Nancy Graham July 5, 2018 Personal Wealth How Much Life Insurance Do You Really Need? Several months ago, we were honoured to host the Ottawa’s Women’s Business Network reception here at PWL. It was a lot of fun! Not only because of the festivities and fundraising but because you’d be hard-pressed to find a smarter, more engaging group of ladies to hang out with … if I do say. When we invited this creative crowd to write down their “No Dumb Questions” on our whiteboard, I was reminded of one financial frustration that confounds almost everyone – even us business brainiacs: How much life insurance do you need? In fact, according to my friend and colleague Peter Harrison of HealthSource Insurance, many of the people he meets are unsure about how much coverage they’ve got, and if the policy they already have is right for them. So today, let’s talk about life insurance, in no uncertain terms. What’s your favourite competitive sport? Football? (Go RedBlacks) Soccer? Whatever it is, they’ve got one thing in common: They all call for a strong offence and a solid defence to stay at the top of your game. The same can be said about your wealth. Sure, you want to get out there and score. That’s where the strong, proactive investment strategy comes into play. But no matter how proactive you are with your investments, life can throw us curveballs. If you’re not ready to respond to them with an equally solid defence, they can sideline you entirely from the game. That’s what life and disability insurance are about. So today let’s get that life insurance off the bench and ready to run defence. I hope it helps to break the challenge down into the two frequently asked questions: First, how much life insurance should you have? And second, what kind should you get? How much insurance is right for you can be clarified by thinking about your family’s “needs” and “wants.” That is, what do you believe their “needs” are? And what type of lifestyle do you “want” them to have if you were to pass away prematurely? For example, say you’re the family breadwinner with two toddlers and a stay-at-home spouse. Your “needs” will probably be many! Should the unexpected occur, they need to continue with their existing lifestyle – including food, clothing, shelter and ongoing spending and saving of a regular household. So, your insurance should be enough to replace that cash flow of normal monthly expenses for a number of years. You’d probably also plan to pay off any outstanding debts – including your mortgage, credit card balance or even student loans. “Wants” are important too. You may not need to ensure your spouse can still take your children on a vacation or become a future snowbird. You may not need to pay for kids’ higher education, weddings, or assist them with down payments on their homes. You also may not need to leave a generous donation to your favourite cause. But you may really want to do some of these. Through the years, I’ve often collaborated with Peter Harrison of HealthSource Insurance when coaching my clients on these sorts of choices. [Show an image of Peter]. No matter what… Peter and I agree: The best time to get started is when you are young and healthy. Not only are the costs lower, but your needs are probably greater and your good health makes it easier to obtain. As Peter likes to say, “Life insurance may be the only product that you have to buy when you don’t yet need it.” What he means is, once you age and your health changes, your insurance company may not allow you to buy a policy. Or if you can get it, it may be much more expensive. This brings me to our next subject: What kind of insurance should you get? There are two broad types of insurance: term and permanent. Because term typically costs a lot less, people may mistakenly assume it’s the right solution every time. But just as a cheap hammer won’t replace an expensive screwdriver, cost isn’t the only consideration here. Again, Peter has provided a helpful way to wrap your head around the differences between them. He describes term insurance as covering the costs only “if you die before a certain time.” Permanent insurance pays your beneficiaries “when you die, no matter when that is.” For example, you may want term insurance if you die while your debts are still high, your children are dependents, and your family will need ongoing income for years to come. In effect, you are “renting” insurance, in case you need to “create an estate” – or feather your nest, if you will – before you’ve got enough feathers of your own. Once the kids are grown, if you no longer need it, you can let that policy lapse. And because the insurance company knows very few policies like this will actually result in a claim… the coverage is affordable. Now contrast that to permanent insurance, which is typically used to fund certain preservation goals like paying off final taxes, establishing a family legacy or leaving a chunk to charity. This policy becomes part of your estate planning and is a piece of equity…something you own as opposed to rent. Because the insurance company knows this type of policy pays a claim eventually, it stands to reason the coverage is more expensive. BUT, it can have significantly more value to you, as the payout is certain. The policy will be there for your beneficiaries whenever you go. This can make permanent insurance an appropriate tool to help you “preserve your estate,” so you can pass efficiently and effectively along to your intended beneficiaries – intact, for pennies on the dollar. By the way, permanent insurance can also be invaluable if you’re a business owner. How does that work? I’ll pick off that question off in my next “No Dumb Questions” segment. So what are your “No Dumb Questions”? Send them to me and we’ll keep ’em coming back in turn. I hope you’ll subscribe to my channel so you can keep on watching. Share: Facebook Twitter LinkedIn Email CIRO Advisor Report
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