THE FINE PRINT TAKETH AWAY … EXCEPT IN LIFE INSURANCE

We’re sceptical because even the simplest offers have fine print. You're enticed but the many conditions take away the charm.

Not only do you spend money to get the offer, you often spend money to use the reward.

A Common Example

Here’s the fine print in a free movie ticket offer from a pizza chain.

1. the buy-one-to-get-one-free condition
2. limited provinces
3. limited theatre chains
4. no IMAX films
5. no IMAX digitally remastered presentations
6. no VIP room
7. no 3D films
8. no Real D 3D films
9. no non-feature film entertainment
10. no advance tickets
11. no midnight performances
12. no reward points
13. no pass-restricted movies
14. no refunds
15. not redeemable for cash
16. no reselling
17. no extensions
18. no reproductions
19. not combinable with other promotions, coupons, vouchers or special discount offers

If you get through all that, be sure to go to a participating theatre by the April 29 expiry date.

Okay, some conditions won’t affect your life. Yet someone felt the need to spell them out. There’s no warning that the movie might be a waste of your time even for free and that you’ll be subjected to commercials. That doesn't warrant a mention?

The Surprising Exception

We’re so used to fine print that we don’t notice one surprising exception. In Canada, personal life insurance contracts routinely guarantee everything except

1. government actions
2. investment returns
3. the availability of investment options

Fine print: Products differ and practices change. We’re looking at what’s common to help you in discussions with your advisor.

Government Actions

Provincial governments set the premium tax rates. They range from 2% in most provinces to 4% in Newfoundland. These rates are far below normal sales tax and the federal government doesn’t add a surcharge.

Insurance contracts are usually guaranteed to be tax exempt based on the tax rules when your coverage takes effect. Governments can change the rules but they might compromise and allow existing contracts to operate as before.

Investment Returns

Permanent life insurance plans allow tax-sheltered investment growth. With whole life, the insurer makes all the investment decisions and you get the rewards and penalties for their judgement. With universal life, you pick all the investments and take responsibility for the returns.

The insurer can often remove investment choices from a universal life plan. For example, if the S&P 500 disappears so will indexes based on it. That’s fair but the new indexes might have higher management expenses --- they rarely go down.

The Guarantees

Whole life has the fewest guarantees and is more like insurance on your car or home. You foot the bill for higher claims by others, pricey computer programming (remember Y2K?) and lousy investment returns.

In contrast, term life and universal life insurance routinely guarantee whatever the insurer can:

• premium rates per $1,000 of coverage
• administration expenses
• tax exempt status (under the rules in effect when you got your contract)
• no new conditions or restrictions

Something to think about when you’re back from the movies.

Links

• Check your pizza literacy (new)
• What's worse than fine print? (new)
• The best tax sheltering in Canada
• The four steps in wealth management
• The two drawbacks of investing in life insurance
• How advisors fool you (and what you can do)

Podcast Episode 64 (4:43)

direct download | Internet Archive page

PS The movie coupon expires on a Thursday, which means you can’t see the new Friday releases like A Nightmare on Elm Street or Furry Vengeance. Thank goodness.

ARE YOU SAVING TOO MUCH FOR RETIREMENT?

When you think of  a rose, do you marvel at the beauty of the flower or think about the prickly thorns?  You get both.

Retirement is like a rose. We're lured by the beauty, but continually reminded of the high price. We face many obstacles. Investment returns are volatile. Company pension plans are disappearing. We're living longer. Medicine does ever-more but costs more and more. Governments face financial crunches because of the aging population. So we personally need to save more more more.

What if the math is wrong?

What if we're actually saving too much? Maybe we don't need 70% of our pre-retirement income when we stop working. That's the discussion in Living on less and loving it in Ellen Roseman’s blog.

Before you start spending your retirement dollars today, consider these two questions:

1. who benefits if you save too much?
2. who loses if you save too little?

You do in both cases.

Saving Too Much

If you think you’re saving too much, you may have more than you need. You’ll never know because the final tally takes place when both you and your spouse have died. The remaining value of your estate, can go to your heirs, causes you support and taxes.

You can't predict the future. We couldn’t have predicted the past.

We are living longer than ever. Even if you’re frugal, you could easily face unexpected expenses. Suppose you require a wheelchair. Could you get into your home without a ramp? Would you need a different vehicle? How do you use your kitchen? Is your bathroom accessible by wheelchair? How do you get into the tub? Maybe you need to move to a nursing home. They aren’t cheap.

Even if you’re healthy, your retirement savings could expire before you do. That’s the risk of longevity. Imagine losing financially by living longer. How horrible.

Saving more than you think you need gives peace of mind. You immunize yourself from economic downturns on the route to retirement too.

You might still run out of money but you’re taking extra precautions to reduce that likelihood.

Saving Too Little

Do you really want to imagine the scenario of running out of money after decades of hard work? Even if you want to start working again, what kind of employment could you find? McJobs might get replaced by cheap, reliable robots. You might not have the physical stamina to work.

The government is there to help as a last resort but how much money do you think they'll have as the population ages?

Maybe you've got children and grandchildren. Maybe they can and will support you. Will they resent you too? How will your dignity be affected?

Under saving increases your financial risks and makes you vulnerable to adversity. As with exercise and diet, the savings habit takes time and persistence to show results. Starter sooner gives more time for the magic of compounding growth.

How Much Is Enough?

Suppose you think you you can retire in comfort on 50% of your current income. Do you know how much capital you'll need? There are many unknowns. We're living longer. Investment returns are volatile. Inflation could return. If your real returns drop 1% below your projections, what does that do to you?

There's a book called The Number by Lee Eisenberg. It's readable but the title is misleading. You won’t find simple formulas to estimate how much money you need to retire. Instead, you how retirement money actually gets spent. That could be an eye-opener, especially if you haven’t save much money to date.

If you haven't read The Millionaire Next Door by Thomas Stanley and William Danko, do. You'll come away with a much different understanding of the self-made wealthy. They live below their means and save save save. This prepares them for adversity and opportunity now and for the rest of their lives. How's that for a plan?

Would you rather accumulate more than you need or end your life financially dependent?

Links

• Living on less and loving it (Ellen Roseman)
• Three practical ways to increase your net worth
• Prescription for Canada’s ailing pension system
• image courtesy of Peter Suneson (Sweden)

Podcast Episode 63 (5:06)

direct download | Internet Archive page

PS Prepare to enjoy the retirement rose but pay heed lest the thorns prick you and draw blood.