Archive for April, 2009

Mortgage Insurance versus Life Insurance

April 22, 2009


[Ray of Financial Highway is the author of today’s guest post. He is a financial industry insider who has worked as a mutual fund and life insurance sales representative and is currently working towards getting a Certified Financial Planner designation.]

I have pointed out many times that insurance is an important part of your financial plan; it is there to protect you and your family should the unexpected happen. However, many families, unfortunately, have found out that it does not always work that way. The issue here is Mortgage Insurance sold by banks and mortgage brokers. Ellen Roseman recently wrote in The Toronto Star about the experience of the Feldman family, who have been paying premiums for years but their claim was initially denied. The Feldmans did get their claim paid out on “compassionate grounds” after The Star got involved, but many families have not been so lucky.

Working in the insurance industry, I have seen too many families being unaware of the dangers of mortgage insurance. Insurance is a complicated topic and the mortgage professionals who sell these products are usually not trained or licensed to sell life insurance. I strongly recommend that you do your homework and deny any insurance offered by your mortgage lender.

In this post, I will point out some of the differences between the insurance you purchase with your mortgage and one purchased from an insurance company.

Post Claim Underwriting

The biggest issue with insurance from the bank is that they have post claim underwriting, which basically means that the underwriting will be done after a claim has been submitted. Technically you could be declared uninsurable after you have submitted a claim and your claim denied as happened to the Feldmans. If you purchase it directly from your insurance agent, all underwriting will be done before the policy is issued. Therefore you know your claim will be paid out when needed according to the terms of your contract, unless fraud can be proven.

Other issues with Mortgage Insurance

  1. Beneficiary is the lender. With life insurance, you select the beneficiary.
  2. Insurance amount decreases with your mortgage, but premiums stay the same. With life insurance, your coverage and premiums remain the same.
  3. Not transferable to new lender.
  4. Payout can be used only to pay the mortgage.
  5. Cannot change policy if situation changes. Policy can be modified as needed.

If you need insurance to protect your family, speak to a qualified insurance advisor to determine the appropriate insurance coverage for your family. Many opt for Mortgage Insurance tempted by the very low premiums but these low premiums come at a huge risk and a few extra dollars saved today could cause your family great pain in the future.

You may also want to check out a story that CBC Marketplace ran on this topic titled In Denial about a year back.

Beware of CRA’s definition of “foreign property”

April 20, 2009


Over the weekend, I completed our tax returns and printed out our T1 General to double check our returns. On the top of Page 2 there is a box that says “Please answer the following question:” followed by “Did you own or hold foreign property at any time in 2008 with a total cost of more than CAN$100,000?”. I’ve always answered “No” for this question because I assumed it meant Swiss bank accounts or a foreign rental property but out of curiosity decided to investigate further. Imagine my surprise when I found that CRA considers foreign stocks held in Canadian brokerage accounts as “foreign property”. Here’s the relevant portion from FAQs about Form T1135:

Is a taxpayer who holds U.S. stocks through Canadian brokerage houses required to file Form T1135 if the cost of such securities is more than $100,000?

Shares of non-resident corporations should be reported, regardless of whether the shares are physically held inside Canada or outside Canada and regardless of whether the shares are held by the person or through a brokerage house.

If you own foreign stocks in a taxable account and your portion of the account exceeded $100,000 in cost (not fair market value) at any point during the year, you’ll have to answer ‘Yes’ in box 266 and attach Form T1135. RRSPs are excluded from these reporting requirements as are Canadian mutual funds that hold foreign stocks. Fortunately, we are many years away from answering this question in the affirmative but I wonder how many are unaware of CRA’s definition of “foreign property” and are answering ‘No’ to this question.

Readers love these books

April 19, 2009


I trolled the comments section of my list of top ten money books and the Canadian Money Forum thread on Favorite Personal Finance Books and came away with a list of ten of your favorite books that didn’t make the original cut (note that links in the post are affiliate links):

  1. The Richest Man in Babylon by George S. Clason. This classic published as a series of pamphlets in 1920s was the overwhelming favorite as the top personal finance book and you took me to task for leaving it out. A modern English version of the book is now available. Or you can download in PDF format from Preet’s website.
  2. Your Money or Your Life by Joe Dominguez and Vicki Robin. The investment advice (putting the entire portfolio in fixed income) might be seriously out to lunch but the book’s key message of rethinking our spendthrift ways struck a chord with many of you.
  3. The Automatic Millionaire by David Bach. You can fit David Bach’s message in two sentences but you felt that anyone who motivates his readers to clean up their financial lives deserves a spot on the list.
  4. The Pension Puzzle by Bruce Cohen. I haven’t read this book, in fact, I hadn’t even heard about it until you mentioned it. The subtitle explains what the book is all about: a “complete guide to government benefits, RRSPs and employer plans”.
  5. The Naked Investor by John Reynolds. In my review, I noted that the author delivers a scathing criticism of the investment industry in Canada for being more interested in lining its pockets at the expense of its fiduciary responsibility towards its clients.
  6. Triumph of the Optimists by Elroy Dimson, Paul Marsh and Mike Staunton is a definitive work on stock, bond and bill returns from 1900 to 2000 for sixteen countries around the world. The book is lavishly illustrated with graphs and is the product of laborious research. The only negative is the price of the tome, which at $112 is a tad too expensive. But I refer to this book all the time and one of these days, I am going to break down and spring for my own copy.
  7. Winning the Loser’s Game by Charles Ellis. Mr. Ellis likens investing to a game of tennis — the winning player is the one who makes the fewest mistakes. The book shows you how to avoid those expensive mistakes.
  8. The Future for Investors. Jeremy Siegel contends that investors are doomed to sub-par returns by consistently overpaying for growth — whether hot stocks or the fastest growing economies whereas history suggests that the companies in slow-growth or shrinking sectors have delivered the best returns for investors.
  9. All About Asset Allocation. Richard Ferri’s tome on divvying up a portfolio is on my reading list and was highly recommended by Canadian Financial DIY.
  10. KPMG Tax Planning for You and Your Family. I’m surprised that a dry book on a rather dry subject made the cut but I suppose a spot must be reserved for a book on helping you with one of two sure things in life.