If you’re like many people, the pandemic has reminded you how precious life is. This has led some of us to make major changes – retiring early to spend more time with grandchildren, for example, or fleeing the city for the tranquility of places like Fernie or Tofino.
For others, it’s simply meant taking a few extra steps to ensure loved ones are protected if disaster strikes – be it another pandemic (oh, please no!) or something as common as an injury that keeps them from working.
We all know that these tasks – like making a will or ensuring we have adequate life insurance – are things we should have done anyway, pandemic or not. But all too often, the busyness of life keeps us from getting around to them.
Let’s delve into three critical areas of wealth protection – life insurance, disability insurance and estate planning – and review some quick and easy strategies you can use to make sure you’re covered, no matter what.
How to tell if you have enough life insurance
When it comes to life insurance, most people fall into one of two camps that sometimes overlap: they either don’t know what kind of coverage they have or they’re underinsured.
According to BlueShore Financial Wealth Protection Specialist, Andre Guillemette, “Many people I’ve spoken with have a policy they bought years ago and have forgotten what coverage it actually gives them. That’s common with life insurance – you buy it, file it away, and life’s distractions keep you from coming back to it.”
If you haven’t looked at your policy for a while, the first step is to dig up your original policy and/or your latest statement and make an appointment with your Financial Advisor or a Wealth Protection Specialist to see if it still provides what you want and need.
The other closely related problem of being underinsured usually occurs when people buy a policy and then experience major life changes – another child, a change in marital status, a significant increase in their mortgage – and don’t get around to updating their insurance plans in response.
So how much insurance should you have? There are a couple of benchmarks you can use to help answer that question. For one, make sure you have enough to pay off your mortgage in the event of your death. But you’ll also want to ensure you have enough to replace your income for a number of years, to make sure your loved ones can maintain their quality of life.
A common rule, according to Guillemette, is that your coverage should amount to 15 to 20 times your annual salary. So if you make $100,000 a year, you should consider $1.5 million to $2 million in coverage. But this formula is only a starting point: if you have no children, for example, you could require less. And if you have a larger family and more financial commitments – a second property on which you hold a mortgage, for example – you may need more.
This is where a knowledgeable financial advisor comes in: they’ll examine your situation and make sure you’re well covered; they’ll also check in with you periodically to see if any updates are needed.
Term or permanent insurance? Here’s how to tell which is for you
One other note on life insurance: most people (especially in their younger years) are drawn to term policies, where you pay monthly premiums in return for a one-time, non-taxable payout that goes directly to your beneficiaries upon your death.
The upside of term insurance is that it’s relatively cheap. The downside is that your premiums rise at renewal as you get older, and your coverage stops entirely when you reach a certain age – usually 75.
Permanent insurance requires higher premiums, but there’s no expiry date. If you are purchasing permanent insurance or converting from term insurance to permanent, most policies require you do so before a certain age – check the policy for specifics. In addition to a one-time, tax-free payout to your beneficiaries at your death that bypasses estate probate fees (identical to a term policy), your premiums collect and grow tax-free throughout the policy’s life, and you can cash it in and collect these funds at any point, with no tax on your capital gains.
This can make permanent insurance a better choice in some situations. Also, similar to an RRSP or tax-free savings account (TFSA), a permanent policy provides an additional tax shelter.
A permanent policy can also be a gift for young children: you could take out a policy on them and cover the premiums; they could then access the cash tax-free in the future. Their young age also gives children a long timeline to reap maximum tax-free compounded growth.
Plus, there’s another tax-planning strategy that could be useful to you here, particularly if you have a larger estate: because a permanent policy is valid until you die, you could use its tax-free payout to offset some or all capital gains, probate, and other estate taxes that may be triggered when your other investments are liquidated. (This is another plan your advisor can help you set up.)
Disability and critical illness insurance: Top up your group plan
If you have disability insurance (which offsets lost wages if you’re sick or injured) or critical illness insurance (which pays you a tax-free lump sum to help offset medical costs if you fall ill) through work, you may think you don’t need a personal policy. After all, aren’t you already covered?
Here again, you may not have enough coverage, as many group policies don’t provide enough income to cover your salary, or even enough to meet your expenses, depending on your situation. Also, if your employer is paying all or part of your premium (likely, in the case of group plans), then the benefit that’s paid out to you will be taxable.
This is where personal disability coverage comes in – you can use it as a top-up for a group plan to make sure you have the income stream you need. Plus, this extra coverage isn’t tied to your job – if you switch employers (as many people are doing these days, due to high demand for workers), it comes with you.
You should also take time to review the definitions of disability or critical illness in your group policy, as in some cases the policy may require the insured to take on another job even if they are still disabled.
For personal coverages, since you’re paying the entire premium yourself, the payout from your policy will be tax-free and the definition of disability or critical illness can be much more robust, depending on the policy.
And for many of these plans, you can also have the option to have all premiums refunded in the event you make no claim over a given period of time. What other kinds of insurance allow you to get your money back if you don’t claim?
Estate planning: Consider outsourcing your executor
When it comes to estate planning, the first and most critical step is to ensure you have a will – and that it’s up to date.
If you haven’t gotten around to doing so, don’t worry, you’re far from alone – 45% of respondents to the Financial Consumer Agency of Canada’s 2019 Financial Capability Survey didn’t have a will, a figure that probably hasn’t moved much during the pandemic, even with the higher interest in estate planning that it’s spurred.
One hang-up many people face with wills is whom to select as the executor, or the person who will administer your affairs once you’ve passed. It’s a complex job that includes applying for probate (or the legal process that allows for the will to be executed), liquidating assets, settling debts and distributing assets to the inheritors.
The challenge here is likely familiar to you: by selecting a family member, you risk causing tension (and potentially a challenge to the will) if there’s a dispute. That may make a friend a better choice, but you may feel guilty asking someone outside your family to take it on.
One way to get around this roadblock is to outsource the role to an estate-settlement service, which may be a law firm or a notary public. Many people dismiss this option because they think it’s too expensive, but it may not cost you any more than having a friend or family member handle the task.
That’s because under the British Columbia Trustee Act, an executor can claim up to 5% of your estate’s value (including assets and income generated by investments) as compensation, no matter if it’s a friend or a professional.
So assuming the person you ask takes the full 5%, they’d charge no more than the professionals. Plus, you’ll take emotion out of the equation – an experienced professional will be much better equipped to handle any conflicts that may arise.
Start with your advisor
The quickest way to make sure your income and savings are adequately protected is to meet with your advisor. They’ll work with you to find the insurance, investment, and estate-planning solutions you need to safeguard your wealth and leave a lasting legacy.
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