The Wonderful World of Mortgage Insurance and What You Need To Know.

   Within the past couple years I have seen a lot of family members, family friends, and personal friends of mine purchase a home and not completely understanding the mortgage insurance that they had purchased with their mortgage from the bank.

What is Mortgage Insurance?

Mortgage insurance is a solution that is mandatory when applying for a mortgage with a bank. Nine times out of ten most retail banks will require that you purchase mortgage insurance in the event that death or critical illness were too happen to one of the homeowners. Many homeowners choose to apply for mortgage insurance in the event of their death so that their family wouldn't have to suffer paying an outstanding mortgage principal that they may not be able to afford on one income.

What is Bank Mortgage Insurance?

When applying for mortgage insurance with the bank, one of the last things the mortgage advisor will ask you is "Do you want insurance to cover your mortgage?" and of course your response is going to be a no-brainer because if death or illness were to occur to yourself or your spouse then you would want your mortgage principal paid off for your family. Right?

But what most individuals/families don't do when applying for mortgage insurance with the bank is read the application and the fine print, which is something that ALL mortgage advisors wont and can't do for you at the bank. The reason for this is because individual branches are not licensed to sell insurance which means anyone who works inside your local bank branch cannot talk to you about insurance which would cause a breach of policy....So why would someone who is not licensed to sell insurance go ahead and sell you a mortgage insurance policy?....Why would you let someone who's not a licenced mechanic replace the wheel barrings in your vehicle?....You don't.

Now lets say you agree to purchase mortgage insurance because you see the importance of protecting your home and family in the event of a death. You'll now go ahead and put your John Handcock on the application which is then put into the advisors desk, and from there you'll leave happy because your mortgage insurance is "approved" and you'll feel more comfortable knowing you have mortgage protection for your family.

WAIT!!! The application is put into the advisors desk and NOT sent to the underwriting department?....I will get back to this in a moment.

Individual Term Insurance

Individual Term Life Insurance is a solution that many individuals purchase when buying their home. As previously stated, most retail banks require you to have mortgage insurance before they will fully approve you for a mortgage. This can be mortgage insurance through the bank or individual mortgage insurance through a licensed life insurance company.

The advantages of purchasing individual life insurance through a licenced life insurance company instead of bank mortgage protection is that you will personally own your insurance policy, unlike the banks where they are the policy owners and you are stuck paying the premiums. Next, individual life insurance coverage and premiums are fixed and will never change over the term of the policy, unlike bank mortgage protection where your insurance coverage is reduced by your mortgage principal, and can be cancelled by the bank without notice at any time.

Example: Your home is worth $200,000 you need $200,000 worth of mortgage/life insurance costing roughly $50 a month (depending on your age). After a year of ownership you have now paid-off a total of $12,000 of principal mortgage payments. After that year your NEW bank mortgage insurance coverage is now reduced to the same amount as your mortgage principal at $188,000, BUT, your monthly mortgage insurance premium payments stay the same as if you were paying for $200,000 worth of coverage.

Now, if you are applying for $200,000 worth of Individual Term Life Insurance coverage costing $50 a month your coverage will never be reduced, your premiums stay fixed for the complete term of the policy, and your coverage can never be cancelled by the insurance company.

Now back to the advisor putting the application in his desk and not sending it off to underwriting. 

The biggest difference between bank mortgage protection and individual term life insurance is that at the time of application individual life insurance companies will immediately send your application off to the underwriting department which will approve your insurance coverage within a week allowing you complete peace of mind knowing that you, your spouse, your children, and your home is protected in the event of illness or death.

Bank mortgage protection sends your application to the underwriting department at the Time of Claim, meaning that the insurance coverage that you have been paying for has yet to be approved by the company. For example if in year four of your mortgage you had a minor stroke or heart attack and in year six you passed away and your spouse needs to make a claim with the bank to payoff the remaining mortgage balance, the bank will now take the application that you had filled out years prior and send it to the underwriting department. The underwriting department will go through the Medical Information Bureau and notice that the deceased spouse had a minor stroke/ heart attack a few years prior and 9.5 times out of 10 the underwriting department will disapprove your claim leaving your spouse having to pay the rest of the mortgage principal when you thought all along it would be paid off possibly leaving your family in financial turmoil.

 

To conclude, what makes more sense? purchasing mortgage protection from the bank which the bank owns that reduces your coverage year by year while you continue to pay the same initial coverage amount, or individually owning your own policy while knowing that the amount of coverage and premiums payments stay the same throughout the entire term of the policy?

Click the link to see CBC's Market place 'In Denial' which speaks about individual life insurance and bank mortgage protection.

https://www.youtube.com/watch?v=qe61HVGIwUo

WEEKLY NEWS LETTER!!!!

It's been over a year since I created this blog and just over seven months since my last post. During the hiatus I have done a lot of thinking about how I should continue with the blog.
In that seven months I have been able to speak to many individuals with many different situations with regards to their investments and insurance, and though I get a lot of the same questions I have no problem answering them because that's what I do, just as someone were to ask you a questions at your place of work.

The concept of this blog going forward is to talk about situations or concerns that many of us young and old are going through when it comes to our finances. I will be posting at least once a week with information about investing and insuring for your future or present time. I know that some financial lingo can be confusing and difficult to understand, trust me I read articles and research every day, and the last thing I want is to confuse my readers. The goal for the Canadian Financial Advisor blog is that it will be simple and easy to understand for all readers.

I also encourage questions and comments from everyone, I would appreciate if no rude or inappropriate comments were posted as it will be deleted. Be professional.

Tax Savings by Income Splitting

Canadians Paid over $188 Billion dollars in personal income taxes in 2011. Income splitting is a great way to reduce a families overall tax bill and leave more money for investment purposes or living expenses.

Someone with a taxable income of $100,000 a year, like Homer as you will read below, pays $7,000 to $10,000 more in personal income tax than two individuals who earn $50,000 each.

The Canadian Revenue Agency have had policies in place for years to dismember any attempts to shift ones income to someone else. Income earned by that one person is generally claimed by that person. But, there are exceptions to those rules and taking advantage of them can result in thousands of dollars in tax savings.

Basically, you have to Loan the money instead of Give the money. And the perfect way to do this is by Income Splitting.

Income Splitting:
The strategy of shifting income from the higher-income earner to a lower-income earner, whether it be a spouse or child, in order to reduce the overall taxes paid by the family.

How it works:
The higher-income earning spouse lends a sum of money to the lower-income spouse or child under a written loan agreement. Under the agreement the lower-income earner agrees to pay interest at the current prescribed rate of one percent to the higher-income earner in the family to make this strategy as tax effective as possible.

Example:
Homer and Marge's tax rates are at 45% and 20% respectively. If homer loaned Marge $100,000 at a prescribed rate of 1% to invest, and Marge earned 5% Return On Investment (ROI) or $5000 on the $100,000, Marge would be left with $4000 of taxable income after deducting 1% ($1000) paid to homer.
Taxes Payable by Marge are subject to $800 ($4000 investment taxed at 20%), Homer would pay $450 ($1000 investment gain taxed at 45%). Totaling $1250 of tax paid.

Are you prepared for rising inflation costs?

Forget the published numbers on inflation. If you really want to know what’s going to happen to your own standard of living, simply look around you

Cost of living, it can be stressful for most of us but do we understand how much the cost of living will cost once the economy and inflation begin to rise. Talking to individuals from different industries such as construction, automotive, sales, and real estate; these individuals all understood that the economy has taken a hit in the last decade. I then asked if they had an idea when the economy and inflation will begin to rise and they didn't, but, they understood that inflation will rise and that the cost of living will increase.
This situation is something that a lot of us don't think about, especially those aged 20-34. Gen Y and X have grown-up in a world of low interest rates and a falling economy, but history has proven that the economy, interest rates, and inflation has always rebounded.

Although Canada's inflation rate recently slid to its lowest level in almost two years, nobody really thinks it's going to stay there. Job outsourcing has dampened inflation here in North America, thanks largely to low wage rates in newly industrialized countries. As wages rise there, however, these increases will filter through to goods and services consumed here.While higher inflation won't strike overnight - it may even be a couple of years away — some analysts believe it could be significant when it does hit.

"We expect global inflation over the next three to five years — or even the next five to 10 years — to be higher than it has been over the last 20 years," says Mihir Worah, head of real-return strategies at bond-investing giant PIMCO.

"While we don't expect double-digit inflation, we do see inflation gradually climbing higher than the close-to-two per cent core numbers that we have gotten used to in much of the developed world," he adds.

Should you be concerned? I'd say yes. Everyone feels the pinch of rising prices. And the older you are, the higher the level of apprehension. Sure, retirees' indexed government retirement benefits and — for some at least — pension plans will help keep their purchasing power intact over time.
However, inflation is a real worry for an increasing number of Canadians. As a result, some advisor's are beginning to employ higher rates of inflation in their projections for clients' future income and expenditures, particularly since the Consumer Price Index, the most common measure used for changes in inflation, simply doesn't reflect day-to-day reality for many people. The CPI measures price changes for a basket of goods and services, based on average spending by Canadians in a particular year. But there can be large differences in the price increases for these expenditures.

In fact, you could say that every person has his or her own individual inflation rate.
For instance, about one-third of the typical family budget is dedicated to keeping a roof over your head, but whether you rent or own makes a huge difference in where inflation hits you most.
It's all about spending patterns. Younger people tend to spend more on electronics, kids' toys or school costs, for example, while older people will normally use up a greater percentage of their income on essentials like food, utilities and — as they age — medical care.
And people of any age who drive a lot will clearly be more worried about changes in the price of gas. But not if they can take the subway instead, an option that's unavailable to those outside major urban centres.

It all adds up. The costs of operating a car, for instance, have increased at a much faster pace than the CPI over the past decade — including increases of about 80 per cent for gas and something like 60 per cent for insurance premiums. The good news is that serious inflation, and the rising interest rates that will accompany it, is still far enough away that you have some time to do something about it.
It's always a good idea to pay off your debts as soon as possible anyway, but if you're holding any kind of credit card debt, this would be a good time to get serious. The same goes for a home equity loan that "floats" with the prime rate. If and when inflation rises, these costs will quickly go up. If you do have to borrow, and that means a mortgage for most people, go long and stretch things out.
For instance, if you think inflation is accelerating and mortgage rates are going to be higher than about 4.5 per cent in five years, then you should at least consider locking in for the 10-year term.

On the portfolio side, the easiest way for investors to set up an inflation hedge is to buy a real estate investment trust (REIT) or a fund holding a basket of these securities that generate much of their income from rents that are likely to rise with inflation. The prices of many REITs have risen sharply, though they could pull back a bit if the economy slows and interest rates rise. Ideally, you want these inflation-fighting assets to be widely diversified, so it's best to invest through mutual funds like Sentry REIT Fund (I own units of this fund) and exchange traded offerings, such as BMO Equal Weight REITs Index ETF. PIMCO also recommends looking closely at inflation-linked bonds, such as Treasury inflation-protected securities (TIPS) in the U.S. or real-return bonds here in Canada.
The rate of return on these securities, while modest right now, is adjusted for inflation, effectively removing that risk at least.

Impulse shopping cost Canadians $3,720 a year.

A majority of Canadians surveyed by the Bank of Montreal say they shop to cheer themselves up and mood-lifting impulse purchases cost Canadians $3,720 annually.
The Bank of Montreal poll found that 59 per cent of those surveyed did impulse shopping and bought items like clothes and shoes and also treated themselves to eating out.

“We’re really struggling to save money on a monthly basis,” said Janet Peddigrew, district vice-president of midwestern Ontario at BMO.

Consumers have been spending more than they’ve been saving over the last 10 years, which is cause for concern, Ms. Peddigrew said. “Those who answered the survey, the majority, said they would do it to cheer themselves up.”

The survey found that 60 per cent of Canadians did this kind of emotional shopping and 55 per cent bought something they might not need because it was on sale.
On average, that amounts to $310 a month being spent on items that are wanted but not needed, according to the survey released on Tuesday.

Those surveyed believed they could save two-thirds of that amount if they made an effort to limit impulse spending, the bank said.

Ms. Peddigrew said setting a budget and using online tools to track spending can help keep impulse spending in check.

Ms. Peddigrew said not having enough savings can leave consumers caught short when an emergency arises, when they need to do a major home repair or when they lose their job.

The poll results come as Canadian debt-to-income ratios sit at a record 152 per cent and top officials issue warnings to start paying down debt before interest rates rise.

There’s also an element of regret that comes with impulse shopping and in some cases, financial difficulties.

The survey found that more than half of respondents regretted their purchases and 43 per cent sometimes spent more than they earned in a month. Another third of those surveyed had to borrow money or take out a loan to cover their impulse spending.

The consequences of impulse spending were more common among Canadians under 30 with one in three unable to afford something they needed because of spending on “wants,” the survey said.
Men said they spent more than women on average, $414 versus $207 dollars but men tended to spend more on technology items, Ms. Peddigrew said.

BMO said its psychology of spending report is the first in a series that will examine personal finance and investing behaviours among Canadians.

LuAnn LaSalle- The Canadian Press

Canadians may be too blase about debt: poll

Saving money...We all want to do it, but, do we know what we're doing it for?
Some of us would like to be filthy rich, while some would like to live a comfortable lifestyle.
What we all can agree on is that staying out of debt is a must and a priority so we can live a financially healthy lifestyle. What would you do if an unexpected event occurred where a lump sum of money is needed? Savings? Ask family? Take out a loan?


TORONTO - A new poll suggests that most Canadians are quite comfortable with using debt as a financial strategy — at a time when debt loads have risen to alarming new highs. The survey, done for bankruptcy trustees Hoyes, Michalos & Associates, finds nine out of ten respondents would consider borrowing money to cover an unexpected cost.

The poll by Harris/Decima asked respondents how confident they were about being able to raise $2,000 within a month if an unexpected need arose. While 55 per cent said they were extremely or very confident they could raise the cash, 92 per cent said they'd consider borrowing to come up with some of the cash.

Less than half — 45 per cent — said they'd never faced a debt problem.

The poll results come as Canadian debt-to-income ratios sit at a record 152 per cent and top officials issue warnings to start paying down debt before interest rates rise. The findings suggest consumers have been unmoved by warnings that rates will inevitably rise and that the resulting financial burden could sink some households.

"It's frightening to see that Canadians have become totally blase about debt — it's becoming their new 'normal' and they're numb to this dangerous trend," says Douglas Hoyes, a bankruptcy trustee with Hoyes, Michalos & Associates Inc.

"For many, the use of debt to not only pay for big ticket items like cars, but also to cover day-to-day living expenses, has become commonplace."

Consumers have taken advantage of ultra low interest rates since the 2008-9 recession to heap on low-cost debt.

The Bank of Canada's key interest rate — which affects banks' prime rates for loans — remains on hold at one per cent, where it has been since September 2010. Coming out of the recession, the central bank set the rate as low as 0.25 per cent in an effort to stimulate borrowing and therefore the domestic economy.

However, with rates still low as the central bank tries to buffer against a globally depressed economic backdrop, the Bank of Canada has declared household debt the number one risk to Canada's economy.

The Hoyes, Michalos & Associates poll results suggest the trend toward debt accumulation is continuing as 26 per cent of respondents said their debt level is higher than a year ago. The survey also found that 70 per cent of respondents said they need immediate help with daily financial matters, including paying down debt (20%), increasing savings (16%), and improving cash flow (13%).

Ted Michalos, a bankruptcy trustee with Hoyes, Michalos & Associates said it appears that Canadians are replacing saving for a rainy day with accessing debt to deal with financial problems.

"Canadians are carrying record levels of debt and yet, surprisingly, 62 per cent of those surveyed are comfortable with their financial situation," Michalos said.

"That is quite a disjoint. It's concerning to see that access to credit and taking on more debt has become an accepted part of financial planning," he added.

One-in-five Canadians surveyed said they believe it would take them two months or longer to come up with $2,000, even if they could borrow. Among those who said they couldn't raise the money within a month, 26 per cent said they couldn't raise the money no matter how much time they were given.

"That's a lot of people who are already at their maximum borrowing capacity," Hoyes said.

The Harris/Decima survey interviewed 1,010 Canadians between Aug. 15 and 23. The survey has a margin of error of plus or minus 3.1 per cent, 19 times out of 20.

Last month, a report on Canadian debt trends by TransUnion found the average consumer's non-mortgage debt load rose another $192 to $26,221 in the second quarter — the highest average debt per person it has seen since it began tracking the variable in 2004. The quarter also marks something of a turning point as the second consecutive quarter in which debt accelerated following more than a year of quarterly declines.

In July, another consumer credit reporting agency, Equifax Canada reported that consumer indebtedness, excluding mortgage debt, grew 3.1 per cent year-over-year in the second quarter, down from 4.4 per cent in the same period of 2011.

The Equifax study also found that high-interest credit card debt fell by 3.8 in the quarter and consumer bankruptcies were down 4.5 per cent from a year earlier. Meanwhile, bank loans and lines of credit showed very moderate growth compared to a year ago.

By Sunny Freeman, The Canadian Press, thecanadianpress.com, Updated: September-24-12 3:00 AM

Can't find a job? Consider moving back home

When job opportunities are not presenting themselves, moving back in with your parents is an option to help ease any financial burden you may be facing.

 

Today's millenials face a tough road ahead of them thanks to the unfortunate effects of the recession. With the unemployment rate for those aged 15-24 at a whopping 14.7 per cent in Canada, double that of the national rate, more and more young adults are graduating into a tough job market.

 

The lack of jobs coupled with high student debt is a common reason for youth to move back home, but other crises like ending a romantic relationship or living with bad roommates can also influence a return to the nest.
Rob Carrick, an Ottawa-based personal finance columnist for the Globe and Mail newspaper and author of a financial guide for young adults, How Not to Move Back in With Your Parents, says it's the most sensible solution for someone who doesn't have a job.

"Ideally, you won't have to pay rent and you can live pretty much cost free," he says. "It means you don't have to go into debt to pay your day-to-day living costs... It gives you a chance to plot a strategy for moving forward without digging yourself into a worse hole of debt."

Before the move
Christina Newberry, a Vancouver-based author and founder of The Hands-On Guide to Surviving Adult Children Living at Home, says before the move happens, both sides need to sit down and discuss:

1. Why you're moving back home
2. What you plan on doing during your time living at home
3. How long you plan on moving back for
4. Other details about your stay such as rent, computer, car, and TV privileges, curfew, and your significant other

There's a huge sacrifice made when both sides agree to live together again. She suggests putting together a contract that serves as a reference whenever there's a problem.

If you move back home again, it is up to the child to renegotiate the terms, says Carl Pickhardts, a psychologist in Austin, Tex., who specializes in parenting consultation about adolescence.

"There's no fixed schedule for the achievement of full independence, it varies for young person to young person and that is OK," he says.

Should you pay rent?
Newberry moved back home twice, once for eight months after she graduated from university and again for two months after a romantic relationship ended. When Newberry moved back the first time, the family decided she didn't need to pay rent, unless she stayed past a year. But she thinks other young adults should.

"It helps maintain that pattern of having that monthly expense to consider," says Newberry who covered her personal expenses during both times. "It also helps the adult child feel less like they're mooching off of their parents — they're making some contribution to the household."

Carrick says the young adult should offer to pay rent and let their parents decide.

How much is enough for rent? It's impossible to suggest a figure, says Newberry, but the family should put together a budget and calculate the financial impact of the adult child moving back. If the child can't cover the cost, then rent could be a percentage of their income.

If your parents won't let you pay rent, lend a hand with household chores, pay for groceries or utilities and treat your parents to dinner to show your appreciation. Use the money you would have used for rent to pay your debts or put it towards the down payment on a house, Carrick adds.

Plan an exit strategy
Avoid becoming a kidult and use your time wisely, says Newberry.

"Some people get into the mindset that they're going to live with their parents until they land the perfect job," she says. "[Instead] focus on the opportunity to really develop your skills because you don't have the obligation of a huge monthly rent or mortgage payment."

Before moving back home, estimate and negotiate the length of your stay and what you plan to do while living there.

Moving back out
If you just landed a job, congratulations, but don't move out right away, says Carrick. To move out, you'll need first and last months' rent, enough money to cover food, the move and any other expenses. Also, if your workplace has a probation period it's safer to stay at your parents' place until that period is over, he adds.
"When you're moving out, you want it to be a one-way trip. You don't want to put yourself in the position of going back a second time," he says.

 

By Josephine Lim, Bankrate.com, June-14-12