Reducing financial stress: What are your options?

Knowing how to access your savings is becoming as important as choosing where to invest.  That’s especially true if you’re concerned about tariffs,  and a possible recession . 

One of the best things to do during times of economic uncertainty is stay invested. However, that’s not an option for everyone. If you need some options to ensure you can pay your bills for essentials, here are two things you can do: 

1. Reduce your spending and contributions.

2. Make smart withdrawals or access your savings.

Knowing more about what your options and risks are can help empower you to make the right decision for you.  Let’s take a closer look.

Cut back on your spending on non-essentials

Why? It’s simple and frees up cash for essentials, without disrupting your savings. The major downside is having to give up guilty pleasures (i.e. that extra streaming service or food box delivery). At least temporarily. 

Pause or reduce your savings

If curbing your spending isn’t enough, you have the option to reduce or pause your regular RRSP contributions. And the good news is you can carry forward any unused RRSP contribution amount indefinitely. However, reducing your RRSP contributions could: 

• mean fewer tax deductions, and
• get in the way of meeting your retirement goals.

If you pause contributions in a group RRSP, you may give up some employer-matched contributions. And if you choose to pause your TFSA, you’ll lose potential tax-preferred, compound growth. 

For many non-registered accounts, it’s often simple to lower or pause contributions. And compared to registered accounts, there may be a lower cost of lost opportunity. Why? Because non-registered accounts typically don’t have tax-preferred compound growth.

Look into your life insurance options

You may have some flexibility in paying your insurance premiums, such as:

• Using any dividends* from your participating life insurance policy (“par policy”) to pay all or part of your premiums.*
• Changing the dividend option in your par policy to take dividends in cash (Note: all or a portion of the cash dividends may be taxable as income).
• If you’ve pre-paid your premiums in the past, you may have enough money built up in your policy that you could withdraw or use to pay your premiums. Once the funds have been depleted, you would need to start paying premiums again, otherwise your policy will end. Some life insurance policies allow you to take an automatic premium loan against the cash value in your policy. These loans would be initiated by the insurance company to help you keep your insurance coverage. You'd be charged interest on the loan, and your cash value and death benefit would be reduced by the loan balance. This would offer a temporary solution. You'd need to resume paying premiums before the cash value is depleted, otherwise your policy will end.
• Talking to your advisor about accepting a reduced death benefit* amount to reduce your monthly premiums. This option is best thought of as a last resort, as you’ll likely be left with a coverage gap. Note that if you go this route, you’d need to re-apply, with underwriting, to increase your coverage when you’re ready.

However, you can’t take this decision lightly, as some of these options aren’t reversible. And there may be tax implications you need to consider. If this is something you’re considering, now would be a great time to call your advisor. Or find an advisor if you don’t have one.

Earn some extra money

Have you been thinking about starting a side hustle? Now might be a good time to freelance or start that Etsy shop you’ve always dreamed of. Earning extra income on the side can help you over the hump of higher cost of living until things calm down. Just be careful of tax implications; your extra income might push you into a higher tax bracket.

Is reducing your spending and contributions not enough? If you need money sooner, you have a few riskier options to consider with the help of an advisor.

You can withdraw from your TFSA

And your withdrawals aren’t taxed. Your subsequent year contribution room increases by the amount of the withdrawal. However, be sure to repay your TFSA quickly (if you can), to minimize the loss of investment growth.

You can make Registered Retirement Income Fund (RRIF) withdrawals

If you’re in retirement, you must withdraw at least the government-mandated minimum each year. However, there’s no cap on how much you can withdraw. But you need to consider the downsides to this option:

1. Withdrawals up to the minimum amount aren’t subject to withholding tax. But you may have to pay tax, depending on total income you report at the end of the year.
2. Withdrawals more than the minimum amount will be subject to immediate withholding tax.

You can access your life insurance cash value

If you have a permanent life insurance policy with cash value,* you may have a few options to consider. It’s best to consult your advisor to discuss these options:

• You can take a policy loan. This is when the insurance company lends you up to 100% of the cash surrender value. Taking a loan doesn’t immediately affect the cash value growth inside your policy. And the loan amount is tax-free. However, you’ll be charged interest.
• You can make a policy withdrawal. This is when you remove cash from your policy. However, it’s not without downsides:
  • Your cash value and death benefit amount decreases.
  • You can’t recontribute the money you withdraw to the policy.
  • You may pay taxes on withdrawals beyond the total premiums paid into the policy. 
• You can consider collateral assignment. This involves applying for a loan with a third-party lender, using your policy as collateral. Luckily, these loans aren’t taxable income. And the loan rate is often lower than a policy loan. But, once again, there are a few caveats: 
  • You must qualify for the loan based on the lender’s rules.
  • The lender may charge you fees.
  • If you don’t pay back your loan and the interest exceeds the cash value of your policy, it can affect your death benefit amount or worse, you could lose your coverage.

You can borrow from a personal loan or your credit

This is an option to consider only if you’ve exhausted all other options because you: 

• Will be charged interest on the loan.
• May have to pledge assets as collateral. 
• Might negatively impact your credit rating. 

Before you decide – ask for advice

Are you considering any of these options above? If so, now is a good time to reach out to your advisor.

Regardless of how much income you have, an advisor can help you:

• Make well-informed decisions
• Help you make a roadmap that meets your long-term goals
• Feel assured in times of uncertainty knowing you've taken steps to prepare
• Avoid making emotionally-driven decisions about your savings

*Definition of terms: 

• Cash value is the portion of your permanent life insurance policy that earns interest and may be available for you to withdraw or borrow against in case of an emergency.
• Cash surrender value is the amount of money you receive if you terminate your permanent life insurance policy before its maturity date, or before you die.
• Death benefit is the money an insurance company pays your beneficiaries when you die. 
• Dividends aren't guaranteed. They may be credited to policies when the experience of the participating account is better than the assumptions we made for factors like investment returns, lapses, death claims, expenses and other factors. You may have to resume paying premiums to maintain your coverage. If you don't your policy death benefit will decrease .Premiums are the annual or monthly fees you pay for having insurance. Most permanent products come with premiums that stay the same, guaranteed. But please note that some permanent products are adjustable. That means their premiums may change over time. 

This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.