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Financial Freedom Is Merely Organized Common Sense
What Is Insurance For?
People often do not own a proper insurance portfolio because they do not know what insurance is for. I own casualty insurance like car, house, liability and group health but I don’t know as much about those as a specialist would. You should review these periodically to be sure you know what is covered and are getting value for your premiums.
The purpose of any kind of insurance is to replace an asset that is lost because of some event. The triggering event. The problems arise when you fail to insure something that you did not think of as an asset. In other situations people insure for the wrong period of time. In some ways insurance is like finance. It is not smart to have the useful life of the asset you buy financed with loans or leases that last longer than the asset will last.
The following is about life insurance and various kinds of disability insurance.
A competent adviser needs to personalize the actual plan. In this piece I want to deal with only a single question. What is it for?
Life insurance protects a value lost as the result of the death of a person.
- The value lost is frequently the worth of the person’s ability to earn income. Their career if you will. This asset is quite valuable early in life. It can be calculated and it should not be overlooked or replaced by some number that is bigger than you can understand. Someone who expects to earn $20,000 per year, (about minimum wage) with no inflation for 30 years, has a career value around $350,000. Inflation, if present would increase that present value to about $500,000. You may earn more and if so you can calculate value. Learning about how net present value works will help you understand many kinds of financial products, not just insurance. Please learn a little.
- Life insurance can prevent the loss that would occur if a non-liquid asset had to be sold to meet estate needs. The cottage, the business, the rental property, the art collection, the jewelry and the farm. These usually are sold to pay taxes, repay debt or meet other cash needs. Fees, commissions, and discounts can be material. If you see a sign that says “Estate Sale” do you expect to buy at a low price. Cash prevents forced sales.
- Life insurance can provide a tax preferred vehicle to accumulate investment assets. In Ontario and some other places, properly designed it will be immune to creditor’s claims. Other than assets you use, from a tax standpoint, life insurance assets should be the last money you spend.
Disability Income Insurance protects accumulated assets and reduces the stress of being unable to work. It protects your health when you need it most.
If you cannot work because of illness or accident, your living costs do not go away. Your career value is still there, but you cannot withdraw any of its value because its value requires that you work to get it. Disability insurance provides an alternative way to draw the money you need to live. Disability insurance protects your assets from forced liquidation. If you have no insurance, you will draw your needs from accumulated savings or the sale of other assets. Neither will help you recover. Design is difficult. Seek competent help.
Office Overhead Expense Insurance protects what you have accumulated. It is to pay specific fixed business expenses while you are disabled. Even if you have Disability Insurance, it will not pay much more than your cost of living. Office overhead coverage pays expenses that will allow the business to be there when you return. Rent, leases, staff, loan payments and other expenses will be reimbursed upon payment. There will be something to return to when you get better and your savings will still be intact.
For young professionals, this is a key coverage. Most cannot get a lot of disability income insurance because their income is still low. Office overhead is not tied to income. Get all you can justify.
Critical Illness Insurance protects savings. It provides a lump sum usually 30 days after the diagnosis of specified and serious diseases. As with other disability coverages, people own this coverage to protect their savings and to provide them with the capital for treatment that may not be readily available otherwise. It can buy time to make other arrangements that suit their life better. Even smallish coverages have real value. Most serious conditions have costs you have not thought about even beyond special drugs and exotic treatment.
Long Term Care Insurance protects savings in the event of your needing facility or home care. A specified amount will be paid for each day of such requirement. As one client has said, “If I need home care, after a year or two I won’t have a home to have it in.” This coverage is attractive to people who have income assets like pension but not much in the way of financial assets.
Insurance can be a rational choice but because people misunderstand it, it tends to become emotional. Try to avoid that condition.
Recall that insurance poor means that someone does not have enough money when they need it. It could be you now because you bought too much or the wrong kind or it could be you or your family in the future because you had too little.
A skilled adviser can fit the coverage to your specific circumstances.
These too made add some value to your thinking.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
don@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI
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Thank you very much for your articles, Don !
Thanks for noticing. Best