Insurance is best known for protecting you from the risk of financial loss and safeguarding your wealth in a number of ways. That’s an important consideration in developing your Total Wealth Plan; so, let’s examine some ways this multifaceted tool can help protect your wealth.
A Total Wealth Plan includes assessing your financial risk in the event of a serious illness, disability or untimely death. Your ability to earn an income is one of your most significant assets; having an insurance plan in place to protect this valuable asset will alleviate financial stress in the case of illness, disability, or death.
Life insurance
At a minimum, any adult Canadian with dependents should consider life insurance. Coverage options can be broken into two main types: term insurance and permanent insurance.
Term insurance
Term insurance is often viewed as renting protection; it is generally used to replace future income or cover specific financial obligations, such as paying off a mortgage and other debts or funding post-secondary education. A specific amount of insurance coverage would be purchased for a specific period of time (the “term”), such as ten years. Usually, this type of insurance is less expensive due to the coverage duration being limited. Many of these policies are renewable and convertible, meaning the policy will automatically renew when it expires – at a higher premium – and there is an option to convert the policy to a permanent insurance product. These attractive features allow individuals to maintain coverage beyond the original term without proof of insurability. If the insured passes away while the coverage is in place, a tax-free death benefit is payable directly to the named beneficiaries of the insurance policy.
Permanent insurance
Permanent insurance provides you guaranteed lifetime protection from the financial impact your death could cause. As long as the premiums are paid, you will have insurance coverage from when the policy is issued to the day you pass away. Typically, permanent insurance is used to address estate planning needs, such as funding taxes owing due to death or creating capital that a business might need to facilitate ownership transfers.
Premiums for permanent insurance are higher than for term insurance because coverage lasts your entire lifetime, and benefits are sure to be paid out. In contrast, term insurance is often cancelled when the need is gone. Also, unlike term insurance, permanent coverage allows for wealth accumulation within the policy as a portion of each premium paid can be invested, allowing assets to accumulate on a tax-deferred basis within the contract. This enables clients to be more creative with managing their estate planning needs, which can evolve over time.
Most investors will build retirement wealth using RRSPs, which will transfer to RRIFs; any remaining balance becomes fully taxable at death. Similarly, any accrued gains on assets can result in significant capital gains taxes – the family cottage is a perfect example.
While tax liabilities can be “rolled” to a surviving spouse, upon that second death, the taxes are payable, which can deplete the estate or, worse, force a cherished asset to be sold.
Permanent life insurance is often the perfect solution for this situation as it provides the necessary funds exactly when needed.
Disability insurance
The risk of becoming disabled for a significant period before age 65 is actually higher than the risk of dying before that age. A disability insurance (DI) policy manages that risk by paying a monthly benefit for a predetermined duration – usually to age 65 – if you become disabled (based on the policy’s definition of disability). Policies typically include a waiting period before benefit payments begin. Various riders are selected to enhance coverage at an additional cost, such as ensuring benefits keep pace with inflation.
Be aware of group coverage limitations
Although many employers provide group DI plans that provide tremendous value, there are some limitations to a group disability policy you should be aware of. For instance, plans are owned by the employer and may be cancelled or changed at any time. Secondly, coverage is often terminated if you leave the company.
The definition of disability is also an important consideration and one that distinguishes individual from group DI. Usually, once you are considered disabled and making a claim, the definition changes after a certain time (one or two years), after which your ability to continue making a claim may become more difficult. If the insurer no longer considers you disabled, you may be forced to consider a role you usually wouldn’t take simply because you’re able to do the job.
Finally, benefits may be capped and are taxable if the related insurance premiums are employer-paid (unless premiums are a taxable benefit, then benefits are tax-free). If you already have group disability coverage, you may consider supplementing that plan with your own individual disability insurance policy. That way, you can mitigate these limitations, benefit from the protection of complementary solutions, and maximize your income replacement during a difficult time.
The cost of longevity
Many Canadians are retiring earlier and living longer. While a longer retirement is appealing, it does present a risk that, at some point, you may need additional financial resources to maintain your quality of life. Three insurance solutions can help:
Critical Illness insurance
Dealing with an illness can be very expensive. The financial impact from the inability to continue working and medical costs not covered through government plans can result in a significant financial setback.
Critical Illness (CI) insurance is a type of coverage that can protect your financial health. A CI policy will cover a range of illnesses outlined in the contract; if the insured is diagnosed with one of those covered conditions, the policy will pay a lump sum, tax-free benefit after the prescribed waiting period. While much of our health care is funded by the provincial governments, some treatments may have additional costs, depending on what they are and where they are received. There may also be ancillary costs, such as travel expenses, that can be burdensome. Worse, family members may want to take an unpaid leave to help provide care, which might create an income gap. Having Critical Illness insurance ensures that if you fall ill, your medical concerns will not be compounded by financial ones.
Long Term Care insurance
When long-term care is required, the costs can be high. Over an extended period, these costs could threaten the financial security you’ve worked hard to achieve. Long Term Care (LTC) insurance can eliminate the fear of outliving your savings or diminishing your estate for the next generation.
LTC insurance will provide a regular benefit that can be used to pay for the care required in your home or a care facility. A benefit would become payable when the insured cannot perform a certain number of Activities of Daily Living (ADLs) outlined in the contract.
With long-term health costs across Canada increasing and the financial support from governments shrinking, this type of protection can ensure quality care without the financial stress.
Life annuities
A life annuity is one of the few ways that investors can guarantee a lifetime income stream, allowing you to ensure you don’t outlive your capital. It can also be helpful in creating an income stream for a loved one while limiting their ability to access the original capital.
An annuity is purchased with a one-time deposit; in exchange for that deposit, the insurance company will make predetermined, regular payments to you for the rest of your life, at which point the contract ends, and the income ceases. Each income payment is a combination of the original capital and interest. Only the interest portion is taxable if the annuity is purchased with non-registered funds. Where registered funds are used, the income payment is fully taxable. The only risk with life annuities is that you don’t live long enough to recoup the original capital investment; however, there are options and strategies that can be used to mitigate that risk.
Annuities can be a useful part of a fixed income strategy and can be established jointly with a spouse, ensuring income continues until the last partner passes away.
We are here to help
Although risk is an inevitable part of life, having the right insurance solutions in place can act as a hedge and help you protect what you’ve worked so hard to build. Our Total Wealth Planning process helps determine how you can best structure, enhance, protect and distribute your wealth.
Contact our office today to get started.
source https://richarddri.ca/insurance-a-critical-tool-for-managing-risk/
Dri Financial Group 