent years. The Fed again lowered what it considers the long-run levels for the fed funds rate. As the US Hot Charts Attachment shows, the 3.75% which the FOMC was calling its low estimate 4 ½ years ago is now the high estimate. See attachment for more details. US Hot Chart
Monday June 20th –Retail Sales MM (CAD)
Tuesday June 21st –
Wednesday June 22nd –
Thursday June 23rd – New Home Sales-Units (US)
Friday June 24th –
Monday June 20th –
Tuesday June 21st – Adobe Systems Inc.
Wednesday June 22nd –
Thursday June 23rd – Blackberry
Friday June 24th –
Have a good weekend!
Categorised in: JMRD Updates