Why Life Insurance?
Let’s face the facts on this issue; nobody gets excited about buying life insurance! It is one of those topics that people simply do not talk about around the breakfast table. That being said, knowing that one’s family is protected from financial hardship in the event of an untimely death can provide you with great peace of mind. With respect to a small business, life insurance can provide a means of buying out the shares of deceased partners, ensure the survival of a business after the untimely passing of a key person or owner and make use of certain products during your retirement planning efforts.
As advisers, we sometimes hear people claim they cannot afford life insurance. It may sound cliché, but whether you are a parent, a business owner or an individual who cares about the wellbeing of a loved one or a cause, you really cannot afford not to have life insurance! Many folks are often quite surprised just how affordable coverage can be. Our advice: Know the facts before you determine that a plan is not for you. An email, a text, or a simple phone call can dispel many of the myths around this most important topic in your financial planning efforts.
Let’s take a look at a couple of case studies. These are actual case studies of situations that have happened to our clients over the years. Out of respect to the clients’ privacy, we have changed the names of the clients involved.
Bruce, a man in his early 60s, owns a family business with his wife, Mary. The two of them work full-time in the business. Although his wife is very knowledgeable about the business, the two of them realize that there would be no way possible that one of them could run the business on their own. When we discussed the topic of life insurance with this couple they explained that Bruce had a few minor health challenges (high blood pressure, high cholesterol, and diabetes) but, all were regulated with medication. The couple thought that life insurance was out of reach because Bruce could not qualify medically anymore. With this in mind, we explained that there are guaranteed issue life insurance products available based on easier qualification criteria for those that cannot pass the full underwriting of a traditional life insurance policy. Although they could not buy as much coverage as they had hoped, based on the maximums that the type of policy that Bruce had to buy allowed for, they were able to buy enough coverage to look after all of their short-term debts of the business and two full years of the couples’ wages that they normally withdrew from the business.
Within just two years after buying the policy, Bruce unfortunately passed away from complications related to a surgery. A few weeks after his passing, the life insurance policy paid out to Mary. She was able to take the time to properly sell the business (as opposed to a fire sale) and found a great young couple who would do a good job looking after the clientele that she and Bruce had built up over their many years in business. Although Mary misses Bruce very much, she took comfort in knowing that she was okay financially and that Bruce’s wishes for her wellbeing were carried out.
Pierre and Tammy had been doing business with Front Gate Financial Group for years. During a slow period in their business, like previous years, they met with our adviser for an annual review. Given that they had just purchased a new (and expensive) machine for their business, a daughter ready to go to university within two years, a boy several years later and they just bought a travel trailer, it was recommended that they increase their term insurance coverage. They also had just made the decision to have Tammy leave her job and work in the business full-time with Pierre. Given that the household income was predominantly based on Pierre’s ability to manage the family’s small business, it was obvious that they needed to “beef up” their current plan. Always watching the nickels and dimes, Pierre hesitated to increase their monthly payments for insurance. He told his adviser, “We are insurance poor! We really cannot afford more coverage.” His adviser looked him straight in the eye and said, “If something happened to you, Pierre, that is exactly how you would leave your family — in an extremely poor situation.” It was the right message, with just the right delivery to drive home the point for Pierre. He finally agreed to increase the amount of term insurance, covering his wife and himself.
Only four months after finalizing the coverage increase, Pierre was killed in a tragic motor vehicle accident. Upon meeting with Tammy to deliver the death claim cheque, she asked her adviser, “What are we going to do now?” He went into his briefcase and pulled out the needs analysis document that he had filled out just a few months ago with both of them. The adviser began to explain, “This is exactly what Pierre and yourself agreed would be your wishes if one of you were to pass away prematurely. Now that this worst-case scenario has happened, we don’t deviate from the plan.” After taking a few minutes to review the document, Tammy became overwhelmed with emotion. The amount of coverage that Pierre had agreed to purchase allowed for the family’s mortgage and household debts to be paid off. The expensive machine that the business had just bought had its loan retired. There was a reserve amount allocated for the kids’ university or college education. Most importantly, there were enough life insurance proceeds left over to invest and replicate the income that the family enjoyed while Pierre was working the family business. Tammy knew that she did not have the skills necessary to maintain the family business. There was enough money allocated in the plan to recruit and hire a very good manager for the business. That individual was able to take a lot of the short-term business stress off of Tammy, so that she could focus on what really mattered — the couple’s children.
Inevitably, Pierre did not leave his family in a “poor situation” — quite the contrary. Even though he really did not want to increase his premium payments, he also did not want to see his wife and kids go without the things that they enjoyed while he was with them. The life insurance proceeds proved to be a real blessing for this family. In the end, it was an expense that they simply could not live without.
Why Disability Insurance?
Of all the things that a person can experience in their lifetime, the loss of household income, or a large drop in household income for a two-income family can be financially and emotionally devastating. After the experience of handling claims, one theme that keeps repeating itself is that for many, the prospects of dealing with a prolonged disability can be worse than the prospect of dying, when it boils down to the financial aspects of the event. Many folks have life insurance. They have a general idea that if they were to die, the family debts will be paid off, there would be money left over to replace the income that was lost, etc. However, many of those folks lose sleep over the prospects of what would happen to their family or their business if they were to suffer a debilitating injury or illness.
The Hard Facts on Disability: Are You One of the Three?
Here is a fact: According to Canadian Life and Health Insurance Association (CLHIA), one out of every three working Canadians will suffer a disability lasting more than three months before the age of 65. Are you prepared for this possibility?
It is easier to buy disability insurance than ever before. Product development in recent years has advanced the types of coverage being offered. Even if you are not in perfect health, or you have made a claim in the past, it is possible to access disability insurance. New guaranteed issued disability insurance products are very reasonably priced and cover even the worst-case scenarios of prolonged disabilities.
The more advanced types of coverage can provide a return of a portion of your premiums if you do not make a claim or the amount of premiums paid are less than the amount of claims made during the life of the policy.
Let’s look at scenarios:
Ethel had worked in the family business for 30-plus years. She had good staff and a thriving business. Ethel had long since purchased life insurance to fund the buy-sell agreement between herself and her brother, Tommy. This meant that if one of them were to pass away, there was a logical and systematic plan to deal with the acquisition of the shares inherited by the family members left behind so the control of the company would never flow outside of the original founders of the company, Ethel and Terry.
During a review a few years ago, their Front Gate Financial Group adviser congratulated them for making the plans to deal with what happened if one of them were to die, but he continued to say the next most obvious question to ask is, “If you believe in insurance because you might die prematurely, do you believe in insurance to deal with the possibility of a disability?” The business partners kind of looked at each other for a few seconds and said, “Well, we think so.” After a five-minute discussion, it became obvious to the adviser, their previous ideas were not absolutely formalized and their flimsy plan was full of holes. The adviser recommended disability insurance as a way to help relieve the stress that would be involved if one of them were to become disabled. A few short years later, Ethel was diagnosed with cancer. After the waiting period that she selected for her policy, Ethel began receiving tax-free disability insurance benefits that replaced her income. By not needing to pay Ethel’s wages, Terry was able to take the funds that paid Ethel to hire an interim replacement while she was out of the office, fighting for her life.
Ethel is now through with her cancer treatments and her doctors tell her that the prognosis is good. They believe that they got all of the cancer and Ethel is soon going to start going back to work a couple of days a week until her strength picks up. The disability insurance payments allowed Ethel to focus on her health during this trying time and enjoy some quality time with her family, as opposed to worrying about the business. She knew that Terry was more than capable of keeping things rolling in her absence, but it provided both of them with peace of mind that he would not be burdened trying to make enough revenue for both families while she was going to be away from the office.
Why Critical Illness Insurance?
Perhaps one of the least known types of insurance protection by the general public, critical illness insurance is known in the business as a living benefit. It is similar to disability insurance in that you must live in order to make a claim. Insurers provide a predetermined list of conditions that are covered under the plan, such as heart attack, cancer, stroke, coronary artery bypass surgery, coma and paralysis (just to name a few). If the insured is still living 30 days after being diagnosed with one of policy’s covered conditions, the insurer provides a lump sum, tax-free benefit to the insured.
The aim of this type of insurance protection is to provide the insured with access to adequate funds necessary to alleviate the financial stress associated with undergoing this type of severe or critical illness. Think money for short-term debt repayment, replacement of income, funds necessary to cover travel and medical expenses associated with the illness for both the insured and their family. It also provides financial resources to doctors abroad that would normally be inaccessible under provincial health insurance. Critical illness insurance is designed to help you to live, so that your life insurance policy will not pay out right away!
A case study:
Remember Ethel from our last case study with respect to disability insurance? Well, she also claimed on a critical illness policy for the same diagnosis of cancer. After surviving the 30-day waiting period after her diagnosis, her adviser delivered the critical illness claim cheque. How is it possible that she was able to claim against her critical illness contract and her disability insurance contract for the same disease? The answer is simply that the policies have two different aims and they can pay simultaneously. Whereas a disability insurance policy can provide a replacement of income while an insured is disabled from carrying on their employment functions, a critical illness policy pays a lump sum benefit. Ethel wanted the peace of mind in knowing that if she was stricken with a critical illness, there would be enough money from her critical illness policy to retire her small mortgage and pay off her sundry debts (lines of credit and credit cards), while at the same time allowing for enough remaining funds to pay for travel and medical expenses. She also wanted to ensure that her after-tax income would be replaced as to not present herself a burden to Terry, her brother and business partner. Although she suffered from one of the most unfortunate events of her lifetime, the diagnosis of cancer, she was financially prepared to deal with this issue and that lifted a great burden. The critical illness benefit ensured that her husband and daughter were able to be by her side while she had to travel approximately four hours for her cancer treatments over the course of several months.
The statistics on this issue are very clear: Two out of five Canadians will suffer from cancer alone in their lifetime!* Unfortunately, many will not be as adequately prepared as Ethel. Don’t be a statistic — know your options by speaking with a Front Gate Financial Group adviser!
* Data taken from the iA Excellence Cancer Guard brochure.