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.