Many Canadians think of Insurance after the event has happened, typically Death, Disability, Failure of Health, or Long Term Care needs.
Insurance comes in many Types. Term, Disability (Covers loss of Income), Whole or Permanent Life (Asset Class with Cash Value & Death Benefit), Critical Illness( Failure of health covers Twenty Five major Illnesses), and Long Term Care
Forthis blog, we will focus onTerm, Creditor, and Mortgage Insurance.
While I am an eternal optimist and would like to believe, that we sail through life with as much as a scratch. Statistics tell a very different story. I know first hand as my first spouse succumbed to inoperable brain cancer at thirty-four. Insurance comes in many types, cost, and designed to provide for different outcomes.
This is the least expensive form of insurance, available in 10, 20, 30, and 40-year terms. Whatever the term you choose, the monthly or annual payment will increase at the end of each term. It is important that you review these schedules with your advisor because, at some point, this type of insurance becomes may become unaffordable.
Purpose of Term:
Generally to cover the debt, credit cards, Education, Mortgages, final expenses, and leave those you care about, debt free.
Many Institutions will position “Creditor Protection” as insurance to cover your minimum CC balances and other loans etc; you may have. This type of Insurance is in most cases pure profit for the institution recommending such coverage. Creditor Insurance has many exclusions, and will pay the declining balance on your debt.
Many Institutions will position “Mortgage Insurance” as insurance to cover your mortgage, and state that this is required in order to qualify. This is factually incorrect. Example: If your mortgage is 500,000.00, the lender will generally ask some qualifying questions, and if all your answers are no, generally they will offer insurance on the mortgage
loan for monthly payment. Herein lies the rub. Suppose you now have paid your mortgage down to say, to 300,000.00, and death should occur. If the claim is approved the surviving person will not receive the original amount of 500,000.00. The claim will pay what is left owing on the mortgage as the first payer.
Complete a needs assessment with a qualified and fully licensed advisor, then apply for the right type of Insurance which fits your budget, and most importantly addresses your
needs.. Should you need to make a claim, you receive the cheque, not the institution.
What does a “Needs Assessment” look like?
A needs assessment is a tool (Spreadsheet with fillable fields) which allows you and the advisor to go through what is important to you. Things like, How much debt, Car Loans, CC debt, Mortgage and so on. Will also input what existing insurance you may have in place? What is your biggest asset? Most say it is an investment, home, or material possession. I firmly believe your biggest asset is YOU, and your ability to earn an income. I ask you this, What if you lost your ability to earn a lifetime of income, How would you fare? Consider this, apply to yourself, and do this exercise, what you would earn in your working years. This does not include what you would need in Retirement? Your current age, your retirement date, how much you earn, than do the math. Suppose you are 35 today, retire at 65, = 30 working years. You earn 100,000.00 annually x 30 years, equals 3 million dollars ($3,000,000.00) without factoring in taxes or inflation. If you factor in Inflation at today’s rate of 2%, and remained stable @ 2% your 100,000.00 in 2019 dollars would equate to 181,136.16 in 30 years. This calculation is based on future inflation assumption of 2.00% per year.
needs? Consider longevity, family history, your lifestyle? How long do you expect to live in retirement? How much will you need annually to live? In my experience seldom do my clients decrease
their living expenses in retirement. Some do because of lack of planning. It is my experience that in retirement, most Canadians expect to live in retirement, as they did in their working years. What is your Number? Ask yourself, this one question? What if I became disabled temporarily or permanently, had a failure of health, or passed away, would you and your loved ones be okay? What is your plan? Are you protected? Are your investments safe? The majority of Canadians draw down their nest egg meant for retirement. Living sick is much more expensive than living healthy. The goods news? There are affordable solutions to manage your risk. Fail to plan,your plan will most certainly fail.
William Peters – Peters Wealth Management