Finding better solutions in a crisis

My clients’ decision to purchase their dream home in the summer of 2019, prior to selling their existing home, hardly seemed like a risky financial move at the time. They gave the old house a fresh coat of paint and put it up for sale by October, assuming it would move quickly in the hot real estate market. They had built up their savings to cover about six months of mortgage, property tax and utility payments, and they were certain the house would sell by the following April.

But the home stayed on the market longer than expected, and then the unimaginable happened: The COVID-19 pandemic temporarily paralyzed the local housing market. Stay-at-home orders put open houses on lockdown, and potential buyers put their plans on hold. The house sat empty for several more months, and then things got even worse for the couple. The pandemic led to layoffs at the husband’s company, and they suddenly found themselves with only one source of income.

By the time my clients came to me, they were financially strapped and in a state of panic. They explained that they had used all of their savings and the full line of credit on their first home to purchase the second home. The housing market was solid, so they never considered what would happen if they were unable to sell the home quickly. With their savings dwindling rapidly, they were ready to dip into their Registered Retirement Savings Plan — a Canadian retirement plan similar to a 401(k) — and other investments to help them continue covering the costs.

I made them aware that they would not only trigger taxes for accessing the retirement savings, but they would also be making a withdrawal from their investments at a time when the markets were temporarily depressed due to the pandemic. I was able to convince them that it would have been the worst time to access their retirement nest egg.

We first directed them to apply for government relief programs put in place to assist those financially impacted by the pandemic. Then we looked at how to help them deal with the additional cost of keeping the old home going until it was sold. Ultimately, the solution was to access the cash value that had been building in their life insurance contract.

It was a whole life insurance policy, and it had been building value for years. The policy gives you the option down the road to make withdrawals — if there’s enough saved once they retire, they can even use the dividend to pay the cost of the insurance in perpetuity. Clients sometimes forget this option is available to them, and it can be a lifesaver in times of crisis.

We had the loan processed in less than a week, and there was enough cash value to cover their financial obligations for at least nine more months. Our solution also gave them access to the funds without any penalties or taxes on the withdrawal. The couple eventually sold the house, and the husband returned to work. Once they were back on track, they were able to repay the loan. Now they’re rebuilding their emergency fund and concentrating on adding more to their retirement.

Aurora Tancock is a 20-year MDRT member from St. Catharines, Ontario, Canada. Contact her at aurora@atfs.ca.