Skipping a generation in your estate planning

I’ve heard several people over the years say they never thought they would have so much money. A growing number of aging people have accumulated significant savings and investments from years of savings, investing wisely, inheritances, property dispositions or selling a business – and are looking for different options when it comes to minimizing taxes and structuring their estate plan.

Taking care of immediate children is still very much a priority, but it’s not the only one. Some of their children are often already well off financially and many are retired themselves.

We are seeing more and more cases where grandparents are leaving money to grandchildren, but there should be extra caution and professional advice when structuring plans to transfer wealth. Income splitting can extend to grandchildren and can lower taxes as a family.

The following are a few examples of how we have assisted clients in helping out their grandchildren.

Outright Gift

The strategy of gifting money to adult grandchildren can be very tax smart. A person who is aged 65 or older may have government benefits such as Old Age Security clawed back if income exceeds certain thresholds set annually. In many cases income taxes can be reduced and government benefits increased by gifting funds to an adult grandchild in a lower income tax bracket. We do not recommend significant gifts to minor children directly as this could violate what is commonly known as the attribution rules.

Registered Education Savings Plan

For grandchildren under 19, grandparents should consider the Registered Education Savings Plan. This is a fantastic vehicle to tax-shelter money, income split with family members, and receive government grants. I’ve had clients set up an RESP for every grandchild they have. They require a consent form from the parents, as there is a limit to the Canada Education Savings Grant.

Tax Free Savings Account

For grandchildren who have reached the age of majority, giving funds to contribute to a Tax Free Savings Account can be an excellent way to income split. Your grandchildren can use this account to build up funds to use one day as a down payment on a home. By moving the funds from a grandparent’s taxable account to a non-tax account this will also reduce the family tax bill.

Paying Down Mortgages

Let’s assume you have the option of investing $100,000 into a two year guaranteed investment certificate or gifting these funds to your granddaughter who is paying 4.6 per cent on her mortgage. The $100,000 would result in $2,000 of interest income which would be fully taxable. If the grandparent was in the 30 per cent tax bracket then the government would receive $600 of this money. If you’re in a higher tax bracket, the amount would be higher and you would also be in the position of potentially losing even more government benefits. Your granddaughter is currently paying $4,600 annually in interest on her mortgage and is not able to deduct the interest costs. By gifting $100,000 the government would receive $600 less, you may receive more government benefits next year, and your daughter would save $4,600 a year in interest costs and also have a reduced mortgage.

Buying a Home

Buying a home is perhaps the toughest financial hurdle for most young people to clear, as salaries are insufficient for many to qualify to buy even a basic home. In one case, a grandmother considered moving into an assisted living arrangement. She had a grandson and two granddaughters, who wanted to purchase her home, which has a $600,000 value. The grandmother has significant pensions and capital outside of her principal residence and does not need the full proceeds from selling the home. During a meeting we mapped out a plan where she gifted each grandchild $100,000. The grandson could purchase the home from his grandmother for $500,000 ($600,000 fair market value less the $100,000 gift). The grandson would then be able to qualify for a mortgage for $500,000, the proceeds of which could be distributed as follows: $300,000 to grandmother and $100,000 to each granddaughter for them to each use towards the purchase of a home.

Insurance Products

In a small number of situations where people are wishing to keep certain gifts out of public record, an insurance product is a solution. By naming a specific beneficiary the insurance proceeds would bypass one’s estate and avoid probate fees. We have also seen situations where grandparents have taken out a second generation insurance policy to leave a significant gift to grandchildren.

Insurance needs depend on most likely outcome

Most people have automobile, provincial health, and home insurance.  All are required to drive, have medical care, and get into a mortgage.  Beyond these basic types of insurance, there are different opinions when it comes to the need for additional protection.

Two risks people face are dying too soon or living too long.  There are financial products specifically designed to cover these risks – life insurance fory dying too soon, and an annuity , which can provide a cash flow for life, covers the risk of living too long.

Getting sick, becoming disabled or having a critical illness may be a concern for some people, while others may worry about long-term care when they age.  Insurance products are available to cover a variety of different types of risks.

It is even possible to insure a lot of the things we buy today.  What do you say when a sales person suggests you buy the extended warranty on that new appliance?  How about an extended warranty on the $100 electronic gadget?  For the people who say, “yes” to the extended warranties they are getting the peace of mind in the event it breaks.

There are some obvious situations where we feel insurance makes sense.  A prime example of this is a young family with children.  If only one parent is working then it would be devastating if that same person passed away.  Term insurance is inexpensive and covers a significant risk.

We have reviewed financial situations where individuals are paying so much in insurance premiums that they are actually sacrificing the ability to save for retirement.  This creates the risk of not having enough to live on at retirement.  On the flip side, we have had discussions with people who have effectively decided to self-insure by putting a little extra in the bank.  If no emergencies come up then they feel they are not out any of the premiums paid for coverage and they are a step closer to retirement.

It is important to look at your lifestyle and genetics.  If you are a heavy smoker or drinker then you have greater health risks than someone that does not.  If you have a high stress profession you are also exposing yourself to greater risks.  We get an idea of family life expectancy by asking the age of parents, grandparents, and siblings.  Understanding your own genetic map and lifestyle should help in looking at the most likely outcome.

As with most things in financial planning, balance is important.  We get lots of questions when it comes to insurance.  Most conversations start with us explaining that our approach is to plan for the most likely outcome.  Even with this approach, some part of the plan will likely unfold different than what we anticipate.

One example illustrating the most likely outcome relates to long-term care.  We will use a recent conversation that we had with Lila, who is 67.  Lila had read something about long-term care insurance and felt that she should be buying some to protect herself.  Lila did not have a lot of discretionary income.  One of the first questions we asked Lila was if she planned on moving into an assisted living retirement home when she was older.  Her plan was to live in her home for at least another 13 years and then move into an assisted living retirement home, likely for the last ten years of her life.

Our conversation then dealt with planning and whether she wanted to leave her house as part of her estate.  Lila had no strong emotional attachments to the home and no family nearby that was interested in living in it.

We projected the future value of her home when she turns 80 years old.  We compared this with the present value of the cost of ten years in a retirement home when Lila is 80.  The conclusion was that the estimated proceeds from selling Lila’s house was more then sufficient to cover the costs of assisted living, and allow her to leave an estate.

One thing for sure is that some people worry more about protection than others.  Even the couples we deal with may be at different spectrums.

By looking at the most likely outcome you should be able to make some better conclusions and create a balanced protection strategy.

If you’re over 65, a GIC alternative

Individual investors who have money invested in term deposits or Guaranteed Investment Certificates through a bank or credit union should also explore insurance contracts often referred to as Guaranteed Interest Annuities, or GIAs.

First off, answer the following questions:

  • What are the fees to sell my investments if I were to pass away before they mature?
  • Are my investments subject to probate fees?
  • If I were to pass away, how quickly could my beneficiaries receive these funds?  4)  What is the best way to structure my affairs to reduce estate costs?
  • Does the interest income I earn qualify for the pension income amount?
  • Am I able to split the interest income with my spouse?
  • Am I able to name a beneficiary for my non-registered term deposit or GICs?

By answering the above questions you will better understand why we feel there is a good alternative for some investors aged 65 and older.  Insurance products have benefits, especially when it comes to estate planning.  Insurance is useful to provide risk management, tax benefits, creditor protection, and the ability to name specific beneficiaries (even for non-registered accounts).  Probate fees may be avoided by naming beneficiaries as opposed to your estate.

Insurance companies offer very similar products to Guaranteed Investments Certificate; but come with some added benefits.  Collectively these products are often referred in the industry as Guaranteed Interest Annuity but each insurance company has a specific name for their products – Manulife’s are Guaranteed Interest Contract; Standard Life calls them Term Funds; and Canada Life has Guaranteed Interest Terms.

GIAs have benefits that term deposits and GICs do not offer and we will illustrate this comparison using Helen Stevenson, a woman who has been widowed.

Helen has a net worth of approximately $1 million split between her personal residence ($600,000) and non-registered bank GIC monthly pay portfolio ($400,000).   Helen is in her mid eighties and came to see us to prepare an estate plan.  She is in the process of selling her home and moving into an assisted living home.   In our estate plan for Helen she was surprised to learn that if she were to pass away today that her entire estate would be subject to probate fees.  We estimate probate fees alone to be approximately $14,000 as all investments, including personal residence, are currently flowing into her estate and subject to a fee of 1.4 per cent.     

Cost Savings:  GIAs are able to bypass the estate.  This will be a considerable cost savings for Helen through reduced fees for executor, probate, legal, and accounting, as well as other costs associated with a typical estate.  By converting her GICs to GIAs she would save $5,600 in probate alone; this does not include other possible savings.

Naming a Beneficiary:  The ability to designate a beneficiary allows you to control who receives the proceeds of your investments.  There is no fee to change beneficiaries, and this process is much easier than changing your Will.  This is especially important for investors who own term deposits and GICs in an individual non-registered account. Helen established four different GIA contracts with different insurance companies, each for $100,000.  The first contract has her four children named as beneficiary, the second contract names her eight grandchildren, the third contract names four friends, and the final contract names four charities.  Helen will live off of the monthly income during her lifetime.  When she passes away, the proceeds from the contract are paid directly to each named beneficiary.  Helen can easily update the beneficiary selection to the contracts with no cost.

Redemption:  There is no cash surrender charges at death for GIA contracts.  Your named beneficiary will receive the original deposited amount plus any accumulated interest.  Proceeds are paid out directly to the beneficiary with minimal delay.

Privacy:  Proceeds distributed from insurance products to named beneficiaries not only bypass probate but also avoid public record.  Every family situation is unique.  Often at times a solution to a complex situation is an insurance product that bypasses the estate and public record.  This is particularly important these days with complicated extended or blended family situations.  Creditor protection is also a benefit of insurance contracts available in most provinces across Canada.

Converting Interest Income to Pension Income:  Interest income earned from GICs is reported as interest income in Box 13 of a T5 slip.  Income reported in this box is not a qualifying source for the pension credit or pension splitting.  GIAs are subject to special rules under the Canadian Income Tax Act (accrued income–annuities reported in box 19 of a T5 slip).  Income reported in box 19 may provide benefits if you are 65 or older, especially if you are married or do not earn other qualifying pension income.  The amounts reported in box 19 qualify as pension income for investors who are 65 or older.  This is important as it enables individuals to claim the pension income amount (if not already claimed).  The pension income amount effectively allows investors to exempt up to $2,000 of eligible income each year.  Note that couples can each take advantage of this.

Pension Splitting:  An additional benefit of GIAs is the ability for couples eligible for the pension income amount to also split the income with their spouse.  This can be done without the concern of the Canada Revenue Agency applying the attribution rules of one spouse in the household earned the base capital earning the income).   The attribution rules are complex but effectively prevent inappropriate income splitting.

Flexibility and Protection:  You may choose between different payment options such as monthly, quarterly, semi-annually, or annually.  You may also choose from different issuers and maturity dates with a wide selection of terms that fit you.  GIAs can typically be purchased to a maximum age of 100.  GICs have CDIC coverage for up to five years.  GIA contracts do not have a time limitation for coverage through Assuris (see for further details).

Insurance companies have features relating to their GIA product that may be different from the general information above.  Not all investment advisors have the required license to sell GIAs.  When we are selling life insurance products we are acting as Life Underwriters.

Prior to acting on information in our columns we recommend you obtain professional advice to determine if GIAs may be suitable in your estate plan.


Consider universal life

Investors who have maximized their RRSP contributions realize their RRSP contributions already realize the benefits of tax-advantaged growth.

But if you want to make the most of your estate or are looking for other growth opportunities, you may want to consider a universal life or whole life insurance policy.

Universal life (UL) can seem somewhat complex, but it is very flexible and allows you to control any investment options.  UL has the potential to have a significant positive impact on retirement income and estate planning.

UL is both a financial product and life insurance bundled together with the benefits of tax-advantaged investing.  Individuals pay premiums for a UL policy similar to a term life or a whole life policy.  The main difference is that deposits over and above the premium amount may be deposited into an investment account.

There are a variety of investment options to choose from. The deposited amounts accumulate on a tax-deferred basis.  The Income Tax Act has constraints on the size of the investment component.  Proceeds from a UL policy include the insurance and investment component and are usually paid out to the named beneficiaries on a tax-free basis after death.

Retirement Income

A UL policy can also be used to enhance retirement income.  Withdrawals are possible through loans by pledging the UL policy as collateral. The loans are repaid from the insurance payout after death.  Another option may be to withdraw a portion of the value of the deposits in the investment account.  However, this type of withdrawal may be subject to taxation.

Maximizing Estate

A UL policy may provide for enhanced retirement income and/or a maximized estate value.  As noted, amounts can be withdrawn through loans or policy withdrawals.  After death the loans are repaid and any amount in excess of what is owed on the loans are paid out to the designated beneficiaries on a tax-free basis.  An estate can be maximized if no loans are taken and no values have been withdrawn.


UL is a flexible type of life insurance product and ensures that a customized approach is used to meet the individual’s needs.   As financial circumstances change so can the amount of the premium payment – subject to certain restrictions of the Income Tax Act and the need to maintain sufficient value within the policy. Other components that highlight the flexibility is the possibility to increase or decrease the amount of insurance, add additional lives insured, or substitute one life for another.

Whole Life

This is the insurance product that our parents loved to hate.  It is less flexible than UL, but offers some distinct differences that can be beneficial.  It is permanent in nature (in force for life) so it is ideal for use in estate planning.  Whole Life builds tax-sheltered cash values, but the investment component is managed by the insurance company.  This investment component pays (non taxable) dividends which are usually used to increase the death benefit.  The recent “de-mutualization” of life insurance companies resulted in their stocks being available to all of us.  More and more people understand the financial strength of these companies.  Many individuals are also realizing that whole life is a very suitable product for some situations.


Certainly it is necessary to be in sufficient health to be eligible for insurance. UL and Whole Life policies are generally most suitable for investors aged 40 or older.  The individual should have already maximized their RRSP and still have remaining funds to invest.  It is important that they be young enough to allow for growth.  Individuals in the higher tax brackets will benefit more than those in lower tax brackets.  Those considering a UL or Whole Life policy should have also paid off all of their non-deductible debt.


Mr. Sanders is a non-smoker and purchased a UL policy when he was 50 years old.  He sold one of his businesses at that time and obtained excellent financial advice.  One of his objectives was to ensure that he could leave a significant estate for his children.  Mr. Sanders decided that a UL policy with an initial death benefit of $500,000 provided the most flexibility.  He plans to make annual deposits of $15,000 for 15 years.

Often it is difficult to see the merits of a strategy unless one compares it to an alternative investment option, such as investing in guaranteed investment certificates (GICs) earning 5 per cent.  We will also see how both develop over the next 35 years, assuming a consistent 5 per cent rate of return and that Mr. Sanders lives to age 85.

In the first year Mr. Sanders could deposit $15,000 into a GIC, earn $750 interest income and pay tax of $328 on this income, ending with $15,422.  Alternatively, this $15,000 could be used to fund the first year’s premium for the UL policy.  If Mr. Sanders chose to fund the UL policy and were to pass away after the first year then the beneficiaries would receive approximately $509,801.  This represents an estimated difference of $494,379 over the GIC option.

What happens if Mr. Sanders lives to be 85 years old?  After 35 years of tax-free accumulation within the UL policy, his children will received a tax-free benefit of approximately $790,837 upon his death.  The GIC alternative would result in approximately $493,041, a difference of $297,795.  As noted above, the difference is even greater if Mr. Sanders passes away prior to age 85.

If you can recall from our previous articles, one benefit of insurance products is the ability to bypass the estate (avoid probate) and avoid public record.  These advantages are in addition to the differences noted above.

Mr. Sanders could have also chosen to enhance his retirement income through policy loans.  Mr. Sanders liked this flexibility but found other sources of income were sufficient to fund his retirement and did not require any policy loans.  The primary purpose of this UL policy was for Mr. Sanders to maximize the amount he could leave to his children.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors.

Are your beneficiaries ready?

Are the beneficiaries of your insurance policies ready to receive an inheritance?  Are they responsible enough to effectively manage a large lump sum?  How would a significant amount of money motivate or change your children?  These are all questions that have led some insurance companies to offer the flexibility to pay death benefits out either through an annuity, as a lump sum or an alternative arrangement.

Here’s how they work:

Lump Sum:  Most insurance products, such as life insurance policies and segregated funds, have named beneficiaries.  Upon notification of the death of the life insured the proceeds have historically been paid out as a tax-free lump sum amount to the named beneficiaries.  Many individuals are hesitant to leave a lump sum to certain beneficiaries.

Annuity Option:  An alternative which we feel individuals should be made aware of, is the ability to pay out the death benefit by way of an annuity.  Generally this is accomplished by completing one simple form and ensures that death benefit proceeds from the insurance product are used to purchase an annuity for the beneficiary.  The annuity may be purchased for a set term or for life.  It may also be deferred or start paying a cash flow immediately.

Educating Beneficiary:  We encourage individuals who are intending to leave significant assets to their children or other beneficiaries to spend time educating them.  In some cases this may involve bringing the beneficiaries into meetings with your investment advisor.  Ensuring your beneficiaries know how to handle a significant gift may be the best gift you leave them.

Illustration:  Mr. Lewis has four adult children, all of whom have taken different paths in life.  He has listed all four as equal beneficiaries (25 per cent) on his life insurance policy.   Based on discussions with Mr. Lewis he chose to treat each child differently with respect to their portion of the death benefit.

Child 1:  Child 1 has had a difficult time maintaining a job and feels that he may not be responsible upon receiving a lump sum inheritance.  Mr. Lewis has decided that the portion of the death benefit proceeds paid to this child should be used to purchase a life annuity.  The monthly payments will be smaller but will last the child’s lifetime.

Child 2: Mr. Lewis felt that Child 2 had consistently demonstrated a hard work ethic and was responsible enough to receive a lump sum inheritance.   He mentioned that Child 2 has already started saving and has done some investing already.   Mr. Lewis felt comfortable leaving this child a lump sum cash amount.

Child 3:  Mr. Lewis noted his uncertainty with respect to how Child 3 would deal with a lump sum inheritance.  Mr. Lewis felt that a twenty-year term certain annuity would likely be more suitable for this child.

Child 4:  Mr. Lewis is very proud of his fourth child.  He has just reached the age of majority and is planning his university education.  Child 4 is still relatively young but is responsible for his age.  As a result, Mr. Lewis felt that a ten-year term annuity would be the most appropriate to ensure funds would be available to the child to complete his university education.

Mr. Lewis has the flexibility to change how the death benefit portion will be paid out to the respective beneficiaries.

Formal Trust:  The annuity settlement option may provide a solution for simple arrangements without the set up costs of a formal trust.  Individuals with more complex situations or those who would prefer a structured approach should consider a formal trust.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors.


Annuities just might enhance cash flow

Many of us will be fortunate to live longer than previous generations. The average life expectancy for a man and woman is 80 and 84, respectively. Although that’s good news, many fear they may outlive their savings while others may be concerned about geopolitical risk and the volatility it may create in the domestic and global financial markets.

Annuities are considered insurance products and pay a stream of payments that are structured over a pre-determined period.  These payments can be distributed monthly or annually.  The terms of various annuities can be for a set period (i.e. 10 or 20 years) or for life.  Life annuities normally come with a guarantee period to ensure a minimum amount of payments in case of premature death.  They may also be set up on a joint basis with the income payable until the last death.  Individuals who are concerned about outliving their savings may find the life annuities of particular interest.


Not all individuals have the desire to leave an estate.  Those who do may still consider annuities provided they qualify for an amount of life insurance equal to the desired estate.  When a life insurance policy is purchased in conjunction with an annuity it is referred to as an insured annuity.  Often the after tax net cash flow from an insured annuity exceeds the after tax investment returns of an individual investment in guaranteed investment certificates (GICs).


Annuities may be purchased from either registered or non-registered accounts.  When purchased with non-registered funds, the payments from an annuity may be taxed on a prescribed basis resulting in only a small portion of the payments being taxable.  A portion of each payment is considered a return of capital (non-taxable portion) and the remainder is reported as income.  When the payment is received from a registered account the full payment is generally reported as income.

Federal Budget

The latest federal budget announced that for 2006 and subsequent years the Pension Income Credit amount is increased to $2,000 from $1,000.  Individuals that are age 65 and older that do not have others pensions (CPP and OAS do not apply) may want to consider purchasing an annuity that would create at least $2,000 of qualifying pension income annually.  Couples may each take advantage of this credit.  The pension credit would offset the qualifying income allowing some couples the ability to withdrawal up to $4,000 per year tax-free from their RRSP.


In a previous article we introduced Mrs. Taylor, age 75 and in the highest marginal tax bracket in British Columbia.  Through our discussion she was considering charitable insured annuities.  Today we are comparing a regular annuity against an insured annuity.  Below we have outlined the monthly cash flow for three scenarios, a GIC investment, insured annuity and regular annuity:



The three options above reveal that the greatest net cash flow comes from the regular annuity.  Remember that the regular annuity provides no estate; the capital used to purchase the annuity is not returned.  With the insured annuity above, the monthly cash flow is greater than a GIC investment earning 4.5 per cent and the capital is returned through the death benefit of the life insurance proceeds.  The life insurance component of the insured annuity provides the ability to allocate the death benefit proceeds to more than one beneficiary, bypass probate and avoid public record.

Points of Concern

It is important to note that the investor is comfortable with the determined cash flow which generally does not adjust with movements in interest rates or keep pace with inflation.  Investors would be wise to consider their current state of health along with their family medical history.

Our rule of thumb when it comes to annuities is that an individual should never put more than one third of their investments into an annuity.  It is important to keep some funds liquid in the event of an emergency.

Many individuals may want to take a hands-off approach to their finances during retirement.  Most certainly would prefer not to worry about their finances and know exactly how much income is available each month.  A life annuity may provide the equivalent safety of fixed income and the comfort of knowing the payments will last a lifetime.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors.

Insurance is for risk management and planning

There should be a specific purpose or reason for buying insurance.  It is relatively easy to calculate the insurance need from a risk management standpoint, but we encourage individuals to understand the full benefits of insurance.  There are so many situations where strategic planning is enhanced with insurance products.

People who have complicated family situations or extended families need to take extra care when updating their will and arranging financial affairs.  What ever your case, get professional advice.  You may be surprised to learn of an insurance strategy which will solve a specific problem or provide flexible solutions to address changing circumstances.

When most people think of insurance the first thing that comes to mind is life insurance.  Others such as annuities and segregated funds, are also considered insurance products.  In many cases, an individual may combine different insurance products to create a strategic strategy that meets their overall short and long term objectives.  Insurance needs change through various life stages and it is important to review the relevance of existing policies.


Risk Management

Having a strategy to deal with uncontrollable events such as death, disability, critical illness and general personal health is an integral part of financial planning.  Others may be concerned about not having enough income at retirement or outliving their savings.  Insurance allows individuals and their families to have more comfort should an uncontrollable event occur.

Tax Benefits

Certain insurance products may be attractive solely as a tax benefit.  We will outline a few of the potential tax savings of each insurance strategy highlighted in this series.  Prior to purchasing any insurance product we recommend that individuals meet with their financial advisor to make sure the policy is consistent with their overall risk management and financial plans.

Creditor Protection

Professionals and small business owners may want to ensure that their personal financial assets are not subject to professional liability.  The potential for creditor protection on insurance products is an attractive feature for individuals faced with this concern.   Professional advice should assist in determining whether these would apply to your situation.  The creditor protection feature may be compromised if the insurance product is purchased to avoid current or anticipated insolvency.


In order to fully appreciate insurance, it is crucial to note the importance of naming beneficiaries.   Provided the individual’s estate is not named the beneficiary then the proceeds relating to any insurance products bypass the estate.  This is important because an individual’s will determines how they wish their estate to be divided.  If the will were contested (Wills Variation Act) then only those assets that flow through the estate would be considered.  In most cases you are able to change the beneficiary selection in addition to naming a beneficiary without their knowledge; you are not required to obtain the beneficiary’s consent.

Avoiding Probate

As noted above, insurance products have a beneficiary.  The beneficiary may be the individual’s estate, charity, individual(s), etc.  Probate fees may be avoided by naming beneficiaries as opposed to an estate.  Only those assets that flow through the estate are subject to probate.  Death benefits are generally paid without significant delay.

Public Record

Confidentiality is very important to most individuals.  It may be disconcerting to some individuals that for a minimal fee, their private will – something they have kept confidential for years – is accessible to the public to view after their death if their will is probated.  Proceeds distributed from insurance products not only bypass probate but also avoids public record.

We encourage individuals to consider insurance strategies in their overall financial plans.  Even those individuals that feel they have no need for insurance may be surprised to learn ways to reduce risk, transfer wealth more effectively and increase privacy.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors.


Planning for the uncontrollable

Having a strategy to deal with uncontrollable events such as death, disability, critical illness, and general personal health is an integral part of financial planning.  Mr. and Mrs. Jones want to know their family would be taken care of if something were to happen to them.

Nearly all of us insure our house and vehicle.  The house may provide your family a place to live and the vehicle a means of transportation.  Do you insure your life? Your life provides a means of earning income to support your family, the house your family lives in and the vehicle you drive.   If only one member of the family works (or is the primary provider), it is important to look at the financial outcome if that individual were to become incapacitated or pass away.  For a couple with dependent children it may be difficult for the surviving parent to replace the lost income resulting in immediate hardship.

Assessing Insurance Needs

The Joneses are in excellent health and both work, so the risk is split somewhat if either one of them were to pass away, become disabled or were to be diagnosed with a critical illness. Assessing the insurance needs for them started with us looking at time horizon, cash flows, income and expenses. We also took into consideration any current insurance policies that the couple might have in place, which in many cases is provided through an employer offered group plan. In the Joneses case, Jill already has a solid disability plan in place as well as group life insurance through her employer.  Jack had no current insurance coverage.

Our Recommendation

Although Jill had life insurance through her employer, the needs analysis indicated that the amount she had wasn’t enough in the event of her death.  We recommended that the couple apply for individual term policies; one for Jack (with Jill as the beneficiary) and one for Jill (with Jack as the beneficiary) to fulfill their needs in the event of either of their deaths.

Term insurance would enable the Joneses to have the flexibility of dealing with a variety of insurance providers.  Other benefits relating to personally owned term insurance includes the fact that the premium or in other words cost of the insurance is fixed for the term that is purchased (in this case 20 years). Further, they may be renewable for additional terms once the initial term has passed and also allows the policy to be converted to a permanent insurance product that can be used to address needs that may exist at later stages in life.

Since they also expressed a need to have protection in place in case their health changed dramatically, we also recommended that the couple apply for critical illness insurance and for Jack to apply for disability insurance.

Dying prematurely, becoming disabled, and suffering a critical illness are some things you can’t control –  but you can plan for.  If you are unsure whether your current life, disability, and critical illness insurance policies reflect your needs, we would be pleased to provide a needs analysis and additional information.