By John Niekraszewicz
Recently I was having lunch with Bob and he asked if I would help his sister Mary with her finances. She had just lost her husband and the role of estate executor was too much for her to handle alone. Dealing with her bankers was causing her so much frustration that she was looking to terminate her banking relationship.
When I met Mary, the first thing she said was, "I'm never dealing with that bank again. After 30 years of being a loyal customer, they took away my emergency fund. Now they are asking for all my financial information and are making me apply for a new emergency fund. They can't just do that, can they?"
This is a great question.
It is quite common to use a Home Equity Line of Credit (HELOC) as an emergency fund. In Mary's case, she qualified for a HELOC based on the information provided by both her and her husband when they originally applied for the line of credit. Now that he is deceased, the bank is requesting that she reapply using her income and assets only. This is a problem for Mary since her family relied solely on her husband's income and her income is very low.
Not only was Mary relying on her HELOC as an emergency fund, but she was also using it to complete house renovations and pay for an upcoming vacation. Without a line of credit Mary found herself in an uncomfortable situation. Bills needed to be paid and Mary was concerned that she would have to either sell her family home or sell her retirement assets prematurely regardless of the penalties and tax consequences.
Mary pulled out her RRSP and Tax Free Savings Account (TFSA) statements. "Look what they put my money into. They told me I was investing in Mutual Funds, but it says right here that these are Segregated Funds. No wonder, I am not making any money, the bank is taking it all away in high fees."
After looking closer at her RRSP and TFSA statements, actually I needed a magnifying glass to read the fine print, the investments were indeed Mutual Funds, but the word segregated referred to something else. The disclosures listed on the statement said that "all Mutual Funds are segregated and cannot be used in the normal course of the bank's business."
This is a good thing.
When Mary referred to Segregated Funds having higher fees than Mutual Funds, she was correct. A Segregated Fund or “Seg Fund” can be best described as a Mutual Fund with an insurance wrapper. These investments fluctuate in value, just like mutual funds, but offer certain features which can be quite costly.
Before deciding to invest in either a Mutual Fund or Segregated Fund it is best to compare the Fund Fact documents of both types of comparable investments. The Fund Fact documents will describe how the fund is invested, how it has performed, what is included in the Management expense ratio or fee and direct you to other documents for additional information.
“Mary, if your husband owned a life insurance policy, then you should be expecting a cheque very soon.”
“Thanks John for reminding me of another reason why I am fed up with the bank. Yes, my husband and I took out life insurance for $250,000 with the bank when we put a mortgage on our house. The bank is now telling me that they used the proceeds from the life insurance to pay off the $50,000 left on the mortgage. Now they are refusing to give me the other $200,000.”
When a lending institution asks you to buy a life insurance policy to protect your mortgage, they are really asking you to protect their company. The coverage you buy is only used to pay off any remaining mortgage balance and the proceeds go directly to the lender to pay off the mortgage. Nothing more. And your coverage ends if you switch lenders. This applies to both mortgage life insurance and mortgage critical illness insurance.
Read. Read. Read. Fine print and all.
After helping Mary with her financial well-being and dealing with her executrix duties, she was grateful but shocked by the complexity of it all. “John, I don't want my kids to have to deal with a complex financial situation when I pass away, so let's get proper estate life insurance in place right now and when we have our annual check-ups let's simplify things by removing as many items from the executor checklist as possible.”
Before implementing any tax, investment, life insurance, or estate planning solutions it is best to seek professional advice. Have an experienced team of professionals work together to uncover the weak links in your plans and implement the correct solutions. Don't just leave your plans to chance because without structuring your family's wealth and estate plans properly, often, bad outcomes occur.
Secure the dog house and invest wisely, then you can enjoy life & have fun.
About the Author
John Niekraszewicz (Nick-ra-shev-itch) BMath, FCSI, CFP, FMA is the Certified Financial Planner responsible for the AHIP Association Health & Dental Plan provided by JVK Life & Wealth Insurance Group. John is also the Principal of JVK Life & Wealth Advisory Group, specializing in Wealth & Estate Planning. John welcomes your questions and can be reached at 1-800-767-5933 or firstname.lastname@example.org
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