Years ago I noticed a sign in Banff national park that summed up a simple vision of a good visitor. Take – Nothing but pictures. Leave – Nothing but footprints. The idea parallels life and our passage through.
We will take nothing with us when we leave and we will leave memories and whatever wealth we did not get around to using while alive. The trick is to avoid leaving unfulfilled obligations. To do that we need to understand the flow of financial planning.
It is simple enough. Everything you earn and have today will be
- consumed in the present, (cost of living – food, gas, clothing, heat, hydro, recreation, and many more)
- paid to satisfy obligations you created at some earlier time (debts of all kinds) or
- transferred to the future (invested) to be consumed some other day.
The flow is quite dynamic and it changes as the years pass. In the beginning, cost of living and debt dominate. Eventually saving and security become paramount.
If we knew the timing of the end of life, it would be easy to maintain balance. But we do not, so we must defend. We shed the risk of bad timing to an insurer.
Your risk is like a light switch – on or off. You might have no problem, but then again you might. If the odds are 99% in favour of a good result, you could make a mistake. You will never be 99% alive. 100% or 0% are your only options.
For insurers the risk model is different. They have thousands of customers. Their model permits 99% of their customers to be alive at any time. They can manage their business so that they can pay money to the 1% who were unfortunate.
The survivors of those in the 1% group use the money they receive to deal with commitments. Pay off debts, provide income for a family, provide capital to fund an education or buy necessary assets to use. Each of us has a different list. Business people have very different purposes. The key point is that few people pass on when everything has been looked after. The insurance completes the plan.
Life insurance lets you die neat.
Establishing the amount of insurance is paramount. The idea is to leave no unsatisfied obligations. A multiple of income is a little mindless and should not be used. For some people it will result in a huge extra and for others a huge shortfall.
It is easy enough to analyze. What was your income, time and skill going to provide? What obligations would it satisfy:
- Future spending requirements
- Future capital needed
- Present income and capital needed
Some may already be provided. There will be some spontaneous income from pensions or government plans. Take that into account. Future spending may change as children become adults. A house may downsize. The bass boat may be sold. Some insurance may already exist. (Don’t count mortgage insurance or optional group insurance. The premiums you pay for these can pay for better insurance you control.)
Investment yield, inflation and taxes must be considered.
It is just common sense, but in my experience those that guess the shortfall rather than calculate are always low. Properly fitted life insurance is an inexpensive solution.
Leave good memories. If you want to take your money with you, buy American Express traveler’s checks. They say they are good everywhere.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772