Life Insurance

A much better name for life insurance would be income replacement insurance, because its main function is to provide for people who once relied on your income after your death. If you have kids or a spouse or a business partner who depend on your earnings, you need insurance. On the other hand, if you’re not supporting anyone else, you don’t. Children definitely don’t need insurance on their own lives.

If you do need life insurance, shop around. Compare quotes at Term.ca, Term4sale.com or MoneySense.ca, and always buy from a broker, who represents several insurance firms, so you can compare prices. Keep in mind that the premiums that different insurance companies charge for the same coverage can vary tremendously. For instance, 10-year term policies for $500,000 of insurance for a 35-year old male smoker in Ontario have annual premiums ranging from just over $500 to more than $1,000, depending on which insurer you choose.

You’re wasting money if you buy more insurance than you need, so think about how much you contribute, after taxes, to your family’s income. You should buy enough insurance to replace about 75% of your lost income, plus a bit extra for funeral expenses and legal fees. For instance, if you figure your take-home pay is $60,000 after taxes, you’ll want to leave a lump sum that could supply your family with an annual income of about $45,000 for however many years you think appropriate. How many years should that be? It depends on how old your kids are and your spouse’s job situation. There’s no single answer that fits every situation, so talk matters over with your spouse before settling on a figure.

When you head out to get quotes, ignore the insurance company’s pitch for complicated whole- and universal-life policies. These add a savings or investment element to your insurance, but are only appropriate in special cases. Instead, stick to renewable term life insurance, says William McLeod, author and insurance expert. Often, he says, combining your investing with your insurance leaves you vulnerable to large, hidden fees. “Under no circumstances should you buy a whole-life policy, and universal life is only appropriate in rare cases,” he says. “It’s usually only for people who are in their 50s or older.”

House and Car Insurance

You can often find good deals on home and auto insurance through university alumni associations, says McLeod. Engineers, teachers and other professionals can also get breaks through their professional associations. If you don’t qualify for such plans, check out quotes at MoneySense.ca and from a good independent broker. Sometimes you can negotiate a cheaper bundled rate if one company provides both your house and car insurance. And you can reduce your rates even more by raising your deductible — it’s not unusual to reduce premiums by 25% or more by raising the deductible to $5,000 from $500. If your car’s not worth much, you could drop collision and comprehensive insurance altogether.

Health Insurance

Supplementary health insurance pays for medical bills the government doesn’t cover, such as prescription drugs, dentist visits, glasses and care outside your home province. If you can’t get this coverage at work and you’re not covered by your spouse’s plan, you still may be able to get a group rate through your alumni or professional organization. If you decide to get your own coverage, be prepared for sticker shock — these plans are expensive. But you can lower your premiums by choosing a plan with a higher deductible.

Disability insurance, which covers you in event of disabling injury or illness, is important but often overlooked. Most people get disability insurance through work. If you don’t, says Bruce Cohen, author of The Money Adviser, you should arrange your own. “Disability insurance is even more important than life insurance,” he says. “Statistically, you’re more likely to suffer a disability early than you are to die early.”

The numbers are scary, with some experts forecasting that the cost of a university education, including tuition and lodging, will run upwards of $100,000 by the time Noor graduates high school. Luckily for Noor, her parents are already investigating options, the most popular of which are Registered Education Savings Plans (RESPs).

RESPs are a good deal for the simple reason that “the government gives you money, and that doesn’t happen too often,” says Linda Knight, vice-president of BMO Mutual Funds in Toronto. In most cases, if you contribute $2,000 a year to an RESP, the federal government chips in an added $400.

There are two basic types of RESPs: self-directed and group, or “pooled,” plans. Group plans are popular for their simplicity — you make your regular monthly payments and the company takes care of the rest. But in the past these plans have drawn criticism from regulators for questionable marketing tactics. Some also enforce restrictive policies. For example, a few only allow for just one payout per school year.

Self-directed RESPs, which can be set up at most Canadian financial institutions, tend to be more flexible and transparent. You can invest in mutual funds, stocks, or GICs, and choose from among conservative to aggressive investment options. “If you have a really young child, you can be a little more aggressive with your asset mix,” says Knight. When university comes, students can withdraw what they need, when they need it.

Both types of RESPs qualify for the Canada Education Savings Grant (CESG). Under this program, the feds contribute 20 cents for every dollar you put into an RESP, up to $2,000 a year per child. That means the maximum annual grant per child is $400 for most middle-class families. (You can contribute up to $4,000 a year to a child’s RESP, to a lifetime maximum of $42,000.)

Lower-income families get an even better deal. Recent changes have increased the grant to 40 cents on the first $500 invested by families that earn less than $35,595, to a maximum $500 a year in CESG contributions, and 30 cents on the first $500 for families earning between $35,595 and $71,190, to a maximum of $450 a year. Lower-income families may also be eligible for the Canada Learning Bond, a $500 one-time RESP grant, which is supplemented by an additional $100 a year until the child is 15.

You don’t get a tax break for money you put into an RESP. But the funds grow tax-free and the withdrawals are taxed in the student’s hands. In most cases, then, the withdrawals are effectively tax-free since any amount owing is offset by the student’s education credit and personal tax credit.

The funds can be used at any qualifying college or university, and even some apprenticeship and correspondence programs. If your child decides not to pursue further education, you get your principal returned and any returns on that money can usually be rolled into RRSPs to avoid taxes; all the grant money, however, goes back to government coffers.

Some families prefer to invest outside of RESPs — in informal trusts, by purchasing stocks or bonds in the child’s name, or simply by opening a savings account. The drawback with these options is that they don’t qualify for the CESG. Thus, it only makes sense to use them once you’ve received the maximum grant.

If the task of paying for your little one’s university education seems daunting, remember that it’s not solely your responsibility. “I would like to have enough put aside so Noor doesn’t graduate $100,000 in debt,” says Sabah Mirza. But “I also expect her to work and contribute towards her own education.”

At least, that’s what I thought until I looked closely at the figures and talked to financial experts. What I learned will be a relief to every parent. First, you don’t need to save as much as you think. And second, if you do it right, saving that money won’t cramp your family’s lifestyle. Here’s how.

Set a realistic goal

According to the 2004 — 2005 Guide to University Costs in Canada, compiled by USC Education Savings Plans, the cost of a four-year program for a child born in 2004 will be $66,816 if you live within commuting distance of the college or university. It will be $134,987 if you have to pay for room and board on top of tuition and books. For parents with two or more children, those estimates are positively panic-inducing. But read the fine print and you’ll see they include “incidental expenses” such as local travel, entertainment and cable. Should you really be worried about saving for these items? Probably not.

For a more realistic estimate, let’s start with $4,400, about the national average annual tuition fee last year. Assuming tuition grows at the same rate as inflation, you can expect to pay around $6,500 a year when your child starts university in 2023. Over the course of a four-year program, the total tuition would be about $27,000. Include textbooks and equipment and the all-in cost is about $35,000 over four years.

You can save that by putting away just $20 a week. (I’ll explain how later.) But before we get into the calculations, let me assuage your guilt complex. As parents, we want to help our kids get the best possible start. But that doesn’t mean we have to shell out for every three ring binder they will ever need until they finish a master’s degree. You can teach your children an important lesson by putting some of the responsibility on them. “Kids learn a lot by having to work part-time through school,” says Sandra Foster, a financial educator and the head of Headspring Consulting Inc. in Toronto. “So before you think about how much you’re going to need to put away, think about what would really be in your child’s best interest.”

Patricia Lovett-Reid, senior vice-president of TD Waterhouse and the mother of four, agrees. “We sat down with each of our children and said, ‘We will fund to this amount, but we expect each of you to put in $2,000 a year,’ because I think that’s a reasonable amount they could save. We really thought there should be an incentive and a commitment on their part financially.”

Here’s how the numbers work in my case. Based on my $35,000 estimate for four years of tuition, books and supplies, minus $3,000 a year in summer job revenue that I expect my daughter to kick in ($2,000 a year in today’s dollars, adjusted for inflation), my goal is to save $23,000 by the time she turns 18. By then, my husband and I expect to have retired our mortgage, freeing up $1,000 a month for unexpected expenses, such as room and board if she chooses to attend a university out of town.

Pick a savings plan

Once you’ve decided on a realistic savings goal, you need to choose an investment plan that does three things. First, because your investment horizon is fairly short — a maximum of 18 years — your plan should protect your principal against a market downturn. Second, your plan should produce decent growth and compound your savings. Finally, unless you’re an investing expert, you probably want a low-maintenance program that won’t require you to make constant investing decisions.

Do it yourself

For most people, a self-directed Registered Education Savings Plan (RESP) fits the bill perfectly. You can set up one of these plans through your bank at no charge (although there may be a small annual maintenance fee of $50 or so) and it works like a self-directed retirement savings plan. You can make lump-sum contributions or arrange for monthly debits from a bank account and you can place those contributions in GICs, mutual funds, treasury bills, even stocks and bonds. There are no foreign content limits on your investments. And although your contributions are not tax deductible, the money in an RESP grows 100% tax-free until your child needs it to fund her education — and at that point it’s taxed at her rate, not yours. Since her income will likely be low, she will probably be able to combine her basic personal exemption (currently $8,012) and tuition tax credits to offset any taxes owing on her withdrawals.

Best of all, even if your stock picks perform dismally or bond rates are in the basement, you’re guaranteed a 20% return on the first $2,000 of what you contribute every year for every child, courtesy of the federal government’s Canada Education Savings Grant (CESG). Put in $1,000 a year and you pick up a free $200; put in $2,000 and you’ll get the maximum $400 grant. This grant money grows with the rest of your savings and compounds for even bigger returns. Factoring in the CESG and assuming average annual returns of 5%, I need to save only $16 a week, starting when my child is an infant, to hit my $23,000 goal by the time my daughter turns 18. If I want to build in a cushion, I can raise my contribution to $20 a week. Based on the same assumptions as above, that should compound into the full $35,000 cost of tuition and books by the time my daughter hits 18.

The one drawback to a self-directed RESP is that you have to make investing decisions for your child, which can be stress-inducing if you’re a novice when it comes to stocks and bonds. A simple and smart choice is to put your child’s money into a good, low-cost balanced mutual fund. (See Suzane Abboud’s Best Mutual Funds 2005 for some good candidates.) A balanced fund holds both stocks and bonds and provides a way to give your child a diversified portfolio in one easy swoop. If, for whatever reason, you don’t feel comfortable with a balanced fund, you can have a financial adviser oversee an RESP on your behalf; just remember that his fees will cut into your returns.

Playing pool

Once upon a time, the only RESP option was a socalled scholarship trust, a pooled investment that parents buy into by purchasing units in the trust. The two largest of these, Canadian Scholarship Trust Plan (CST) and USC Family Education Savings Plans, have been around since the 1960s. These firms manage your funds and guarantee your principal by sticking to safe investments such as government bonds and GICs.

Canadians have more than $5 billion in scholarship trusts, but the plans are plummeting in popularity now that most financial institutions offer self-directed RESPs that are more flexible and more transparent. Last summer, scholarship trusts came under scathing criticism from the Ontario Securities Commission, which lambasted them for luring customers with questionable marketing tactics, hidden fees and downplayed risks.

You should take the trusts’ marketing hype with a huge grain of salt. Many claim to achieve above-average returns. Many also promise to top up their payouts with the forfeited earnings of people who drop out, or whose kids don’t go on to post-secondary education. In 2002 — before the Ontario Securities Commission report — CST was claiming an 11.04% return for members whose children completed post-secondary studies that year. However, when MoneySense contacted its head office to get more details, we found the savings plan that earned 11.04% was no longer sold and that the 11.04% figure doesn’t take management fees into account. Details about those fees, which can be extremely high, are buried in the fine print of CST’s eye-blurring 68-page prospectus.

A major concern about many scholarship plans is their limited flexibility. While most will allow you to adjust your monthly or yearly contribution to reflect your financial situation, they also penalize or even disqualify you for missing payments. So if you have one or two months when your cash flow unexpectedly dries up, your entire RESP could be in jeopardy. Stringent rules can also be a problem when it comes time for your child to collect. Most plans mete out payments once a year for four years. That’s not ideal if your child’s financial needs fluctuate from year to year of study, or if she goes to university for more than four years. In contrast, a self-directed RESP lets you make withdrawals anytime you see fit and the plan doesn’t have to be closed until the end of the 25th year after you opened it, which should give your child plenty of time to earn a master’s degree.

Self-directed RESPs are nearly always a better way to save for kids’ schooling than scholarship trusts, but if you’ve already signed up for a scholarship trust, you don’t have to panic and cash out. The Ontario Securities Commission was clear that the problems with these plans relates to the way they are sold, not their accounting practices.

Trust us

An informal trust used to be one of the most popular ways for parents to put aside money for post-secondary education, and some people still swear by this method. Start-up is as simple as making an appointment with your bank or financial adviser to open a savings or brokerage account in trust for your child. To make it official, you must name a beneficiary (your child, of course) and a trustee (your spouse or any adult who is not the donor).

A trust fund’s main appeal is that it can be used for anything that is related to your child, not just his or her education. You can treat it as an emergency fund — if you’re laid off, you can tap the fund to cover the cost of food, clothing and other child-rearing expenses. In contrast, if you were to withdraw money early from an RESP, you may pay a stinging 20% penalty and lose any government grant money.

There are drawbacks to a trust, however. The biggest is that you miss out on the 20% government grant, or CESG. Maintaining a trust is also more work than an RESP. Because the income that grows within the trust is not tax-sheltered, you may have to file a tax return in your child’s name to report the income. Capital gains are not likely to be a problem — they’re taxed at your child’s rate, so unless she’s earning huge sums, she probably won’t have to pay any tax. But dividends and interest may be taxed in your hands.

Most frightening of all, when your child reaches the age of majority — 18 in most provinces — the trust is hers. So if she decides to blow it on a sports car or a trip to Rome instead of law school, you have absolutely no say in the matter. (If you want to stipulate that the funds can only be used for education, you have to open a formal trust, which means hiring a lawyer and paying legal fees.)

My advice is that unless the freedom to access your money at any time is worth more to you than a guaranteed 20% return, stick with an RESP for at least the first $2,000 a year of education savings. Then, since you won’t receive any CESG money for contributions above $2,000 a year, you might start an informal trust with any educational savings left over. This half-and-half approach gives you the best of both approaches: a trust’s flexibility along with free money in your RESP.

“To me the RESP is a no-brainer,” says Heather Clarke of Investors Group in Winnipeg. “A guaranteed 20% return — you probably need to go back to school yourself if you don’t realize that’s a great deal.”

Unfortunately, many Canadians don’t take the time to make an estate plan. Maybe it’s the terminology — “estate” suggests a spacious manor set in rolling hills and a stable of fancy cars. But drawing up an estate plan is a smart move for folks at any income level, and the good news is that the process is easier than you think.

The first and most important step is to make a will. “It’s the cornerstone of your estate plan,” says Sandy Cardy, vice-president, tax and estate planning at Mackenzie Financial Corp. in Toronto. “Yet about 50% of the people who should have a will, don’t.”

If you die without a will — known as “dying intestate” — the government decides who your beneficiaries are, and how your assets will be divvied up. “Not only will your assets not go where you want them — for example, a common-law or same-sex spouse might not be recognized in most provinces — but they’re not going in the most tax efficient way,” says Cardy. It’s well worth paying a lawyer to draft a proper will, she says. A lawyer can also help you draft medical and financial powers of attorney, which set out who will make decisions on your behalf if you become incapacitated. Rates vary considerably so phone a few lawyers to find how much they charge for this service. Expect to spend $400 to $600 for a basic set of wills and powers of attorney for you and your spouse.

Once you’ve written a will, it’s crucial to talk to your family about its contents. “There’s nothing like greed for cash, inheritances and family heirlooms to drive a wedge between siblings,” says Cardy. “I see it every day — otherwise very healthy, happy siblings being ripped apart.” She’s witnessed fights over money, like the one that occurred when $50,000 was left in one daughter’s name (in an attempt to reduce probate fees) without clear instruction to split it 50-50 with her sister. She’s also seen families blown apart over emotional landmines, such as the case of adult siblings who refused to speak after fighting over possession of an old cribbage board from the cottage.

Debbie Ammeter, vice-president of advanced financial planning at Investors Group Financial Services in Winnipeg, says you should ease into a discussion of your will gradually. “People have trouble talking about money and death,” she says, so you might start by talking about related issues, such as plans for your funeral, powers of attorney or health care issues. “Then you can get into discussions about your will and estate, so you’re doing it gradually rather than just jumping in and talking about your finances all at once.” If you’re not comfortable speaking to all your heirs as a group, try one-on-one conversations, but be sure to give a consistent message to everyone.

Your will should be set up so the taxman gets as small a slice as possible. In general, a surviving spouse won’t have to pay tax on assets left to him or her. Most of the hit comes when assets are transferred to the next generation. “While we can’t avoid taxes, there are strategies to minimize the hit, or spread the cost out over time,” says Cardy. Talk to a lawyer about how to gift assets while you’re still alive, or get an accountant or financial planner to advise you about ways to transfer a cottage so that the capital gains on it are recorded over more than one year.

You may also look at custom-designed testamentary trusts to help you control how your assets are distributed. For example, you might arrange for a child who’s lousy with budgeting to receive her inheritance in stages at ages 18, 21, and 30. Again, a lawyer’s advice is essential.

Sure, it takes some effort to structure a proper estate plan. But you’ll save your family time, money, and more importantly, headache and heartache. Think of it as a way to protect your legacy. “Don’t sit back and assume the kids will sort everything out once you’re gone,” says Cardy, “because that won’t happen.”