For each of our clients, as regular readers know, we prepare a Wealth Forecast that attempts to project (as best as is possible) how their money is expected to grow and meet their needs for their respective time horizons. There are many assumptions that we have to make and as I discussed on Friday, understanding inflation is one.
We also assume a steady or increasing employment income (for those who are earning one, i.e. not retired) as the means to add to savings and grow wealth (income - expenses = savings).
But, what if that income should suddenly be reduced?
If it is merely a change in employment circumstances from losing a job, there is hopefully only a short time frame where you can land a new job and resume the income stream.
If however, there is something more dramatic: illness, injury or worse, loss of life, that income stream may never be resumed.
More often than not, these situations take you by surprise.
That is the benefit of Critical Illness, Disability and Life Insurance: they offer the protection you and/or your family need if you suffer a loss of income (under the respective category) that would remedy your income needs and reduce the risk to your financial health.
Of course their is a cost associated with protecting you from that risk, but what is appropriate (if it is at all needed) can all be determined through the Wealth Forecasting process (High Rock's Certified Financial Planner (CFP) professional, Bianca Tomenson is also licensed to sell insurance products and is co-authoring this blog), which helps to identify risks across your wealth growing years.
There are a number of benefits that come with the use of insurance products, but much of it stems from the fact that you (in most cases) pay the premiums in after-tax dollars, so the beneficiary(s) receive after-tax dollars.
For Life Insurance especially, this can be a significant factor in planning for your estate and what you wish to pass on, to whom and what tax burden you wish to pass on as well.
Life Insurance benefits by-pass the estate and go directly to the beneficiaries, tax (and probate) free.
Interestingly, whole life, participating policies (which pay annual dividends that can be used to purchase additional paid-up life insurance each year and as a result potentially increase the death benefit significantly over longer periods of time) can be used as a way of supplanting income in later years (if necessary). These types of policies accumulate a cash surrender value (CSV) over time and the policy owner, while still alive, can utilize the CSV by borrowing against it and making the amount borrowed payable to the lender, by making the lender a beneficiary (of the policy) for the amount borrowed (plus interest).
The borrower pays no tax, the lender receives the re-payment of the loan, tax-free, on the death of the insured.
As well, the death benefit is guaranteed and therefore an asset that is highly diversified away from the financial markets and the risks of price volatility.
Depending on your circumstances, of course (and this needs to be looked at in conjunction with an expert who is not selling you what you don't need), this may fit well into your financial goals. We have seen may positive outcomes from this type of planning over the years and the security and peace of mind can be well worth the cost.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist