DOELL OSMAK

Lawton Partners Financial Planning

  • About
  • Services
  • News
  • Contact
  • More
    • Resources
    • Ethics Audit
  • Client login

Get acquainted with segregated funds: An insurance-based investment that for some, is a perfect fit.

December 14, 2020 by Darcie Doell and Laurianne Osmak

The financial world uses a language that can be confusing for people who don’t have a deep understanding of investing. It can be more difficult when it comes to a particular product they may have heard of, but don’t have a firm grasp on its intent or how it works. Segregated funds are a unique kind of investment product and getting acquainted with a few key terms can help boost your knowledge.   

Segregated fund contract: A pool of investments held by an insurance company and managed separately from its other investments. A segregated fund contract combines the growth potential offered by a broad range of investment funds with the unique wealth protection and estate planning features of an insurance contract. Segregated fund contracts can help transfer wealth to the next generation quickly, privately, and cost effectively. They can also minimize exposure to risk through various guarantees, such as death and maturity guarantees, and provide potential creditor protection – all from a single product or insurance contract. But what do each of these terms mean? Let’s break it down: 

Estate planning benefits: Because segregated funds are technically insurance contracts, they let investors name a beneficiary to allow the investment to bypass probate and the estate at death.  Probate is a legal process that certifies the validity of a will and the authority of the executor(s) to facilitate the transfers of assets to heirs. It can take time – months, or even years – and in many cases, there are fees. With segregated fund contracts, the money goes directly and quickly to the person who inherits the money (the beneficiary of the contract). While poor estate planning can erode your wealth for the next generation and cause distressing, potentially expensive delays, segregated fund contracts can help make sure your beneficiaries will receive their inheritance quickly and cost-effectively. They may also help to preserve confidentiality: wills can become public documents, and the information in them can be easily accessed. Segregated fund contracts are private. 

Creditor protection: Segregated fund contracts have the potential to protect your assets from creditors. If a family class or irrevocable beneficiary to the contract is named, the segregated fund contract may be protected from the owner’s creditors during his/her lifetime. Also, the death benefit is excluded from the owner’s estate as it is paid directly to the beneficiary, usually placing it beyond the reach of estate creditors. You can read more about estate planning and creditor protection and about how the regulations particularly apply in Quebec. More insights on the creditor protection for business owners is available here.

Maturity guarantee: With a segregated fund contract, you’re guaranteed to receive at least 75 per cent of your deposits (or 100 per cent, depending on the contract), reduced for any withdrawals, when the contract matures. This is known as a maturity guarantee, and it applies at the maturity date (which occurs after a minimum number of years has elapsed or at a contract set date – for example, age 100 of the annuitant), even if markets decline during the contract period. And if markets rise, your savings grow. Some contracts even let you “reset” your maturity guarantee to lock in growth. This way, you get the opportunity to protect your capital along with growth potential. 

Death benefit guarantee: Segregated fund contracts also include a death benefit guarantee. The guarantee can be up to 100 per cent of your deposit, again reduced for withdrawals, depending on the type of contract selected and the age of the annuitant when the product is purchased. Your named beneficiary, who can be anyone – a family member, friend or charity – receives the death benefit in the event of death. As with maturity guarantees, some contracts “reset” the death benefit guarantee to lock in growth. 

Segregated fund fees: The guarantees and benefits of a segregated fund contract are a type of insurance, which you’re paying for. Segregated fund costs include management fees, insurance fees, operating costs and applicable sales tax. A contract might also include a charge for early withdrawal. 

Segregated fund contract who’s who

Contract/policy owner: The person who enters into and owns a segregated fund contract. 

Annuitant: In provinces other than Quebec, this is the person on whose life the maturity guarantee and death benefit guarantee are based. In Quebec this person is called the life insured (‘insured’) and the word ‘annuitant’ instead refers to the person who will receive the payments. For registered contracts, the contract owner and annuitant/insured must be the same person. For non-registered contracts, they can be the same, or the contract owner can decide to designate another person as the annuitant/insured. The contract owner is the person who will receive the funds at maturity of the segregated fund contract. The beneficiary is who will receive the funds when the annuitant/insured dies. 

Beneficiary: The person(s) named on the segregated fund contract by the contract owner to receive the death benefit when the annuitant/insured passes away. Your beneficiary can be anyone – a family member, a friend, or a charity. 

Insurance company: This is the company that you enter into a contract with and that backs the guarantees of the provisions in your contract. 

Advisor: Your key contact! Advisors who are licensed to sell insurance (including segregated funds) can help you determine the segregated fund contract that’s suitable for your needs. An advisor can also help you decide on specific funds that are available in the contract.

The appeal of segregated fund contracts depends on a few key factors, such as time horizons, fees and estate benefits that differ from typical mutual funds or exchange traded funds. But what makes them unique could be what makes them the right type of investment for you. Speak with your advisor to see if a segregated fund contract is suitable for your investment strategy or needs.

Segregated fund products at a glance 	They perform much like mutual funds, wherein they’re a collection of diversified portfolios of stocks and other assets, but in addition to this, they’re a type of insurance product that offers additional benefits and some potential protections of your credit and principal investment. 	They typically cost more than mutual funds, due to the added insurance component and the guaranteed protection of your principal. 	You can choose a contract that protects 75 per cent or 100 per cent of your capital. The higher the guarantee percentage, the higher the cost. 	Only insurance advisors, or those licensed to sell investments and insurance (and some online brokers) can sell segregated funds, which lowers their availability compared to mutual funds. 	Recognized as a type of insurance contract, they remain within the jurisdiction of insurance regulators rather than securities regulators.

Filed Under: Credit protection, Financial Planning, Insurance, Investments, Segregated fund contract

Coronavirus and market uncertainty: What you should do

March 10, 2020 by Darcie Doell and Laurianne Osmak

Over the last week, the financial market has taken a downturn amidst fears over Coronavirus. The S&P 500 had its worst weekly drop since the financial crisis in 2008, after setting all-time highs the prior week. 1 

Understandably, investors are anxious about their money. If you are concerned with your portfolio, you’re not the only one, however, during times of market volatility, it’s important to stay level-headed to avoid making financial missteps. 

Keep calm 

In situations like these, it’s important to keep perspective. This is not the first time the market has taken a downturn. Market corrections are a natural part of the investment cycle and over the long term, individuals that remain invested and use the volatility as an opportunity to buy will be rewarded. 

The media can make it seem like each market downturn is worse than before. In reality, though, volatility alone doesn’t hurt investors, but if selling in a downturn, it will lock in losses. 

Keep up-to-date 

Currently, there isn’t enough information to know how the Coronavirus will affect the market, over the short, medium and long term. However, it’s important to know that the financial market doesn’t like uncertainty. Therefore, as further developments come to light, there will likely be further corrections to the market. 

How have markets reacted to virus outbreaks in the past? 

The table and chart below, show how the S&P 500 has performed during similar virus outbreaks in the past. While the impact can be negative, the long-term impact has been limited. In all past scenarios, markets were higher 12 months after the virus was identified. 2 

Source: Bloomberg Finance L.P., CitiResearch, FactSet. As at February 27, 2020. The starting date for the 12-month return is the month each virus was identified. 

Keep in mind your portfolio is diversified 

We know market downturns can be stressful and being bombarded by media reports doesn’t help but keep in mind your portfolio is diversified. It’s important to remember that your portfolio is tailored to your unique investment time horizon, personal situation and financial goals. If you do have questions about your portfolio, please don’t hesitate to contact us. 

Review your investments 

This is a good time to review all your investment accounts including your TFSA, RRSP or RRIF to ensure you are diversified. If you haven’t reviewed the accounts that we don’t manage, please reach out to our office and we can provide you with recommendations that align with your financial goals. 

Keep in touch 

We’re here for you and hope to serve you by helping you make objective and educated financial decisions. These decisions will help you stay the course so you can achieve your financial goals. 

If you have friends or family that need help with their investments, we are happy to offer a complimentary review. We will discuss what their financial goals are and what makes the most sense for their situation. Often by working with a financial advisor, it can help them feel more confident about their finances. 

At any time, should you wish to discuss or review your investments, please contact us. We’re here to support you. 

1Source: https://markets.businessinsider.com/news/stocks/stock-market-news-today-worst-week- since-2008-coronavirus-economy-2020-2-1028951101 

2Source: https://www.ci.com/en/coronavirus-update 

Filed Under: COVID-19, Financial Planning, Investments, Market uncertainty

Shoot to score: A goals-based approach targets financial planning to meet objectives throughout life

February 11, 2020 by Darcie Doell and Laurianne Osmak

How do you measure the success of your investment strategy? Most people look at their returns: five per cent is better than three per cent. But investment returns don’t tell the whole story. Whether or not an investment strategy is successful depends on whether it delivers the money the investor needs at the right time, allowing them to achieve specific goals.

That’s the aim of a goals-based approach to financial planning. Rather than chasing returns on investments, this approach identifies the amount of money required at different times throughout an investor’s life and structures separate investment portfolios, alongside debt management, insurance, tax and estate planning strategies, to help ensure the investor has that money available when it’s needed. Then, instead of checking returns against the markets, the investor evaluates success by measuring their progress towards each goal.

In addition to redefining success, a goals-based approach also redefines risk. After all, the true risk for an investor is not that an investment portfolio loses money this year; it’s that the investor falls short of their savings goals and can’t do what they had planned to do.

What are you saving for?

For most people, the answer is, “Lots of things!” But that’s a bit like setting a New Year’s resolution to “Do a bunch of stuff.” It’s not specific enough. And when goals are vague, it’s hard to know how much to save, which investments to choose and what level of market volatility you consider acceptable.

Well-defined goals, on the other hand, are more achievable. Knowing exactly what you’re working towards is a great motivator to keep saving. It also makes it possible to build a financial plan around specific milestones that help keep everything on track.

As a starting point for goal setting, consider goals many people share: a comfortable retirement, a new home, a cottage, a renovation, education (for children or for yourself) and travel. Keep in mind that some common goals stretch beyond a lifetime – for example, a desire to provide a legacy to loved ones or make a substantial donation to a favorite charity. 

Let’s consider Maggie, age 40, who has three primary goals. She would like to take a year off work and go back to school full-time in three years, renovate her kitchen in six years, and retire in 20 years. Because the date she needs to access her money is different for each goal, so is her tolerance for market volatility. Maggie can’t afford for her savings to be worth less than they are now when she’s ready to hit the books. On the other hand, it’s okay if her savings for retirement are temporarily down three years from now, as long as they recover in time for her to have enough money to stop working when she plans.

Since Maggie’s goals have different time horizons and risk tolerances, it makes sense to create three investment portfolios – and that’s exactly what a goals-based approach does. Each portfolio will have a different balance of equities, fixed-income investments and cash: more fixed-income investments and cash for shorter-term goals, and more equities for longer-term goals. When Maggie reviews each portfolio, she can of course look at its rate of return, but the more important measure of success is whether she’s on track to achieve the goal that particular portfolio is designed to help her reach.

Of course, sometimes goals shift. Maggie may decide to keep working and take classes in the evenings. That may allow her to put a down payment on a larger home instead of renovating her kitchen. Maybe one of her teachers will connect her to a new job she loves and she’ll change her mind about retiring at age 60. A goals-based approach can generally accommodate new plans, as long as they’re not made at the last minute. Portfolios will simply be appropriately adjusted, and investors can start tracking their progress towards new goals.

Whether or not goals shift, all investment portfolios need fine-tuning as investors approach the date when they need to access their money. As each goal gets closer and the time horizon shrinks, the related portfolio allocation will have to reduce its exposure to market volatility to ensure it can deliver the right amount of income when that money is needed.

That said, a goals-based approach ensures that only the portion of money that’s required in the near future has its risk level (and therefore growth potential) scaled back. The rest of an investor’s money can continue to enjoy a greater opportunity for growth towards longer-term goals. The flexibility to precisely calibrate a portfolio to its goal, while leaving other investments to keep working towards other goals, is one reason a goals-based approach adds so much value.

Not only about investments

How do debt management, insurance, tax and estate planning fit into a goals-based approach? They’re other essential components of a complete financial plan and can contribute to the likelihood that an investor will achieve their goals.

Debt is a drag on any financial plan, slowing it down with every dollar in interest paid. Having clear goals in mind can be a powerful inspiration to pay down debt and get rid of that drag. Your advisor can recommend strategies to be debt-free faster, including targeting the highest-interest debt first and consolidating debt into a single account with a lower interest rate.

Unexpected events can derail the best-laid plans – and that’s where insurance comes in. Health and dental policies can help with the cost of medications, dental procedures and health-related services when needed. Disability and critical illness policies help protect the ability to meet goals by providing financial support in case an illness or injury prevents you from working. And life insurance policies can help ensure loved ones avoid financial hardship and can continue to make progress towards their goals after the insured person’s death.

Plan to reach your goals

With the right strategies in place, you’re much more likely to reach your goals. Here are steps you can take in the short term, medium term and long term to improve your financial well-being. Remember, every step you take gets you closer to your goals. 

Short-term stepsMedium-term stepsLong-term steps
Create a budgetArrange insurance protectionSave for retirement
Start an emergency fundSave for larger purchasesDevelop an estate plan
Pay off debts Plan for children’s educationSave for “nice to haves”

Effective tax planning reduces the amount of money paid in taxes, providing more money to invest towards goals. Simple tax strategies include maximizing Registered Retirement Savings Plan contributions every year to get the biggest possible tax deduction and, where practical, earning the most highly taxed type of investment income – interest income – within a registered plan where money grows on a tax-deferred or tax-free basis. 

For many people, the goals addressed by estate planning are among the most important. Estate planning can help make sure assets pass to beneficiaries efficiently and tax-effectively, establish strategies to meet the needs of a loved one with a disability and/or set up a generous gift to charity. It can both provide significant tax savings and ensure family members are well taken care of.

Speak with your advisor

Defining clear goals and aligning financial planning to meet them can help you make the most of your money and avoid common financial pitfalls. For example, knowing that overspending or paying too much in interest will jeopardize your ability to have the experiences you want in life may prompt you to redouble your efforts to trim your budget and eliminate debt. Meanwhile, knowing exactly how much income you need in retirement makes it less likely you’ll skip a few months of saving, because you know the precise amount of money you must set aside regularly to stay on target towards the future you want. 

Furthermore, understanding what you need your money for and when you need it will help you avoid investments that are inappropriate for your situation and focus on the ones with the risk/return profile that suits you best. An added benefit is that when you know exactly why you’re invested in a specific way, you are less vulnerable to the distractions of market ups and downs and can stay invested towards your goals.

Overall, focusing on goals makes financial planning more concrete and less abstract, allowing you to mix and match strategies with a very clear idea of what they need to achieve. It can also clarify conversations with your advisor, giving them a well-defined job: to get you what you want when you want it. 

We want to hear “Your Story” – Let’s talk about how a goals-based approach to financial planning can help you achieve your dreams. 

Source:  manulifesolutions.ca 

Filed Under: Financial goals, Financial Planning, Investments

Client Login

Follow this link to sign in to your account using the LP Financial Planning Services client site portal.

Login

Get in touch

  • Phone: 306-922-2020
  • Fax: 306-922-0535
  • Email: Darcie Doell
  • Email: Laurianne Osmak
  • Email: Michelle Sawula
  • Home
  • About
  • Services
  • Resources
  • News
  • Videos
  • Contact

© Copyright 2021 Pat Weir · All Rights Reserved

Privacy Protection Notice