B-SIDE – INSURANCE: A LIFE STORY IN 3 PARTS

Where exactly does insurance fit into a life well lived?

I mean, isn’t it a bit of a third rail, morbid, snoozer of a topic after all? This kid here, does he really look like he’s worried about insurance? Heck no.

Well you’ve got me. Despite being an immensely important way to protect just about every kind of wealth, there are several very good reasons (but not good enough!) that people tend to shy away from asking the tough questions to build a rock-solid insurance portfolio.

What is an insurance portfolio? I thought you’d never ask 😊

In my own words, an insurance portfolio is the right-sized water wings to keep you afloat in life’s completely unpredictable wave pool. It’s an invisible coat of armor to make sure you’re impervious to all things sharp, pointy or able to trample you and your hard-earned wealth. It is neither too big nor too small, too expensive or too cheap, it is designed and tailored to fit exactly who you are. If it sounds hard to imagine, not to worry, it isn’t. This month’s B-side article is designed to help you see your own perfect coat of armor clearly no matter what age or stage in life you find yourself. Let’s begin.

The Young Guns (20-35):

At this stage of life, the focus is protecting your income and your future insurability. Think “Secure your financial independence no matter what life throws at you”, and “Disability insurance isn’t just for accidents — it’s your paycheck protector.”

This is the period when career building is ramping up along with income and responsibilities. A Young Gun might buy a house, take on a mortgage, have a child or two, start a business, and at the same time, start to figure out what they really enjoy about life.

Ideally, they are mindfully protecting their health along the way, because it’s during this phase that health challenges can really throw a wrench into the long-term viability of job, house, mortgage and kids. So although one might think life insurance is the most important to help raise a family in the event of premature death, living through an illness or injury can be just as challenging if not more so without the support of living benefits.

The “water wings” in this case need to consist of 2-3 pieces of insurance, over and above the health benefits covered by the government and offered by most employers.

1. Life Insurance (Life) – a contract where an insurance company agrees to pay a lump sum (“death benefit”) to a named beneficiary (or beneficiaries) upon the death of the policyholder. This benefit typically pays off debts, funds future education costs, and other living expenses of the survivors. The payout is tax-free. How much life insurance does one need? One rule of thumb is 7-10 times your annual gross salary, while a more in depth needs analysis will take into account debts, education future income replacement. At this life stage “Term Life Insurance” is the most affordable.
2. Disability Insurance (DI) – provides protection if you’re unable to work and earn an income. Generally, disability insurance replaces between 60% and 85% of your income.
3. Critical Illness (CI) Insurance – provides a tax-free lump-sum payment if you are diagnosed with a covered critical illness, such as cancer, heart attack, or stroke. This payout can help cover additional expenses related to the illness, like medical bills, home care, or lost income. The CI benefit rule of thumb is 6-12 months of expenses.

This is also when insurance can be the least expensive to acquire because insurance is cheaper the younger you are, all health factors being otherwise equal.

The big idea for Young Guns is maintaining independence while taking on new obligations.

The Mid-Life Go-Getters (35-55):

At Mid-Life, the focus is protecting the income levels that have risen through years of career and business building. It’s also about insuring the ability to deliver on caregiving roles, and continuing to guard future financial stability.

Think, “Your family relies on you. Ensure you’re financially covered while caring for them, and that someone can finish the job of raising them in the event that you cannot.” And also think, “Living benefits such as disability and critical illness insurance give you options if illness strikes — allowing you to focus on recovery, not finances.”

Insurance protects your ability to provide and care for loved ones without sacrificing your own financial security.

How do the water wings change at Mid-Life?

1. Life Insurance (Life) – debts are on track, so the attention can start to shift to funding a Whole Life insurance approach to fund ongoing risks but also the goals of the High-Net Worth Achievers aged 55+
2. Disability Insurance (DI) – this generally remains in play until we are within 12 months of retirement, or to the very last day of work if a benefit through work.
3. Critical Illness (CI) Insurance – where we may have used Term CI insurance in our Young Guns years for affordability’s sake, here we might start adopting something more permanent with less coverage to make sure it’s affordable for the long-term into retirement.

The big idea for Mid-Life Go-Getters is to keep the big picture life plans in play for the whole family, no matter what.

The High-Net Worth Achievers (55+):

The suit of armour for this group is all about legacy planning, estate preservation, and maintaining financial control. Once all of the debts are paid off and the kids are launched, attention can turn to using insurance to preserve control over who you are and what you’ve built all the way to the end, and sometimes beyond.

 “Use life insurance to transfer wealth tax-efficiently — and control your assets.” This is because life insurance passes directly to whomever you name, it gets there without any taxes, and if set up properly, the government won’t see a single nickel of it. No probate, and no hassle.

What about living benefits in retirement – does an Achiever still need those? Many Critical Illness and Disability Insurance policies can be converted to Long Term Care insurance post-retirement. And if set up early enough and with the right structure in place, Whole Life Insurance can also be called on to pay care costs allowing you to keep the house, maintain the liquid investments, and ensure both spouses can age in place optimally. What does this allow you to do? “Living benefits and whole life insurance mean you can access cash for care without depleting your estate.”

How do the water wings change for the HNW Achievers?

1. Life Insurance (Life) – we’ve probably stepped entirely away from Term Life and have either funded a Whole Life insurance policy or are undertaking to do so. Caveat about Whole Life: Young Gun or Mid-Life business owners and high income earners are well advised to skip right to here from the very start, and begin with Whole Life if it’s within the budget, for at least part of their Life insurance portfolio.
2. Disability Insurance (DI) – this has either dropped away and been cancelled, or in some cases it is both affordable and desirable to convert the DI policy over to a Long Term Care Insurance policy, which provides financial protection when an individual needs help with daily activities or requires long-term care due to chronic illness, disability, or cognitive impairment.
3. Critical Illness (CI) Insurance – like DI, most CI policies can also be accessed or converted to Long Term Care Insurance. Got extra cash earlier on in life? This is another piece of risk management that can be fast funded on a permanent whole life basis starting as a Young Gun or Mid-Life Go-Getter as well.

For the High-Net Worth Achiever, insurance is a strategic financial tool that provides access to funds beyond the houses and the investment accounts, and allows them to direct funds very specifically without tax or probate, granting them broader control for longer.

The Cognitive Biases That Sometimes Aren’t That Helpful

Now I’m not going to lie – for most people when I first meet them, the topic of insurance is about as popular as the one about updating the wills. Life insurance and living benefits insurance are inherently emotional products. They require us to confront uncomfortable subjects like death, disability, and critical illness, leading to several psychological barriers. This isn’t a bad thing, it’s just a human thing.

Here are some ways we can blast past them to make sure your suit of armour is on point:

1. In denial about your own mortality? Our conversation will focus on legacy building or protecting loved ones, which can feel more positive and purposeful than discussing death directly.
2. Feeling Invincible? Many people, particularly younger clients, believe they are less likely than others to experience critical illness or disability. This cognitive bias can result in underestimating risk and delaying or refusing coverage. Although the actuarial tables agree that young people make fewer claims than any other cohort, it’s still completely reasonable to imagine parking 5-10% of your annual take home pay to protect what you have. Strength is never a weakness.
3. This is so complex and overwhelming! Complexity leads to paralysis by analysis — clients delay making decisions to avoid the mental effort of understanding policies. My hope is that this life story in three parts gives you something to “hang your water wings on” as it relates to your life stage and why insurance is probably just as important for you.

For your own personalized set of water wings, drop me a note. And remember, there’s more than one way to wealth^TM.

Gillian Stovel Rivers, MA, CFP®, CEA
Senior Wealth Advisor
Assante Financial Management Ltd.
www.surroundwealth.com

 

The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances. Insurance products and services are provided through Assante Estate and Insurance Services Inc.