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…
Note: The following is a guest post from lawyer Manda Ivezic. Manda practices in real estate, wills & estates, and small business law in London, Ontario and provides wills at a very reasonable rate of $300 for an individual and $475 for a couple.
A recent LawPRO survey estimated that 56% of adult Canadians don’t have a will. Wills were least common for 27-34 year olds, 88% didn’t have one, and 71% of respondents didn’t have a power of attorney at all.
Why do so many of us put off wills and estate planning? Common reasons to delay estate planning include:
You’re too young to anticipate your death – you see yourself living a long and full life, dying of old age far in the future. You have plenty of time ahead of you to take care of your will.
It’s overwhelming or unpleasant to think about.
You think it’s unjustifiably costly.
You don’t think you’re wealthy enough to need a will.
You don’t realize how important it is, because you don’t understand what exactly will happen in the absence of a will or power of attorney.
The problem with putting off wills and estate planning is that you can’t safely assume how the future will play out.
Delaying may mean it never gets done – an accident or illness could make you incapable of creating a will. Not preparing will and estate plan only makes a bad situation worse. The consequences of dying without a will can easily outweigh the time and lawyer’s fee.
As well, a lawyer’s input can result in substantial cost savings down the line compared to the upfront cost, maximizing what is left to your beneficiaries. A will also saves time and trouble down the road. At the very least, appointing an executor will prevent someone having to apply to court to be appointed as your estate’ executor – an avoidable burden at the worst time for your family.
Get this task out of the way and give yourself peace of mind. Here’s what you need to know when creating a will and estate plan…
How much life insurance do you need? Just enough, that’s how much.
Buying too much life insurance is a common problem. It’s an understandable problem, but a problem none the less. Buying life insurance is a tough decision. It’s emotional and it’s easy to get away from the cold hard facts.
If it wasn’t hard enough, insurance companies also make it very enticing to buy more life insurance than you need. The price for the next $250,000 of life insurance is usually quite a bit less than the first $250,000. This makes it very appealing to over-insure yourself. You think “why not buy an extra quarter million, it’s only an extra $15 per month?”
But buying life insurance rarely aligns with someone’s personal values. No one wants to buy life insurance. Life insurance isn’t fun, it doesn’t bring you joy, and the only time it becomes useful is when you’re no longer around. What you value about life insurance is the security it provides. So why buy more than you absolutely need?
When buying life insurance, you want to buy just enough to provide that security and not a penny more. So how much life insurance do you need?
Insurance helps you manage risk. Specifically, financial risk.
Insurance is great for highly unlikely but catastrophic risks. Things like a car accident, large medical expense, house fire, or an unexpected death.
Each of these risks could have massive financial consequences if they were to happen.
Luckily, the chances of these happening are extremely slim, however, there is always still a chance. Buying insurance helps you mitigate that very small chance by insuring against it. If you do experience some bad luck, your insurance will help cover the financial impact.
Before we jump into when you might consider life insurance let’s first cover what insurance is in general.