Understanding Insurance Options
Life insurance is a way for you to protect the financial future of your loved ones by providing a tax-free, cash payment to your beneficiaries after your death. You may not have savings to leave to your family today but the death benefit from a life insurance contract could be your legacy.
Before purchasing insurance, you need to consider if it makes sense for you and your financial planning. Three typical reasons to buy insurance are:
- To protect income
- To protect estate value
- To create an estate
So, with this in mind, the first questions I would ask you are:
- Would your loved ones be financially impacted if something happened to you? In other words, if your paycheck disappeared, how would their life change?
- If the stay-at-home spouse was no longer there to provide childcare, what would be the additional costs to the family?
- What would be the costs following your death and who would be responsible for paying them? Consider the final expense costs, taxes from capital gains, probate fees?
Let’s look at the types of insurance available
Term life insurance
- Term life insurance provides uncomplicated, affordable protection for a defined period when insurance needs are high but available funds are limited.
- In the event of your death, the policy pays a tax-free, cash benefit to your beneficiaries.
- The costs will never increase for the entire policy term.
- Ideal for people who want to ensure that debts like mortgages and loans are paid, children’s education needs are met, or income is replaced if they were no longer able to support their family.
Participating life insurance
- Participating life insurance provides lifelong protection with an opportunity for tax-advantaged cash value growth.
- The amount of coverage and annual costs are guaranteed for life. In addition, you may be eligible to receive dividends which can buy more coverage, reduce your premium payments, earn interest inside the policy, or be taken out as cash.
- This is suited to people who want to supplement their retirement income, help pay for children’s education, or increase their death benefit over time to keep pace with inflation.
Universal life insurance
- This is flexible lifelong insurance protection combined with an investment component that you choose and manage based on your risk profile and objectives.
- A guaranteed death benefit will be paid to your beneficiaries’ tax-free.
- The money you pay goes into a policy fund that is used to pay for the cost of your insurance. The remaining balance is invested on a tax advantaged basis from a variety of investment options.
- Ideal for people who have maximized their RRSP contributions, want to enhance their estate for their children and grandchildren, or are business owners looking for a tax-efficient way to protect the value of their business.
Insurance plans through your employer
As part of your group benefits, your employer will likely provide basic life insurance coverage. However, this type of insurance typically only meets basic needs and ends when you leave your employer.
Mortgage vs Term Life Insurance
There are many reasons why a Term Life Policy is a better choice:
- Premiums: Premiums are the same throughout the life of your policy (mortgage) regardless of the fact your balance is going down.
- Underwriting: Underwriting is the administrative process by which an insurance company decides if you qualify for coverage, what risk they are taking on, and the cost they will charge you. Underwriting on mortgage insurance is not done upon application but at death (post claim). This means that the decision of whether you qualify is only done after a claim is made, leaving you open to the risk that you never, in fact, qualified.
- Declining Benefit: The amount for which you are covered declines as your mortgage is paid down but ,as mentioned earlier, the premiums remain the same.
- Beneficiary: Mortgage insurance designates the beneficiary to be the bank but, with a personal Term Insurance Policy, you would assign your own beneficiary.
- Portability: Mortgage insurance is tied to your home. A simple Term Policy is portable and covers you regardless of who your mortgage is with.
- Total coverage: Mortgage insurance only covers your mortgage but a personal Term Policy can cover all your insurance needs (mortgage, income replacement, Estate costs, education, childcare)
An annuity is a financial product sold by an insurance company and provides you with a guaranteed regular income. Typically, this income is used during your retirement years, but can also be used to provide an income stream at any time.
An annuity is purchased with either a lump sum of cash or through multiple payments over time.
The income payments you receive back from an annuity when the income stream begins is a combination of interest and a return of your capital. You can choose to either receive income payments for a fixed period or for as long as you live.
Why do I need an Estate Plan?
Having a properly drafted will is without a doubt the cornerstone of an Estate Plan but often, as your financial affairs become more complex, a more holistic plan is preferable. If you have children, philanthropic goals, investments, business assets, vacation homes, or other valuable items, you need a comprehensive estate plan to make sure the wealth you’ve worked hard to build is distributed according to your wishes. A properly structured Estate Plan can also reduce the potential costs such as taxes and probate as well as delays involved in settling your estate.
The best time to create your Estate Plan is when you are in relatively good health. Indeed, an important step in comprehensive estate planning involves planning for uncertainties and incapacity, such as changes to your health and well-being. Nevertheless, keep in mind that estate planning is an ongoing process and should be revisited as your life circumstances change, your children grow up, your assets become more complex, and your goals evolve.
What’s in an Estate Plan?
There are several common ways to achieve your estate planning goals and each of them would be tailored to your situation. These include:
- Types of wills
- Beneficiary designations
- Powers of attorney
- Insurance contracts
- Trusts, tax planning, and charitable gifts and foundations.
When should I revise my Estate Plan?
- Death of a spouse
- Marriage or remarriage
- Birth of a child or grandchild
- Death of a beneficiary
- Purchase or sale of a business
- Beneficiary developing special needs
- Executor named in Will predeceases you
- Purchase of foreign property
Who should be my Executor?
Getting past the funeral is an emotionally traumatic time for the mourners, family, and friends. For the Executor, however, this time has added stress because it’s when the work on behalf of the Estate begins.
In some situations, when the scope of Executorship becomes evident or problems occur, it can trigger trauma all over again for everyone involved. For this reason, I often recommend that my clients consider naming a professional, such as a lawyer, accountant, or trust company, to act as Co-executor of their Estate. This way, their personal Executor can focus on dealing with family members and beneficiaries, while a professional will take care of the technical and time-consuming administrative duties.
And our clients have another important resource; Lainymar Wealth Group is trained and experienced in coaching an Executor through the Estate process and we are always available to our clients in times of challenge.