What is joint first-to-die life insurance and why would you choose it over two regular life insurance policies?
Life insurance is meant to protect against an unexpected death. It’s meant to provide financial protection for those who may be dependent on the insured. This is very common for families with young children and also for households with dual incomes (especially when one income is larger than the other).
There are many types of life insurance but one of the most common types for the average Canadian family is called term life insurance.
Term life insurance covers the insured person for a specific length of time (the term). It’s typically less expensive than other types of life insurance because it only lasts for 10, 15, 20, 25 years. The cost of term life insurance is very low when purchased early. A young family in their late 20’s or early 30’s will pay very little for term life insurance because the probability of an unexpected death is very low.
Joint first-to-die is one form of term life insurance that is available to couples. A joint first-to-die insurance policy pays out when the first person in a couple passes away. Instead of having two term life insurance policies for $500,000 each, a couple could purchase a joint first-to-die policy that covers both for $500,000. A joint first-to-die term life insurance policy is typically less expensive than two similar but separate policies, so it can be attractive in certain situations. But what are the downsides of a joint first-to-die life insurance policy? And when might you choose a joint first-to-die policy over two separate policies?
The 4% Rule is a common personal finance rule. It suggests that a retiree can spend 4% of their initial retirement portfolio each year, adjusted for inflation, and have a reasonably high chance of success.
When talking about the 4% Rule, a retirement period is considered a “success” when the retiree doesn’t run out of money by the end of retirement. Any investment balance above $0 is considered as success, even if that’s just $1.
By using this safe withdrawal rate, the success rate of a retirement plan could be as high 90%-95%+. This means that during 5%-10% of historical periods a retiree could run out of money if faced with the same sequence of returns in the future.
But… this also means that during 90%-95% of historical periods a retiree will end up with money left over, sometimes a lot of money.
This is the unspoken downside of the 4% Rule. By aiming for a high success rate of 90%-95% we’re often building plans for the very worst-case scenarios. By using the 4% Rule we’re planning for a very poor sequence of returns in early retirement, we’re planning for below average returns for 5, 10, 15+ year periods, or we’re planning for high inflation that is significantly above the average.
But what happens if we get average returns, average inflation, and steady growth year over year… well… we could die with millions in the bank.
No one wants to be “the richest person in the graveyard”, so what can be done about the fact that 90%-95% of the time the 4% Rule will leave us with lots and lots of money in late retirement?
There are a couple options to consider but first, let’s look at the typical “success rate” analysis that we do in a retirement plan and what “success” actually means.
Critical illness insurance is a unique type of insurance that will provide a lump-sum payment in the event of a critical illness. What is unique about critical illness insurance versus other types of insurance is that it is VERY specific about what is covered.
Unlike disability insurance, or life insurance, a critical illness policy has some very specific criteria that need to be met before benefits are paid out. While many people may feel that their illness is critical, a critical illness policy doesn’t actually cover many common illnesses but only specific “critical” illnesses.
The idea behind critical illness is good. It can provide financial support during a difficult period of time. A time that may see a decrease in income or an increase in expenses. It helps provide financial support during an unexpected and potentially life changing period.
But despite the benefits we’ve personally decided not to purchase a critical illness policy. We made this decision for a number of different reasons, which I’ll touch on at the end of the post, but first let’s review what a critical illness policy is and what it covers.
Warning: This is not insurance advice. These are my own opinions about critical illness insurance and shouldn’t be considered insurance advice. If you’re unsure if critical illness insurance may benefit you then you should speak with an independent insurance advisor.
Risk management is an important consideration in any financial plan. There are many risks that must be managed to have a solid financial plan. For example there is investment risk, inflation rate risk, longevity risk… and of course the risk of an unexpected death.
To help reduce the risk of an unexpected death we can use life insurance, but there are many types of life insurance to choose from, so what type of life insurance is right for your situation?
Although it can be difficult to think about, reducing the risk of an unexpected death is very important to consider when creating a long-term plan. This is especially important in certain circumstances. For example, life insurance is extremely important when there are dependents who need to be provided for in the event of an unexpected death, or when there is a large tax liability that could be triggered by an unexpected death.
In this post we’ll explore the different types of life insurance that are available and some of their important features, but first it’s important to understand the purpose behind life insurance.
There are many different risks when it comes to retirement, but one risk that isn’t talked about very often is the risk of living a long and healthy life. It may seem odd to call this a risk, but from a financial planning perspective a long and health life increases the risk of running out of money in retirement.
According to the guidelines from the Financial Planning Standards Council of Canada, for a couple who is currently 55, there is a 25% chance that either partner in a couple will live to age 98 and there is a 10% chance that either will live to age 101.
Living a long and healthy life isn’t some obscure risk… for pre-retirees the chance of living to age 100 is around 1 in 10.
This risk becomes even greater for those aiming for early retirement in their 50’s or even 40’s. Retiring at age 55 could mean a 43+year retirement period for 1 in 4 couples and a 46+ year retirement period for 1 in 10 couples.
With such a long retirement period, and such a high possibility of reaching age 90+, we want to ensure that we’re taking steps within our financial plans to avoid the risk of a long life.
There are a few things that anyone can do to avoid this risk…
No financial plan is immune from risk. No amount of planning is going to eliminate risk entirely. In fact, there are many common risks in a financial plan that may cause issues down the road. What we need to do is identify what types of risk a financial plan may face and find ways to reduce that risk or mitigate it where possible.
When we talk about risk we naturally assume that means investment risk. While this is one common type of risk, there are also many other common risks we need to watch out for.
Some of these risks can be reduced or sometimes even eliminated with proper planning. For each major type of risk below, we’ve highlighted a few ways to help mitigate the impact this risk may cause, but even with these tips its usually impossible to eliminate these risks entirely.
A financial plan will typically cover 30-50+ years. Over this time span there are many unknowns that may occur. A good financial plan will be flexible enough to absorb these unknowns and still be able to reach the same goals with only minor tweaks.
This flexibility is important. It’s impossible to eliminate all these risks. It’s very likely that even the best laid plans will experience some disruption along the way. Having some flexibility, and knowing where that flexibility exists, will help reduce the stress and impact if the unfortunate were to happen.