Manulife does a great job of developing products that address gaps in the marketplace, and an equally great job of promoting them. Their latest creation is an all-in-one product that can provide life, disability and critical illness insurance.
I have read comments from various insurance agents that this bundled product can save a client up to 30% of the cost of purchasing individual policies. I think that the potential cost savings of the Synergy product may be misleading and bears further scrutiny.
In my view, the reason that premiums are lower is the benefits within the Synergy product are less generous as compared to robust individual policies for life, disability and critical illness.
Now, there is nothing wrong with purchasing an insurance policy without all the bells and whistles as long as you understand the tradeoffs that you are making. For example, when shopping for a car, I expect that a fully loaded vehicle with all of the possible features will cost more than a standard, bare bones version of the same car. If I decide that I don’t need the heated leather seats, I am happy that I don’t have to pay for them. Buying insurance is not like buying a car though. The features that make disability insurance policies more expensive are not nice-to-haves like leather seats, but must-haves that dictate whether, and how much, you will actually receive in benefits at the time of claim.
As with all product purchases, buyer beware applies. Understanding what a policy does not cover is as important as understanding what it does cover.
In this entry I highlight some of the limitations of the disability insurance aspect of the Synergy plan that purchasers should be aware of.
Benefit Period Limits
Manulife limits the benefit period (for how long they will pay you) to a total of 24 months for all disabilities that are caused by psychiatric or by neck or back conditions. Some statistics indicate that up to 70% of disability claims fall into those categories.
So whereas a typical stand alone disability policy will provide benefits to age 65 no matter the cause, the Synergy product imposes a two year limit on payments for the most common disability benefit claims.
As a result, by limiting their exposure to these risks, Manulife should be able to reduce premiums.
For the Synergy product, Manulife does not pay disability benefits if a total disability begins within 24 months of the policy start date and is caused by, contributed to, or results from a pre-existing condition.
So, if you complained to your doctor of numbness in your foot, and then were diagnosed with Multiple Sclerosis within 24 months of the policy start date, Manulife could refuse benefits on the basis that the numbness was a pre-cursor to the MS related disability.
In a typical stand alone disability policy there would be full medical underwriting, and unless the policy specifically excludes or limits disabilities related to particular conditions, all disabilities would be fully covered.
Make sure that your insurance agent properly compares the Synergy product against the stand alone alternatives. There is no question that a bundled approach can be an affordable solution for consumers. Just make sure that you understand what you are getting for the price paid.
Next entry I will highlight the limitations within the critical illness element of the Synergy product.
It is estimated that there are about 150 fee-only financial planners in Canada. That is 150 individuals, not companies. Compare that to the fact that there are over 17,500 Certified Financial Planners (CFPs) across the country.
With so many CFPs offering free financial plans, why would you pay for one?
To answer that question, let’s first consider what a comprehensive financial plan entails.
• An analysis of your cash flow (current, future, and retirement)
• An analysis of your debts
• Illustrations of a variety of retirement income scenarios
• A review of your tax situation and potential tax savings
• An estate plan review
• Assessment of financial risks relative to your existing insurance package
• Investment analysis and recommendations, including a customized Investor Policy Statement
• Ongoing updates to ensure that you adapt to changing circumstances and stay on track.
Given the above, how many hours do you think a Financial Planner invests serving you?
To help you guess, here is a simple outline of the financial planning process.
• Gather all relevant information
• Assess and analyze the information
• Research if necessary
• Prepare analysis and recommendations
• Present recommendations
• Help with implementation
A properly developed comprehensive plan will take, on average, 15 – 25 hours of the planner’s time.
Now ask yourself, what business person or company would provide 25 hours of expertise and work for free?
If you are getting a “free” financial plan, it likely means that:
a) The plan is a loss leader. The planner is doing the plan with the expectation that you will purchase recommended products from them. As such, there is a built in conflict of interest motivating the advisor to build product recommendations into the plan. OR
b) You are not getting a comprehensive plan. OR
c) Both a) and b).
So if you are seeking a thorough, objective analysis of your financial circumstances without product influences, what do you think that’s worth?
Although kidnap insurance is not new, the risks associated with international business and personal travel have raised both awareness and the need for this little known or understood insurance product.
What does it provide?
The product that that I present to clients is arranged by Hunter McCorquodale Inc., and underwritten by certain underwriters at Lloyds and offers:
Crisis Management - In my opinion, the most important benefit of coverage is immediate, priority access to ASI Global, a specialist crisis management team. Evidence suggests that, in situations where the advice of professional crisis management specialists was available, the hostage was released safely in 90% of cases.
In addition to Crisis Management, coverage includes, but is not limited to:
• Ransom payments or loss of ransom in transit
• Fees and expenses for
o Response consultants
o Independent negotiators
o PR consultants
o Security guards at incident site
o Travel and accommodation
• Post-incident benefits such as
o Psychiatric, medical and dental care
o Cosmetic or plastic surgery
o Rest and rehabilitation
What does it cost?
Here are some examples to give you an idea as to the cost of coverage.
Business executive travels to Panama City monthly, 5 to 7 days per trip in addition to one trip to Columbia. $2 million coverage for 12 months was $2,575.
Two contractors go to Afghanistan and need coverage for 9 weeks. $1 million coverage was $2,450.
Large Canadian resource company, with worldwide operations needs coverage for 20,000 employees. $5 million coverage for 12 months was $49,000.
High net worth Canadian family travels within Canada and the US for vacation. $1 million coverage, 12 month policy is $1,300.
If the idea of Somali pirates, foreign terrorists or South American/Mexican drug cartels is taking the shine off of your travel plans, Kidnap insurance might be the solution for you.
U.S.citizens continue to have obligations for U.S. tax purposes even though they may be a Canadian resident for many years.
Canada and the U.S. have worked together over the years to ensure that treatment of RRSPs and RRIFs by each is consistent. This is not true for all Canadian investments where special rules apply. For example, problems can arise where a U.S. person holds a Registered Education Savings Plan (RESP).
The main disadvantage is that, unlike RRSPs and RRIFs, U.S. persons cannot elect to defer the taxation of income earned in an RESP.
The U.S. tax implications for RESPs depend mainly on the residency of the contributing parent and the beneficiary child.
Contributing Parent is a U.S. Citizen or Resident
The income earned within the plan, including Canadian Education Savings Grants, is taxable to the parent for U.S. tax purposes. There are no income tax consequences upon withdrawal of the funds. That being said, there is an element of double taxation. In addition to having to pay tax on the plan income as mentioned above, for Canadian tax purposes the income will generally be taxable in the hands of the child when they go to university or college.
Contributing Parent is Not a U.S. Citizen or Resident
but Beneficiary is a U.S. Citizen or Resident
The income earned within the plan is not taxable to any party when earned. However, if the child is a U.S. citizen or resident, the accumulated income is taxable to the child upon withdrawal of the funds. A special prescribed tax and interest charge is calculated based on the accumulated income distributed from the plan, which achieves roughtly the same result as if the income were taxed as it was earned over the life of the RESP.
Tax Reporting Requirements
Since an RESP is a foreign trust, U.S. persons who invest in them are subject to the U.S. reporting requirements for foreign trusts. The ability to obtain the tax treatment described above can be jeopardized if the proper U.S. tax reporting forms are not completed. In certain cases, a portion of the original RESP contributions may be taxable to the beneficiary if the appropriate forms are not filed.
If you are a U.S. citizen considering contributing to an RESP for your child in order to take advantage of the Canadian Education Savings Grant, it may be better for another relative in Canada to set up the RESP.
To find out how U.S. foreign trust tax rules apply in your situation, speak with your accountant.
A banker, broker and financial planner walk into a bar.
They are approached by a fairly inebriated customer who laments the huge tax bill they just learned about from their accountant. He asks the financial experts what he should do. (true story, except the bar part). :-)
You can learn about the various professions via their answers to his question.
The banker suggests that the fellow simply refinance his mortgage by adding the CRA bill to his existing debt. With interest rates so low and a long ammortization, he will barely notice the increase in his monthly payment!
The broker tells him that the banker's advice was good and then asks to see his investment portfolio. Certainly he can help there.
When hearing about the unexpected tax bill, the fee-based financial planner says, "how the heck did that happen"? And proceeds to develop a cash flow and tax minimization plan to ensure that the debt is paid off quickly, and a tax surprise like that doesn't occur again.
If you are fully disabled for the rest of your working life, the disability benefits within your group medical insurance can easily exceed $1 million over time. In spite of the value of the coverage, and its financial importance in the event of a disability, most employees have a limited understanding of how the coverage would work for them in the event of a claim. Many will not be aware of insurability requirements for disability benefits.
A number of insurers are building in insurability requirements which employees must meet in order to be eligible for maximum benefits under the plan. A basic amount of coverage is in place without medical evidence. The basic coverage amount can be much less than you are eligible for based on your salary level. This is one way that insurers and employers keep plan costs under control. Medical evidence must be submitted by the employee and assessed by the insurer before the maximum benefit is approved.
For example, a recent plan that I reviewed had the following features:
Benefit: 66.67% of monthly earnings rounded to the next higher $1
Maximum Benefit $5,000
Benefit Period: Age 65
No Evidence Limit: Evidence of insurability is required for amounts in excess of $3,000.
So, based on the above limits, once a member of the plan, the employee automatically qualifies for 66.67% of salary coverage, until, their salary exceeds approximately $54,500. Unless they provide evidence of insurability, once they pass this income threshold, they will not be eligible for the maximum benefit under the plan. It is capped at $3,000.
I asked the client that is a member of the above plan how much disability coverage they have through work. They answered, “two thirds of my salary from what I recall”. This client earned $75,000 and thought that he was covered for about $4,200 per month. He was shocked to find out that at best he would get $3,000 because he had not provided evidence of insurability when his salary was increased beyond $54,500.
When was the last time you reviewed your group health insurance benefits thoroughly? I recommend that you pay particular attention to the disability benefits. That is one of the most important, and valuable, features of your plan.
In past blogs I have highlighted how to find an unclaimed bank balance and a missing life insurance policy.
As it turns out, there are millions of matured Canada Savings Bonds (CSBs) that are sitting un-cashed somewhere.
The good news is that the federal government keeps a record of the owners, and many matured bonds have received an interest payment extension. This means that although the bonds have matured, the government will continue to pay interest for a further 10 years.
Getting at the principal investment is the key though. For Series 1 to 31 (the old ones with the interest coupons attached) you need to call the Bank of Canada at 1-800-665-8650.
For Series 32 and later, you should call 1-800-575-5151. You will want to be prepared with the CSB certificate number is you have it. If not, the service agent will ask you a variety of questions to confirm your identity and to identify which particular CSB issue they are to search for.
If it is determined that you are the rightful owner of matured bonds, and after a 120 day waiting period, The Bank of Canada will send you a letter of indemnity form to complete. This form must be completed in the presence of a Commissioner of Oaths or Notary Public. Check out http://www.redsealnotary.com for a cost effective notary in your neighbourhood.
The Bank of Canada has arranged a program for you to obtain Bonds of Indemnity from The Guarantee Company of North America (GCNA) at very favourable pricing. This program is available exclusively through an insurance broker, HKMB HUB International (HKMB HUB).
If the total amount of CSBs is less than $1000, the charge is $25.
If the total amount of CSBs is between $1000 and $3500, the charge is $65.
If the total amount of CSBs is between $3500 and $100,000, the charge is 2% of the total.
If the total amount of CSBs exceeds $100,000, HKMB HUB will help you find a surety/bonding company that will handle the transaction and the fees would be determined by that company.
Once HKMB HUB International has received your completed documentation, along with the associated premium fee payment, a replacement certificate(s) for your un-matured certificate(s) or a cheque for your matured certificate(s) will be issued. It takes 6 to 8 weeks for this portion of the process to be completed.
If this information has not motivated you to retrieve your matured bonds, perhaps knowing that the interest rate being paid on most outstanding and matured CSBs is only .65% will.
This is often the response when I tell clients what it would cost to replace their company group health insurance if they become self-employed or find new employment with a company that does not offer as generous a group health insurance program.
The vast majority of employees do not know the monetary value of their company health insurance benefits. In fact, most are also unfamiliar with what the benefits offer them and their family.
You probably scanned the booklet when you were hired. You then selected some options (if there were multiple benefit levels to choose from) and then filed the booklet away.
Here are some things to consider before you make that job change, or gripe about the minimal raise you got this year....
1. The most valuable part of the plan is the long term disability benefit.
Insurance is really intended to cover the big, uncertain risks in life.
Employees tend to value the smaller, certain costs such as teeth cleaning and vision coverage. Most of us could manage the small stuff if we had to, but a long term disability without income would be a financial disaster.
2. The second most valuable part of the plan is the prescription coverage, if the annual benefit is unlimited.
These days, some of the most effective medications for a severe or chronic illness can cost upwards of $5,000 per month. Because of this, many plans now have annual caps on the amount that can be claimed for drugs. If your plan does not have an annual cap, be thankful.
3. You likely did not have to qualify medically to be eligible.
If the company is large enough, getting on the health plan is as simple as getting through your initial probation period (typically 3 months). You get on the plan irrespective of medications you currently take and your health history. If you tried to buy your own individual coverage, in some cases, existing medications would be excluded, and in cases of poor health history, coverage is often declined outright.
4. In general, group benefits are not portable.
Some plans allow a departing employee to convert the life insurance coverage to individual coverage. This will be at a higher rate that you could get if you applied for new coverage because you don’t have to qualify medically. So if you are healthy, buying your own coverage makes more sense.
Some plans also offer conversion options for medical benefits, also at higher than medically underwritten rates, but if your health is poor, this could be a good option for you.
The most valuable benefit, long term disability is not portable.
5. The cost of group benefits is rising dramatically each year, which is a significant expense for your employer.
Health care cost inflation rates are well above general inflation rates. Cost of benefits can also increase dramatically for a small company with higher than average claims by one or more employees.
So if you are contemplating a change in employment, do your homework on the group benefits you are giving up so that you can negotiate knowledgeably with your new employer. Before you become your own boss, find out what buying your own coverage will cost so that you can factor that into the cost of running a business.
Mortgages are more often sold than bought. Evidence of this truth is best illustrated by the number of Canadians choosing to buy into the TD Collateral Mortgage structure.
Now, TD isn’t the only bank offering Collateral Mortgages, they just seem to be the most aggressive in their sales approach with clients.
If you have a TD or Scotia bank STEP mortgage, you likely have a collateral mortgage and you might want to know what that means. Likely the bank told you about all of the advantages of such a structure, but they may not have emphasized the drawbacks.
First, let me distinguish between a Collateral Mortgage and the traditional Regular Mortgage. I asked Bob Woods, of Assured Mortgage Services (www.assuredmortgage.ca/bob) to clarify the differences.
He said, “A collateral mortgage is a loan attached to a promissory note, and backed up by the collateral security of a mortgage on a property. These are not new in Canada and historically have been used in the granting of secured lines of credit. They work well by allowing the balance of the loan to float up or down depending on the customer’s needs.”
So I asked Bob what are the downsides of such an approach for a conventional mortgage. Here is the list that he gave me:
Collateral mortgages appear on your personal credit bureau, while Regular Mortgage Charges generally do not. Even when Regular mortgage charges do show up, they do not affect the credit rating. Bob has seen individuals with Credit Scores in the low 700’s drop to less than 630 after the promissory note loan/collateral mortgage showed up on the credit bureau. The reason for this is that 30% of Equifax’s Beacon Score is attributable to balance limit rations. A $300K limit and a $300K balance can do some serious damage to a person’s credit score.
A collateral mortgage is often registered for the total value of the property. TD is known to be offering up to 125% loan to value. This offers the customer the “convenience” of applying for additional credit when the value in their property appreciates, without additional legal or registration fees. Personally, I don’t see this as an advantage at all, since it facilitates taking on more debt rather than paying it down.
It gives the bank more power as it relates to other unsecured debt (credit cards, lines of credit etc.) that you may have with the lender. A Collateral Mortgage allows the lender to seize equity (mortgage payment) and or re-direct that payment to cover other debts that you have with that lender. So in essence, you are securing all of your loans with your collateral mortgage.
A collateral mortgage cannot be transferred under a “no fee” offer by a competitor bank at maturity. To transfer the mortgage would require new legal fees, re-registration of the mortgage etc. This is a disincentive to transfer your mortgage in order to get a better rate from a competitor.
Finally, if your collateral mortgage goes into default, even briefly, the bank can revert to the registered face rate. Check your paperwork; this is likely to be Prime plus 10%.
I have no problem with banks changing their product structure or creating different borrowing options. What I do object to is the lack of transparency in explaining the pros and cons to the ultimate consumer.
A few Money Insights readers that read the most recent blog regarding searching for unclaimed bank balances asked if there was a similar search service for missing life insurance policies.
There is. It is free, and is offered by the OmbudServices for Life and Health Insurance (OLHI). But before the OmbudServices dedicate time and resources searching for a policy, they expect you to have done a little sleuthing first. At the very least, there are two minimum requirements:
1. There is a reasonable basis for the search. Due to the size and scope of each search, there must be basic evidence to support the premise that some un-located coverage does exist.
2. Specific, factual data about the deceased is available
OLHI expects that you will have already conducted a thorough search through the deceased’s papers, files, and safety deposit boxes. In spite of the lack of policy documents, you must have reason to believe that a policy exists. For example, policy renewal statements, bank statements showing pre-authorized premium payments, and written correspondence with an insurance company would likely justify an inquiry.
OLHI will not do a search within the first three months following the date of death or later than two years after the date of death.
The search will not turn up policies purchased outside of Canada or group insurance policies. For possible group insurance, an executor should contact the deceased’s employer and professional associations to determine if any group life insurance existed. Credit card issuers and banks should be contacted to confirm if any creditor insurance had been purchased.