Preserving Wealth: Chapter Five, Protecting Your Family

Authored by Jack Lumsden, MBA, CFP®, Financial Advisor, Assante Financial Management Ltd. 

Chapter 5 of Preserving Wealth discusses the crucial topic of protecting your family through proper life insurance planning. During a lively weekend gathering, led by Uncle Wayne, they explore different types of life insurance, assess their coverage needs, and discuss the importance of disability and critical illness insurance. The chapter provides a practical guide to determining how much insurance you need and the benefits of both term and permanent life insurance.

Key Learning Points:

1. Types of Life Insurance:

   • Term Life Insurance:
     • Ideal for short-term needs, similar to renting an apartment. It provides coverage for a specified period (e.g., 20 years) and is generally more affordable for younger individuals.
     • Key uses include covering mortgage debts, and children’s education costs, and replacing lost income during critical family-raising years.
   • Permanent Life Insurance:
     • Suitable for long-term needs, akin to buying a home. It offers lifelong coverage, builds cash value over time, and can be a smart choice for estate planning or charitable giving.
     • It can also be used as a financial tool, allowing for loans or withdrawals against the policy’s cash value, which grows tax deferred.

2. Determining Insurance Needs:

   • Calculate the Required Capital:
     • Cover debts, such as mortgages, car loans, and credit card balances.
     • Ensure sufficient funds for children’s education, accounting for future tuition increases.
     • Prepare for final taxes, including capital gains tax on non-registered assets (excluding spousal rollovers).
     • Provide enough income to support dependents, often calculated as a multiple of the family’s income.
   • Assess Existing Policies:
     • Review current life insurance coverage through employer-provided plans, personal policies, and group insurance.
     • Identify any gaps and consider supplemental insurance to ensure comprehensive protection.

3. Tax Considerations:

   • Capital Gains Tax:
     • Upon death, non-registered assets are subject to capital gains tax. Planning for this tax is crucial to avoid a financial burden on beneficiaries.
     • Strategies such as joint ownership and gifting assets can help mitigate tax liabilities.
   • Tax-Free Insurance Proceeds:
     • Life insurance benefits are typically paid out tax-free, offering a reliable financial cushion for your loved ones.
     • These proceeds can be used to cover immediate expenses, invest for future needs, or settle estate taxes.

4. Disability Insurance:

   • Income Protection:
     • Essential for protecting your income in case of an accident or illness that prevents you from working.
     • Ensure coverage provides at least 65% of your current income. Individual policies can supplement employer-provided plans to meet this threshold.
   • Policy Features:
     • Look for non-cancellable policies to guarantee coverage continuity.
     • Consider options with own-occupation clauses, which pay benefits if you are unable to perform your specific job.

5. Critical Illness Insurance:

   • Lump Sum Payment:
     • Provides a lump sum payment if diagnosed with a severe illness like cancer, heart attack, or stroke.
     • The payout can be used for medical expenses, mortgage payments, or lifestyle adjustments during recovery.
   • Coverage Scope:
     • Review the list of covered conditions and any exclusions or waiting periods.
     • Some policies offer partial payouts for early-stage diagnoses or less severe conditions.

6. Assessing Overall Coverage:

   • Regular Reviews:
     • Regularly review and update insurance policies to reflect changes in your financial situation, family needs, and long-term goals.
     • Major life events like marriage, the birth of a child, or purchasing a home are critical times for reassessment.
   • Professional Guidance:
     • Work with a financial advisor to ensure your insurance strategy aligns with your overall financial plan.
     • Advisors can provide insights into the best types of coverage, appropriate benefit amounts, and policy features tailored to your specific needs.

This chapter underscores the importance of a comprehensive approach to insurance, ensuring your family’s financial stability and peace of mind in the face of life’s uncertainties. By understanding and planning for various types of insurance, you can create a robust safety net for your loved ones.

You can read the full chapter HERE

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For more information, refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring Wealth by Jack Lumsden, MBA, CFP® or schedule a call with Jack at 905-332-4403