Question

Explain relevant saving and insurance plans in Canada. What are factors affecting individual saving plans? What are determinants that are to be considered before investing into any individual saving plan. Use real case references to support your content.

Answer 1

Insurance can be of various types. Be it life insurance, health insurance,automobile insurance, house insurance etc.

1) LIFE INSURANCE: The two main types of life insurance in Canada are term insurance and permanent insurance.

(a) Term Insurance: In this type of insurance an individual is covered for a specfic number of years say 10,20,25 etc or upto a specific age say 60 years. If the policy holder has kept up with the premium payments and dies within that term, the insurance company will pay out the lump sum death benefit. If, however, the policy holder reaches the end of the term, the coverage ends and no payment will be made when he or she eventually dies, unless the policy is renewed for another term.

(b) Permanent Life Insurance: As the name suggests the insured is covered by the insurer for his life time till the time of his death. The payout has to made in full by the insurer after the death of the person. Permannent life insurance is also of 3 types

• Term 100 is the most basic permanent life insurance, where coverage is guaranteed for life and premiums are fixed and must be paid until age 100.
• Whole life insurance is similar in coverage but also has a cash value that builds up in the policy over time. You can use this cash value as collateral on a loan or receive it as a payout if you decide to cancel the policy.
• Universal life insurance is like an investment and life insurance policy combined. The lump-sum death benefit payment depends on how well your investments perform, as does the cash value you would receive if you decide to cancel the policy.

Savings Plans in Canada

• Principal-Protected Investments: The aim to protect your money from the ups and downs of the stock markets, but can in some cases provide you access to their growth potential. Some examples of different principal-protected investments are guaranteed investment certificates (GIC) at a fixed or variable rate of return and deposit notes.
• Mutual Funds: Although the return is not guaranteed as with principal-protected investments, mutual funds are interesting if you are looking to get even more out of your savings over the long term while accepting part of the risk. With that said, investing in such a fund is still less risky than directly buying company shares on the stock market. With a mutual fund, a manager undertakes the selection of the companies that will be in his or her fund. Therefore, your money is invested in hundreds of companies (sometimes residing in the same sector or geographical market). This is a good way to diversify your portfolio and avoid putting all your eggs in one basket.
• Exchange Traded Funds (ETF): ETFs are comprised of various securities of companies traded on the stock market. They usually aim to replicate a particular index or follow a currency or another financial asset. Two characteristics, however, differentiate them from mutual fund investments. First, their low management fees are attractive to many investors. Secondly, they are traded the same way as a stock. You can quite simply buy or sell them when the stock markets are open.

Factors affecting the individual saving plans are as follows:

• Basic financial literacy and knowledge and understanding of available saving and investment vehicles
• Values, attitudes and perceptions regarding saving and investment
• Trust in financial institutions and intermediaries
• Capacity to take risks is am important impediment in individual savings plans.
• The knowledge of financial markets gives and individual the choice of where he should park his money.

Following are the determinants that are to be considered before investing into any individual saving plan.

1. Determining your requirements:
Follow the path that helps you achieve your short-term and long-term goals. These can include funding the education for your children, or investing in your business for expansion, retirement or travel plans, etc. You can directly address your requirements by identifying these goals with your investment.

2. Risk Tolerance:
How much risk can you tolerate in the long run? Thus, understanding the risk factor is one of the major keys for choosing an investment scheme. The risk tolerance may differ for every investor, being a personal characteristic. Our age and the emotional make-up, also largely impact our ability to tolerate risks. Risk tolerance levels may differ for every part of your portfolio.

3. Income Level:
Your absolute income level as well as your return requirements, can largely effect your decisions relating to investment. Our income can also influence our risk preferences. Investors with higher income may be more inclined towards riskier strategies, as they can conveniently contribute to investment capital if they face any losses.

4. Tax Liability:
Your tax or any special tax circumstances, are a few considerations that will help you determine ways to seek the maximum utilization from your tax-benefitting investment schemes.

5. Total Wealth:
Our investment objectives should also consider the assets outside our portfolio. The value of a person’s expected pension, or his other retirement benefits may influence the return objectives and risk tolerance of his investment portfolio.Moreover, our wealth levels can also impact the way we live (our lifestyle). A desired standard of living determines our risk tolerance factor, and should be considered with your investment objectives.

6. Investment Time Horizon:
This may require us to ask questions such as:

When do you plan to draw the assets in your portfolio?
Do you prefer to choose short or long term maturity assets?
Do you have enough time for recovering from a descending market?
How important is capital preservation, for meeting an urgent financial need?

7. Liquidity :
This is about the ease with which you can transform your assets into cash, at or near to the latest fair market value.This may require us to ask questions such as: do we need an investment portfolio to liquidate easily, or can we wait some more? Liquid assets include cash at hand, cash at bank, fixed deposits and liquid funds