Optimized Insurance Coverage
Peace Of Mind When You Need It Most
The Importance of Insurance
“The more you have, the more you have to lose” is an axiom that supports the value of insurance. It can be used to protect against a loss of income, replace assets and protect survivors into the future should a bread-winner pass away. The amount of financial risk you can potentially take-on often grows with your wealth. However, the obligations associated with a high-income lifestyle also requires the income be replaced to allow the status quo to remain in-place.
Having the appropriate insurance plan in place will alleviate the financial stress that accompanies illness, disability, or death. An insurance-licensed advisor will integrate the following strategies into a financial plan:
Life Insurance
Life insurance pays a death benefit to designated beneficiaries upon the death of the insured. There are two different options when purchasing life insurance:
1. Term Insurance
Term insurance is comparable to renting your protection. You pay premiums for a set period (ex. 10 years) and the insurance company agrees to offer you a pre-determined amount of insurance for the duration of the term. Once the term expires, the insurance is either renewed for another term at a higher cost or the coverage ends. Term insurance is usually the most affordable way to protect family.
2. Permanent Insurance
Permanent life insurance offers many advantages. It provides your family with lifelong protection at a predictable cost, tax advantaged transfer of wealth, and estate preservation or creation.
Permanent Insurance can be thought of as owning your protection. There are two types of permanent insurance:
Whole Life: Offers a permanent life insurance solution that provides fixed lifetime premiums and a cash value component that accumulates for the duration of the policy.
Universal Life: Universal Life insurance can offer a flexible, permanent option that also has a tax-advantaged investment component. If properly managed, it can help you to build wealth and provide protection.
Unlike other types of insurance, life insurance is purchased for the benefit of surviving family members. Life insurance provides beneficiaries with the large cash payment that can be invested or used to maintain their lifestyle and maintain their lives financially. Life insurance can also be used to offset the tax implications in your estate or to create an inheritance for loved ones upon your death.
Critical Illness Insurance
Critical Illness insurance pays a lump sum benefit to the insured if they are diagnosed with one of the stipulated illnesses or conditions of the insurance contract.
Critical Illness can be either purchased for a defined length of time like 10 or 20 years, or to the age of 65, or as a permanent insurance solution. There is a listing of medical conditions covered in a critical illness insurance contract. If a diagnosis of one of the specified conditions is received, a claim is filed, and a benefit is paid following a verification process. When a critical illness policy is purchased, there is typically a waiting period before coverage begins.
Dealing with a catastrophic illness can be very expensive. The loss of income and the cost of treatment and care is often greater than planned. A Critical Illness policy can provide the policyholder and their family with the capital necessary to recover without threatening other financial goals and obligations. It can protect existing savings by avoiding a withdrawal from RRSPs, which will have significant consequences for your retirement plan and income taxes.
Disability Insurance
Disability Insurance is an income replacement insurance that provides a monthly income if the policyholder becomes disabled or unable to work. Disability policies can offer a wide range of protection options for both long-term and short-term disability as well as partial or total disability. The premiums are determined by the amount of income to be replaced, occupation, and other underwriting considerations like benefit amount, waiting period, and benefit period.
In the event of a disability, this insurance will replace a portion of the beneficiary’s income, typically about one-half to two-thirds. This income replacement can protect retirement savings and prevent the liquidation of retirement assets for day-to-day living expenses. It is possible to avoid income tax on disability insurance payments, an experienced advisor can provide valuable guidance when coverage is purchased to protect future payments.
It is essential to work with your advisor to mitigate risks in a financial plan by implementing strategic elements such as insurance. Life, Critical Illness, and Disability insurance can provide different levels of protection and be personalized to individual needs. Wealth and family members can be protected from unexpected events and illness with thorough insurance planning.
Life Insurance: How much is enough?
Life insurance is the foundation of a solid financial plan. It is important to ensure that survivors are protected if there is an unexpected death. Below are some typical considerations to include when calculating the necessary amount of insurance:
1. Liabilities and Cash Needs
A good rule of thumb is to first and foremost ensure that your debt is paid off in the event of your death. Mortgages, lines of credit, and car payments are all financial strains that can be left on a surviving spouse. It is also prudent to account for expenses that might arise if one spouse were to die, like childcare expenses. Future expenses that are not yet funded, like education savings, could be paid with insurance.
2. Final Expenses
Funerals and other memorial expenses are not cheap. It is typically suggested that families plan for about $20,000 in final arrangement expenses.
3. Income Requirements
What would the surviving spouse’s standard of living look like? Would the surviving spouse earn sufficient income to maintain the current family home, vehicles and extracurricular activities alone?
Families should plan to have enough insurance that they can take an income from the invested capital to keep their current standard of living for many years to come. A grieving family does not need additional surprises or disappointments. Retirement contributions, living expenses, and income shortages are factors that should be included in an insurance plan.
Example
30-year-old John and Jane Jones have 3 children, a new house, two cars, and a plan to retire at the age of 60. They want to make sure that if something happens to John that the family will stay on track financially, as Jane stays home with the children. They work with their advisor to assemble the following:
- • Mortgage: $400,000
- • Car Debt: $40,000
- • Education: $100,000 x 3 children= $300,000
- • Retirement Contributions: $1,000 a month
- • Housing Expenses: $2,500 a month
- • Other living Needs: $2,000 a month
- • Final Expenses: $30,000
- • Other Debt: $20,000 line of credit
The Jones need $790,000 to pay off debt and fund post-secondary education. Jane will also need an income of $5,500 per month ($66,000 per year) for ongoing expenses to maintain their current standard of living. $2,100,000 of investable capital (assuming a 4% annual return) is needed to generate an annual after-tax income of $66,000.
Reviewing a family’s expenses and financial needs can bring everyone peace of mind by funding it properly.
