Financial Planning 101… Answering the “What If” Questions
Financial planning is all about determining how much money you need for life’s “rainy days.”
Consider asking yourself 3 questions:
1. “What if… I die too soon?”
2. “What if…I live too long?”
3. “What if… I get sick or injured and can’t work?”
One secure umbrella for rainy day events is personal insurance.
Insurance is money; money when you need it, in the amount you need and for as long as you need it.
I have been a life and income replacement benefits sales person for over 30 years.
I am always bemused by people who suggest to me they are “over insured”. They claim to pay “high” premiums for car insurance, home insurance, boat insurance, motorcycle insurance, truck insurance, jewellery insurance… they are “insurance poor.”
“What if… I die too soon?”
Sudden, unexpected death of a family bread winner is catastrophic loss enough, a “well planned” life insurance policy provides cash for income, to retire a home mortgage and/or provide for continued education for dependent children.
I have never once had the surviving spouse of an insured client tell me they had “too much” from the proceeds of a life insurance policy.
Life Insurance proceeds can provide cash to pay off debts, eliminate a house mortgage, and still provide income for your dependents should you die prematurely.
Illness, as we all know is no respecter of who you are or what your life plans might be. Gord Downie’s recent passing made that clear. Many people suffer illnesses that are not terminal, but treatment and recovery interrupt their earnings and can have a devastating economic effect. RSPs cashed in, mortgage defaults, children’s education commitments stalled. Your lifestyle depends on your ability to work. Why is that asset not the one that deserves priority over all other assets, many which lose value with age.
“What if…I live too long?”
Retirement income guaranteed to last as long as you do and provide income to continue the lifestyle you choose.
Most people believe their pensions are secured and guaranteed, but the Nortel and more recently Sears Canada experience indicates that is not the case. All the more reason to include prudent RSP investments to insure future income where it is needed.
Getting started with a savings plan for the future is simple. Start with a monthly contribution you won’t miss, and add to it as your earnings permit.
The fastest growing sector in Canada’s economy is the self employed or small business owner, much talked about now as minimum wage increases begin shortly. This growth sector probably can’t afford pension plans that require an employer contribution. Individuals working in this dynamic would need to set aside a fixed amount to build their own secure future.
TFSAs allow for tax free growth, RSPs offer a way to reduce current tax and defer tax on gains until the future. Just 2 ways to realize income at a time when working is not the preferred option.
“What if… I get sick or injured and can’t work?”
Steady reliable income continues for as long as a disability prevents you from earning money to maintain your lifestyle and that of your dependents until you recover. A lengthy interruption of cash flow income can deplete savings, eliminate RSP investments and produce bankruptcy. A good insurance policy provides replacement income no matter how long the disability lasts and can conserve an estate.
I have known people to lament they wished they had encouraged the purchase of more when they had the opportunity. A recent experience with a client who suffered a catastrophic accident, strengthened my resolve that no one ever has too much insurance. This client and I had discussed increasing the monthly benefit of his income replacement insurance just last year. He grudgingly approved an increase in the benefit to maximize eligible earnings. The phone call from his hospital bed, seeking reassurance he would get all the benefit told me how important annual reviews and repetitive discussions about the negative consequences of insufficient income really is. Several of his coworkers and friends called me to increase their insurance.
We don’t know when or if he will return to his high-income occupation. What we do know, is he has a regular income for as long as he needs it, even to post retirement age if he is unable to work again. He won’t cash in RSP savings. He won’t sell his house to generate cash to sustain his family lifestyle.
At claim time, no one is ever “over insured.”
Income replacement insurance and life insurance provide back up security for RSP savings, particularly for independent business owners and anyone who isn’t fortunate enough to have a guaranteed employer sponsored pension plan. Money, in the amount needed, when needed for as long as it is needed.
