As your financial planners, we consider everything that could impact your financial well-being. Two of those being unexpected death or illness. We call this, “risk management”. And, the most effective tool to manage risk is, duh duh duh, INSURANCE.
I wanted to kick off the year by discussing what I have in the way of insurance. Before I do that, here are a few points to note:
- We believe insurance should be used to cover certain financial obligations.
- You can be over-insured.
- All situations are different. Sometimes insurance is unnecessary.
I am 45 years old, married and have 3 children. I have people dependent on me to help pay bills, pay debts, save for my children’s education and save for retirement. The moment my ability to earn income is gone, my family will suffer. Therefore, I need to replace my income if I unexpectedly pass away or become ill. Certain types of insurance can address these issues.
I have a Term Life insurance policy to pay for my mortgage and replace my income if I pass away. The amount of the death benefit was the balance of the mortgage at application time, plus the funds necessary to cover the annual after-tax expenses, indexed to inflation, for my family to maintain the same lifestyle, until the youngest finished her undergrad. I reduced this amount by my spouse’s after-tax income annually, indexed to inflation, until the youngest finished undergrad. I chose term insurance because there was a finite amount of time for the coverage and the premiums were astronomically cheaper than a permanent policy for the same amount of coverage.
I do have a Permanent Life insurance policy to pay for my final expenses at my passing. Because, I am unsure of my “expiry date”, I chose a permanent policy so that it would be in force at that time. The death benefit amount was nominal as it has only one financial obligation.
I have Group Disability coverage through my employer. A percentage of my income (60%) will be provided on a monthly basis until I can resume work or until retirement time, whichever comes first. I chose not to top this coverage up, instead opting for a Critical Illness coverage policy.
The Critical Illness differs from the Group Disability in that it pays a lump sum at one-time, upon diagnosis. There is no clawback of the benefit amount should I “recover” from the illness. I chose a benefit amount of 1.5 times our after-tax annual expenses. This amount made sense given the nature of the policy. If I were diagnosed with one of the covered conditions, my thought is that I would recover within 12 – 18 months and would resume working. If I did not, then the group disability coverage would continue. I also opted for the “return of premium” option on the Critical Illness policy. If I did not make a claim on the policy within the first 15 years, then I would be eligible to cancel the policy and receive all premiums back. Thus, the policy acted as a forced savings strategy. And, it would be a win-win – all of my premiums would be returned and, most importantly, I was not diagnosed with a covered condition.
Again, these insurance tools made sense at the time of application and for my specific situation. However, for people in similar situations to myself, you may want to review your coverage and the types of policies you have in place. There may be opportunity to enhance or reduce your coverage.
Reach out to myself, or any of our financial planners, for a more detailed conversation.