HOW TO BEST EVALUATE YOUR LIFE INSURANCE NEEDS
Life insurance is a must for anyone with debt, investments or loved ones. It can be used to pay any debts or taxes owing at death. It can also protect family and friends in the event of an untimely death. Under certain circumstances it may also supplement retirement income (see Insured Retirement Program). There are different versions including term and permanent with guaranteed costs for specific periods of time. All death benefits are tax-free.
It works very simply. A monthly or annual amount or ‘premium’ is paid to an insurance company. It can be paid by cheque or by monthly withdrawal from your bank account. In return the insurance company will provide a contract of insurance to the insured. If the insured should die, a pre-determined tax-free death benefit will be paid to the beneficiaries chosen by the insured.
In order to be offered a contract of insurance each insured must first go through an underwriting process. The insurability requirements are based on age and insurance amount. It could be a written application or a complete physical by a doctor. Typically, blood and urine tests, height, weight and blood pressure are the requested requirements.
There are various types of insurance to choose from. The main criteria being the period of time the company insures you. Although it has changed over the years the current most popular versions are for 10 years, 20 years or for life.
The 10 and 20-year periods are usually referred to as term insurance. Once the designated period ends, the insurance will renew at a higher premium amount. Once you reach a certain age, 75 or 80 in most cases, the insurance will expire. In other words you can lock in a specific premium for 10 or 20 years and then it will increase if you choose to continue with the insurance. Often times, if the insured is in good health, it is advisable to inquire about purchasing a new policy that might offer better rates than the existing policy is offering.
The main benefit of term insurance is that it is fairly inexpensive for the value that you ‘might’ receive. The insurance companies spread their risk across thousands of people. They know that only a very small percentage of people that buy term insurance will either hold the policy to full term or actually die, so they can afford to charge small premiums. The only limitation with term insurance is that when you need it most, it won’t be there, because most term insurance expires at age 75 or 80, which is most likely just before you will.
An alternative or complement to term insurance is known as permanent insurance. Permanent insurance guarantees a fixed premium amount for life. If you buy permanent insurance at age 35 you will always pay the rates of a 35 year old, regardless of how old you are or any negative changes in your health status. The insurance company is well aware however that one day you are going to go. If you own a permanent policy they will some day have to pay out a benefit. As a result they will have to charge you higher premiums than they would for the equivalent amount of term insurance.
Permanent insurance comes in two main forms, universal life and whole life. Both will base future cash values and death benefits, beyond certain minimums, on projected growth rates that are not guaranteed. With a universal life policy the insured makes the decision as to where excess funds are invested. These choices can range from guaranteed investment certificates to stock market indices or even mutual funds. Some people call it a self-directed insurance policy. With a whole life policy the returns are based on the performance of the participating fund. This is a fund managed by the insurance company and the return on this fund helps determine the amount of dividends that will be provided to whole life policyholders each year.
CRITICAL ILLNESS INSURANCE. WHY?
A critical illness plan provides a one-time cash benefit of $25,000 - $2,000,000 in the event you are diagnosed with or, in some cases, require surgery for the insured critical illnesses. There are 20+ covered conditions with the primary ones being cancer, heart attack, stroke and coronary artery disease requiring surgery. There are no limitations or stipulations on what you can do with your money.
What are your options if you or a family member should contract an illness? Or have a heart attack? Or need specialized medical treatment your family can’t afford?
By self-insuring you may be sacrificing in other areas of your life or taking income from another source. Are you willing to reduce your standard of living today or in retirement?
Depend on existing insurance coverage
Life insurance won’t pay out when you are sick and disability coverage will only pay out a percentage of your income, for a fixed period of time with a cap on earnings and that’s if you meet the proper definitions.
Buy a critical illness policy.
Through this innovative solution you can collect a benefit ranging anywhere from $25,000 to $2,000,000 and use that money any way you choose to assist in your recovery. For example, you may want to:
Access quick and expert medical service anywhere in the world
Pay for specialized medical treatment, private nursing or childcare
Reduce or pay off your debts (mortgage, credit card, loans etc.)
Pay to modify your home or automobile to accommodate your special needs
What is it?
A critical illness plan provides a lump sum benefit in the event you are diagnosed with or, in some cases, require surgery for the insured critical illnesses. There are 22 covered conditions with the primary ones being cancer, heart attack, stroke and coronary artery disease requiring surgery.
Survival of a critical illness can result in potentially sudden, severe and in some cases, long-term financial difficulties. The critical illness insurance concept was generated within the medical profession. While doctors saved patients lives, a financial drain was created during their recuperation.
There is an answer available when we need it most. Rather than having to worry about financial concerns, focus can be placed on recovery and healing.
What it isn’t!
Critical illness insurance does not replace disability insurance. Disability insurance replaces a percentage of your income should you not be able to work (see Disability Insurance). You may not meet the definition of disability and therefore not be eligible for disability insurance when you contract a critical illness. So there is room for both in any insurance portfolio.
THE IMPORTANCE OF DISABILITY INSURANCE
What is your most valuable asset?
Your home? Your car? Your most valuable asset is you and your ability to earn an income. Without your income where would you be? How long could you afford to pay for your home? Your cars? Your kid’s school? Contribute to your RRSP’s? Put food on the table?
You can lock in that income and protect it from loss with disability insurance. Disability insurance will replace a percentage of your income if you become disabled and unable to work i.e. unable to do the important activities of your job.
This year one in eight Canadians will become disabled for more than three months and half of those will be disabled for more than three years.
How well do you understand your group disability coverage at work? Most people are completely unaware of the details of their plans and more specifically the definitions.
Disability insurance is all about definitions. If you don’t understand the definitions this may lead to interpretation by the insurance company, which may work against you.
Here are a few of the more important definitions that you should be aware of:
This definition, the preferred choice for disability insurance, will pay a benefit to you even if you choose to take on another occupation but are unable to do your chosen occupation. A surgeon that loses a hand but decides to be a professor would continue to receive disability benefits for not being able to be a surgeon yet while working as a professor. This is the most desirable plan to have.
This definition is in most individual plans. You will receive a benefit when you cannot work in your chosen profession and are not working at all. If the surgeon above had this type of policy, the day he decided to work as a professor his disability payments would end even though he can no longer be employed as a surgeon.
This definition is based on being employed at a job suited to your education, training and experience. The insurance company makes the decision as to what is suitable. Our surgeon, if the insurance company felt he could, would have to answer phones at the hospital (with his one remaining hand), whether he did so or not they could stop further disability income, if pay it out at all. This is the typical definition in your group plan.
A group benefit plan with disability coverage is a great thing to have but unfortunately it may not be as good as you think. Common limitations on most group plans:
Limits on how long you will receive the benefits
Limits or no payments on partial disability
High income earners usually aren’t aware that benefit amounts are maxed out well below their monthly requirements
Tax considerations – if your employer pays any portion of your premium your benefit will be taxable
Additional things to consider:
reviewing the benefit term, will they pay you all the way to age 65 or just 2 or 5 years
Do you expect your income to increase? An option to increase the benefit amount is a must otherwise your monthly payments may be well below what you require to live on in the future
Finally, certain policies offer the benefit of receiving back up to 70% of your premiums if you never make a claim. Not only are you insured but you have a savings plan in place as well.
THE RRSP BACKUP PLAN - LIFE INSURANCE
Most people think of permanent life insurance as money paid when someone dies. They know it’s a great solution for paying a tax liability at death, providing an estate for loved ones or leaving a gift to a charity. But what about planning for retirement? Without careful planning, you may not have enough savings when you retire to maintain the standard of living that you’re enjoying now. Permanent life insurance provides an opportunity to receive tax-free growth inside a tax-exempt insurance policy and the ability to access that growth tax-free.
People typically think of RRSP’s and other registered plans when they think of retirement. Many rely on these registered plans as their main source of retirement income. The problem is that the amount you can contribute to these plans is limited. This means the base amount might not be large enough to provide the retirement income you desire.
One solution is the Insured Retirement Program. It uses a permanent life insurance policy to provide you with the insurance protection you need plus a unique additional feature…access to tax-free cash during your retirement years.
Under current tax law, the cash value in a life insurance policy accumulates tax-free, up to certain limits. The insured retirement program lets you use that cash value at a point in the future. Whether you want to supplement retirement income, purchase a vacation property or go on a trip, the insured retirement program lets you use your policy’s cash value as collateral for a bank loan.
This bank loan provides the cash you desire…and you receive it tax-free. The loan doesn’t have to be repaid until the life insured dies. When the insured dies, the tax-free death benefit is used to repay the loan and the interest. Once the loan is repaid, any remaining death benefit is then paid to the policy’s beneficiary.
Executive Summary: We take a long-term, diversified approach to investing. We believe that a well-diversified investment portfolio held for the long-term will help our clients meet their goals. We take into consideration time-horizon, risk tolerance, income, taxation issues, dreams and goals to help coordinate an investment strategy that will help you sleep at night. Our minimum asset requirement is $250,000 or annually maximizing your RRSP and TFSA deposits.
The goal is to diversify a portfolio across two main management styles, value and growth.
A value manager will look for companies that are currently out of favour. If the manager feels these companies are trading at a discount to their true value he will purchase that company. If the manager was correct and it truly was an excellent company, just under-valued at the time, the market will eventually realize the true value, the company’s share price will increase and the manager will profit.
A growth manager selects companies whose earning are growing faster than the rest of the market and hopes to capitalize on this growth through an appreciation in the share price.
We typically start a portfolio on the value side, which tends to be more conservative and then as assets grow ‘diversify’ to include some growth companies as well.
An additional level of diversification will include companies of varying sizes. For example small capitalization companies (small cap) offer greater potential growth but also greater volatility. These companies range in value anywhere below $1 billion. Medium or mid capitalization companies are in the range of $1 billion to $5 billion. Large cap companies are those greater than $5 billion in market capitalization.
Once again investment choices are determined by many factors as listed above. Depending on the client, appropriate options may include Guaranteed Investment Certificates, T-bills, mutual funds, stocks, tax-shelters, insured retirement programs, registered and non-registered investments and registered education savings plans, each offering varying degrees of risk and return.
THE SOUNDING BOARD
My clients are my number one priority, and I’ll go the extra mile to make sure they’re completely satisfied with my work. Have a specific project that requires professional attention? Or just some questions on any financial issue. My services are designed to tackle even the most complex projects. Contact me today to discover how I can help.