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Get the future you want: Make a financial plan – Part 3: Insurance

In the previous article of this series, Part 2, we looked at the why and how of setting money aside – both for emergency and for opportunity. That fund you keep saving into, month by month, could put a new roof if your house suddenly needs one; or, go toward buying that property you find yourself interested in. In this third article, we discuss the importance of insurance as a safety net for you and your family.

 

The vital role of insurance

Insurance gives you a safety net in case of emergency. Put bluntly, it can save your financial and personal future. For that reason, it’s not an understatement to refer to a good insurance plan as your own personal risk management.

Insurance tends to be the most misunderstood area of financial planning. Part of the reason is that many financial advisors don’t even talk about it! Many would rather only discuss money accounts with you: RRSPs, TFSAs, open accounts.

But advisors with your future and long-term stability and security in mind will also raise the topic of a financial safety net. Think about it. Everything in your financial plan depends on a safety net – on insurance that covers you in worst-case scenarios.

Here’s why we compare insurance to a safety net. Insurance can save you from a calamitous fall into financial and personal ruin! What if you suddenly face a devastating health situation? A good insurance plan covers that. It takes care of the big bills.

Another reason people commonly misunderstand insurance is that they simply don’t like thinking about it. Which is only human. Who wants to contemplate dire circumstances? Easier to take the attitude that bad things just happen to others.

Yet it’s only sensible – it’s only good planning – to face up to possibilities; to prepare for the worst. And insurance is the most cost-effective and the simplest way to do that. In paying monthly, quarterly or annual premiums, you are transferring all financial risk in case of calamity to the insurance company.

Not all insurance is the same. Different types include: disability, critical illness, life, medical and dental, long-term insurance. All respond to a particular need. Some I’ll be covering in a future article.

For now, let’s look at how Insurance fits with your plan. A lot depends on your financial situation.

 

Different ways insurance can work for you

Insurance is an integral, cost-effective method that provides money when we need it the most.

Ask yourself: What would happen financially to your family if you died suddenly? Would you want them to be able to collect a paycheque from the insurance company every year?

Insurance covers that. In fact, it can help by responding to two substantial needs in case of emergency:

• It reduces or eliminates your debt (mortgage, credit card, line-of-credit, etc.).
• It replaces your income for your family.

For those in a higher income bracket, life insurance can act as an alternative investment that produces another income stream. For estate planning purposes, it can pay off taxes at death. (Yes, we still have to pay taxes when we die!) It can serve as tax-shelter money, or to pay a future tax bill. It can complement trusts and other estate planning vehicles.

 

Disability insurance

Disability insurance replaces lost income if you are unable to perform the regular duties of your job. It’s income-tested in that it replaces up to two-thirds of your gross income, just slightly below what you make after taxes per year.

But not all disability policies are the same. Different categories of jobs receive different policies. This is another topic I’ll be covering more in a future article, but suffice it to say for now that different definitions of disability exist. For example, disability as an owner versus disability as an employee. In planning for risk management, for the insurance plan that’s right for you, these are important distinctions to discuss with your financial advisor.

 

Odds of being disabled

Could you afford your lifestyle if you weren’t able to work for the next six months? Most people couldn’t. They would have to draw on their savings and other sources.

That’s where critical Illness insurance is so critical for you and your family. Some quick facts: Critical illness occurs in men more than women. Ninety-five percent of the time someone is diagnosed with an illness, it’s one of the 26 illnesses covered by insurance. In the event you are diagnosed with an insured illness and survive for the next 30 days, the insurance company pays you a large lump-sum amount of money – tax-free.

Insurance can be used to pay for medical bills not covered by the government, for example:

• to renovate your house to accommodate the new lifestyle your illness necessitates, like ramps for a wheelchair
• to pay for a new vehicle to transport you
• to hire a full time nurse to take care of you
• to pay for your spouse to stay at home with you.

It was doctors, not the insurance industry, that came up with the ideas for covering the above and more. They saw the adverse effects financial stress was having on patients. Their sensible conclusion: Removing financial stress makes patients get better, faster!

Note: insurance policies include the return of premium rider on the plan, so you can receive all your money back if you are not diagnosed with an illness.

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In Part 4 of this series, we’ll look at savings strategies. We’ll look at the two types of savers: Which category will you fit into? We’ll also discuss effective ways of budgeting. Be sure to join me as I address the topic of Saving: Intentions are good but strategies are even better.