Think Forward,
Planning Right to Left.

Prioritizing debt is an important skill to learn because it determines how fast you will pay down your debts. Debts have varying payback plans that will require you to place them on a scale to decide which should go first. Obviously, the interest rate is an important factor to consider when prioritizing your debt. It is advisable to have a strategy for paying your debts so that your other financial goals can be met. Debts are known to affect the attainment of one’s financial goals. There are a few strategies you can try that can help you prioritize your debts for easy payment. Some of these strategies include starting with the debt with the highest interest rate; starting with the least balance; starting with the highest balance; and consolidating your debts.

Starting with The Debt with Highest Interest Rate

This is known as debt avalanche. It entails you starting off paying the debt with the highest interest rate to the least. Debts with high-interest rates are always difficult to pay because of the accumulation of the interests. Getting it off your books first will save you money and help you focus on paying off other debts and financial goals. Picture an avalanche and imagine your debt tumbling down quickly. That is how this strategy works.

Starting with The Debt with the Least Balance

This strategy is good for gaining momentum. It is known as the snowball debt repayment strategy, and it is more motivational than strategic. If you are finding it difficult to figure out how to pay your debt, start from the lowest and gradually work your way up. Another advantage is that it gives you that little bit of extra cash to tackle your big debts. This strategy also comes in handy where you feel you cannot adopt the previous strategy. Start with the least balance.

Starting with Your Largest Balance

This is the opposite of snowball strategy. This strategy prioritizes the debt with the largest balance, and it is an unpopular strategy because it may be difficult to achieve. The question is why will I start with my highest debt? It may not give room for other financial goals because all your resources will be channeled towards paying off that debt. However, there are cases where you may opt for this type of strategy. An example is when that particular debt has a promotion of a reduced interest rate, and you need to pay it off before the promotion ends.

Consolidating Your Debts

This is usually what you resort to when it is taking too long to pay your debts, or the interest rates are making it difficult to get it off your books. When you consolidate your debts, it gives you the opportunity of paying all your debts at once. You can take a loan to pay for your consolidated debts which then leaves you with the repayment of that loan only. For example, you can consolidate all your credit card debts and pay them off with a balance transfer credit card. This strategy is particularly effective when you have multiple debts that are hindering you from achieving your financial goals.

Cash value is a type of life insurance policy that lasts for the lifetime of the policyholder. This type of life insurance also has a cash value savings component that the policyholder can use for different purposes such as loans or cash to pay policy premiums. Some other distinctive features of a cash value life insurance are that it is known to be more expensive than term life insurance and does not expire after a number of years. To simplify further, the cash value is the sum of money that accumulates in a cash-generating permanent life insurance policy or annuity which is held in your bank account. Your insurance provider allocates some of the money you pay as premiums to investments portfolios such as stocks and bonds and then credits your policy based on the performance of those investments.

How Does Cash Value Work?

Cash value is a type of permanent life insurance that provides insurance cover for the policyholder’s life. Most cash-value life insurance policies require a fixed-level premium payment. A part of it is allocated to the cost of insurance and the remaining is deposited into a cash-value account and invested in different financial investment portfolios. It earns a tax-deferred modest rate of interest. This ensures that the cash value of your life insurance increases steadily over time. The implication of this is that as the cash value increases, the risk of the insurance provider decreases because the accumulated cash value offsets part of the insurance provider’s liability. You can also use the earnings to increase the death benefits in your policy or other living benefits, depending on your preference. Bear in mind that as you make withdrawals from the cash value in your insurance policy, the death benefit will also reduce.

Example

Assume you have a life insurance policy with a $35,000 death benefit with no outstanding loan or prior cash withdrawals. The accumulated cash value of the policy is $10,000. Upon your demise, the insurance provider will pay the full death benefit of $35,000 but the money accumulated into the cash value becomes the property of the insurer. The implication of this is that because of the cash value of $10,000, the real liability cost of the insurance provider is $25,000. This is calculated by subtracting the death benefit from the accumulated cash value ($35,000 – $10,000).

Types of Cash Value Life Insurance

Cash value insurance is usually used to augment your life insurance policy. However, you need to understand how it works for each type of life insurance policy.

Whole Life Insurance

If you have a whole life insurance policy, having a cash value policy will augment your life insurance policy. When you take a cash value insurance policy, your premium stays the same for the rest of your life. A small percentage of your premium is diverted into a savings account to accumulate interest. The rate of interest returns varies depending on the insurance provider, but it is known to hover around 2%. You have access to the funds in the savings account during your lifetime.   

Variable Life Insurance

This is slightly different from the whole life insurance policy. With this policy, you can determine how your accumulated cash is invested. You have the opportunity to invest the small portion diverted from your premium into investment portfolios such as bonds and stocks. This requires a good knowledge of the investment market. Variable cash value life insurance has a higher premium than the whole and universal cash value life insurance.    

Universal Life Insurance

Under universal life insurance, you have a bit of control over what you pay as your premium. For example, you can pay more than you usually pay for a premium and you can divert the surplus into your savings account. The advantage of this type of policy is that if you cannot meet up with the premium payment in a particular month, you can use the money in your savings account to pay your monthly premium. There are three types of Universal Life Insurance: Guaranteed Universal Life Insurance, Variable Universal Life Insurance, and Indexed Universal Insurance.

Advantages of Cash Value Life Insurance Policy

• You can earn interest on a cash value savings account
• You can overpay on your premium and divert more money into your cash value account
• You can spend from your cash value account while you are alive
• You can earn returns on a cash value investment account

Disadvantages of Cash Value Life Insurance Policy

• Your returns are capped at a certain amount
• If you remove money from your cash-value account, your death benefit decreases
• You have to pay fees associated with your cash-value account

Tax Advantages

There are various tax benefits you and your beneficiaries enjoy with a cash value insurance policy. One of the benefits is that your beneficiaries can receive your death benefits tax-free. This is an advantage your beneficiaries get to enjoy with your cash value life insurance policy. Another tax advantage is that the earnings on your invested accumulated cash value are tax-deferred. Therefore, as your cash value grows, you do not need to worry about the CRA deducting from your earnings. One of the things you can use your accumulated cash value for is collateral for loans. When you borrow money against your policy, you do not have to worry about paying taxes on the loan as long as the policy is still active. However, if you withdraw your accumulated cash value or take the surrender value and terminate the policy, you may be taxed on the portion of the money that came from interest or investment gains on your invested cash value.  You should understand the tax rules before making withdrawals from your cash value policy.

Bottom Line

There are other minor considerations and questions you may have when considering this approach. Talk to us about your options.

Executive Summary

Diversification is a concept that many investors understand on some level.  It makes sense to not put all your eggs in one basket, but diversification is more than just investing in more than one fund or stock.  Diversification is the basis of modern portfolio theory, and it is an essential risk management tactic that every investor should be utilizing. Here’s how it works:

Correlation

The measure of correlation indicates how closely two assets follow together when the markets go up and down. The scale of correlation goes from -1 to 1, with -1 being a perfect inverse correlation and 1 being a perfect correlation.   For example, Oil Company A and Oil Company B will both fall if oil prices fall, and they will both rise if oil prices rise.  Therefore, they have a perfect correlation.  Conversely, when Oil Company A rises, Automobile Company A will fall.  This indicates an inverse correlation.  If one company’s rise and fall does not affect another company, then they have a correlation of 0.

The key to diversification is having varying degrees of correlations so that your portfolio is getting the most out of the market, while offsetting losses. 

Asset Allocation

Picking a group of stocks that have varying degrees of correlation is a good place to start, but to truly diversify one must take on a variety of different assets.  This is where assets allocation comes into play. Determined by risk tolerance and time horizon, holding a variety of different asset classes is the best way to curb volatility in your portfolio.   Asset classes include stocks, bonds, commodities, mutual funds, real estate trusts… to name a few.  Each asset class brings different risks to the table, so it is important to make sure you are thoughtfully choosing investments that complement one another and work well together.

Overdiversification

Too much of a good thing isn’t a good thing at all, and that is especially true when it comes to diversification.   It is possible to hold too many different investments that correlate in too many different ways. This might diversify the risk out of your portfolio, and it may stop you from making any gains.   It is important to work with a wealth professional who can help you pick an appropriate amount of investment holdings while still utilizing an appropriate asset allocation so that you stay on track.

The Bottom Line

Understanding that you need to diversify your portfolio is not always enough as it can be a bit more intricate than it seems.  We can help you understand how your investments work together to optimize your portfolio.

Executive Summary

Business owners regularly face complex retirement planning and insurance needs. It is not uncommon for business owners to have a large amount of their wealth tied up in their corporation.  This can create a complex need for both insurance coverage to protect that wealth and the flexibility to use that wealth.  The Corporate Retirement Strategy was developed to address both of those needs.  This strategy can provide insurance protection and a flexible income stream in the future.

Below are the basics of how this particular strategy can work for a business.

What You Need to Know

The Corporate Retirement Strategy has two key components.

The first of which is a permanent life insurance policy.

The idea is that the corporation will purchase a permanent life insurance policy on the business owner to provide them with the insurance coverage needed to protect the company assets.  On top of the monthly insurance premium, the business would direct any surplus earnings into the permanent life insurance policy. These surplus funds would build up significant amounts of tax-advantaged cash value within the policy. This policy serves a dual purpose.  The insurance provides much needed protection for the company all the while accumulating funds that could be used by the business owner in the future.

The second component to this strategy is utilizing the funds that the insurance policy has accumulated. 

The corporation may be able to pledge the policy as collateral in exchange for a tax-free loan from a lending institution.  The corporation could then use these loaned funds to supplement a shareholder’s retirement and the loan would be repaid by the life insurance policy when the insured dies.  On death, a portion or all of the life insurance proceeds are used to pay off your loan. Even though the benefit was used to pay off the loan, the corporation may still post the death benefit amount to its Capital Dividend Account.

This strategy may be good for any shareholder or key person of a Canadian Controlled Private Corporation who has a successful business with either excess income or a large corporate surplus.  With proper planning this strategy can help reduce taxes, supplement retirement, and provide insurance protection fort the company.

The Bottom Line

While this strategy may work for some business owners, it is not the right fit for every corporation.  It is important that the strategy is executed carefully to be successful and fulfill its intended purpose.  It may be prudent to work with a tax professional, your insurance advisor, financial planner, and the lending institution to ensure that your corporation will benefit from the Corporate Retirement Strategy.