The pandemic has forced many individuals to turn their attention to preparedness planning in an attempt to answer troubling financial questions on illness and death. This has prompted many to review their wealth and estate plans, including their insurance coverage.
“This is a time when people have stopped to think, ‘is my family protected if I were to become sick or die?” says Tiffany Harding, vice-president and head of Wealth Planning at Gluskin Sheff.
While COVID-19 may be a trigger at this point in time, it is recommended individuals review their insurance needs annually to see if they have the proper coverage in place. This is especially important if they have had major changes in their lives, such as:
-a purchase of a home/business
-increase in debt/investments
-birth/adoption of a child/grandchild
-or an illness/disability/death in the family
“Much like we do an annual tax review, an annual review of our investments and a check of the batteries in our smoke alarms, an insurance review should just be part of the annual routine,” says Mark Skeggs, vice-president of Wealth Planning Gluskin Sheff.
For instance, Skeggs says someone who has had a change in their employment might find their new employer offers less disability protection and may want to top up their coverage with a personally owned policy. Anyone who has purchased a home should consider the benefits of having life, disability and critical illness insurance in place to help cover the mortgage and other financial obligations, if they died prematurely or became ill and were not able to work. On the flip side, an individual or a couple may determine they no longer need certain insurance coverage if their mortgage is paid off.
You need to revisit the purpose and intention of the insurance policies you own regularly to determine whether they still fit within your goals.
Insurance for wealth planning
There are two main categories of insurance to consider as part of wealth planning: Living benefits—including disability, critical illness and long-term care protection—and life insurance, including term and permanent coverage.
Living benefits insurance can be an attractive solution for those who have income and assets they wish to protect. Living benefits provide an income stream and also help to protect the depletion of retirement assets in the event of an unexpected illness, injury or long-term care need.
“Insurance helps to protect your greatest asset, which is your ability to earn an income,” Harding says.
Generally speaking, disability insurance replaces a portion of your income due to a qualified illness, such as mental health or musculoskeletal disorders, or an injury that impacts your ability to work.
Separately critical illness insurance provides a lump-sum, tax-free payment if you are diagnosed with or affected by a specific condition such as a heart attack, stroke or cancer and meet the survival period. Critical illness insurance allows you to concentrate on your recovery, as it can help cover expenses associated with a serious or life-changing illness.
Long-term care insurance provides an income stream to help cover long-term care costs such as a private nurse or at-home care for individuals who are physically or mentally unable to provide care for themselves.
“If one of these events happened when you’re living, and you don’t have insurance to cover the unexpected costs, it could deplete your savings and unwind everything that you’ve worked for up until that point,” Harding says.
“If you don’t have sufficient coverage in place, you may have to draw down on the equity in your home, or even sell your home, to cover the costs. It can also be disastrous to your longer-term retirement plan. Also, the impact may be far reaching, since when one person experiences a health crisis, other family members and caregivers’ lives may change as well. “
Life insurance is a fundamental part of a wealth and estate plan that is used to protect assets and provide liquidity. Insurance can protect assets, as it replaces income if a loved one were to die prematurely. It is also a common tool in estate planning to provide liquidity to pay tax liabilities, equalize assets for beneficiaries and/or to fulfil philanthropic wishes strategically.
There are two common types of life insurance: term life insurance and permanent life insurance.
Term life insurance is often referred to as “renting” coverage for a period of 10 or 20 years, for example, and used to cover expenses such as a mortgage, or the cost of post-secondary education for a child, if a parent were to pass away, prematurely.
Permanent life insurance provides coverage for life, meaning it’s akin to “owning” insurance. Certain permanent life insurance policies can combine a death benefit with a tax-sheltered savings element, making it an alternative investment strategy for individuals and families. The death benefit, including the investment portion, will ultimately be received by the beneficiary of the policy tax-free.
Some individuals also use life insurance as a way to fulfil their philanthropic wishes, such as donating to charity, says Skeggs.
“Insurance policies can be a great way to give back while you’re still alive,” he says.
For example, if a life insurance policy is no longer needed as part of your wealth plan, you can consider donating it to a charity.
Skeggs says the donor could continue paying the annual premiums and receive donation tax receipts for the premiums paid. This can be an efficient strategy to consider at the end of the year for people looking to achieve tax savings and make a charitable donation.
How much coverage do we need?
Figuring out what insurance coverage you need may be overwhelming for some, Harding says, because there are different types of insurance solutions to consider depending on your specific circumstances.
The starting point is always with your goals and objectives and to review your financial situation and existing insurance coverage through that lens, says Harding. She recommends individuals work with an experienced and licensed insurance advisor who knows the right questions to ask and understands how insurance can fit into their wealth and estate planning goals. “A licensed advisor will help you consider what’s important to you,” she says.
Harding cautions the annual insurance review process may require having some very personal discussions about potentially-uncomfortable topics. “Advisors need to ask the uncomfortable questions such as, ‘What happens to your family if you were to come ill, disabled or pass away prematurely?’” she says. “Sometimes individuals do not want to think about these situations happening to their family; however, it is important for advisors to understand what level of protection you want and need.”
On the bright side, Harding says those challenging conversations lead to comprehensive wealth and estate plans that provide people with the peace of mind that their families and assets are protected should something unexpected happen.
“At the end of the day, it can help people sleep better at night,” she says. “There’s a lot of comfort in knowing that your family is being looked after.”
* Please note there are references to employees who are no longer with the firm, but were as of the date of publication.