Playing The Odds

People are more exposed to risk of loss than they normally believe.  If they knew to do it, they could neutralize some of the risks with insurance.

The risks that I can deal with relate to loss of income for someone who operates a business or professional practice.  Death, disability and retirement.  There is also the live too long problem and the effect that has on the need for income.  Fire theft and liability are dealt with by other brokers.

Let’s look at probabilities.

Dying is 100% probable.  For people with estate liquidity problems, or with an need for a larger estate, or for a wish for tax preferred asset growth, life insurance is a cost-effective way to neutralize the problem.  For people who will die at an advanced age, the liquidity for taxes and other liabilities could be important but possibly not crucial.

Dying during your working life is less probable, less than 1 chance in 5, but the results are far more devastating.  No business person, and few others, die when everything is done.  The debts are paid, the retirement fund is set, the kids are educated and the tax issues resolved.  Business management is in place and can continue to operate without your leadership or special skills.   If it has been created properly, life insurance can fill the gaps promptly and completely.

Created properly involves several layers of coverage.  Short, intermediate and long term.  Created properly involves fitting it with other aspects of the financial plan.  Created properly is value sensitive and flexible.  Insurance poor while living is a bad idea and insurance poor after an untimely death is worse.

Disability because of illness or injury is a problem for younger people.  The likelihood is much higher than dying and it turns up sharply around age 35.  The other aspect of disability is that the probability of ever returning to work after a serious disability is less than 50%.  What assets will replace income?

In some situations the problem is a joint problem.  In a law firm with five partners, all aged 35, what are the odds that none will have a disability before retirement.  Small.  Where will the money come from for their draw?  How will their share of overhead be covered?  Easy to solve ahead of time.  Hard after.

Critical illness insurance and long term care insurance should be considered and will be useful in many situations.

Retirement is not so much a crisis as an event.  Properly considered, alternate assets will replace the usual income.

Life is about working to earn income.  If you cannot work, or choose not to work, there must be money working on your behalf or you will suffer.  The important thing to notice is that with insurance, it need not be your money that is working on you behalf.

A well designed and executed insurance portfolio is an important part of the foundation of any financial plan.  Do not give it short attention. 

Everyone has the problems. Their decision is around the question of which money would be missed more, the premium or the claim.

Insurance poor can come in two wrappers.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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