The Life Cycle of Insurance
This weekend I had some down time and I decided to put on NFL football. The Seattle Seahawks (5-1 this season) were facing the Buffalo Bills (6-2). The Seahawks managed to score 34 points. If you know football, with 34 points, there is a good chance you are going to leave the game with another mark in the victory column. Unfortunately for Seattle, their strong offence was unable to make up for a weak defense. The Bills ended up pouring in 44 points to take the victory.
“A strong offence, can never make up for a weak defense.” This got me thinking that a client’s financial plan and overall wellbeing is no different. Your offence would be your assets, such as stocks, funds, properties, etc. that may grow in value and support your retirement. However, as the Seahawks proved on Sunday, it could all be for nothing if you are not protecting it. You can experience strong growth, be in a great position, and suddenly life throws a curveball (premature death or disability), putting that plan in jeopardy. In financial planning, your greatest defense is insurance.
Our earlier blog 3 Questions to Help Prioritize Your Insurance Needs, spoke about the different types of insurance available, but how does that insurance fit into a plan? What do you need to do along your journey from income accumulation to retirement to estate transition, to ensure your plan stays intact? Working with professionals, we ensure we have an airtight plan to protect the wealth they build. Below is an example insurance timeline, showing how insurance can be your ultimate defense to support your high-scoring offence:
Early Income Earnings Years (25-35 years old)
During these years, young professionals often experience the following life events:
- Complete education and transition to the workforce
- Buy a house
- Get married/start a family
- Start building their financial/wealth portfolio
During these years, the short-term insurable need would be the greatest. The defense should be focused on the “IF”. If you’re injured, if you get sick and if you die, your plan will continue unscathed. Individuals tend to take on the greatest amount of debt and have 30-40 years of income generation ahead of them. Also, expenses are higher, and this period generally involves many life events happening in a short time. During this period, a good defense would look like:
- Disability Insurance – The proper plan will replace lost income and that lost income will grow with inflation. The goal is to manage debt obligations and expenses, and still keep planning for the future.
- Term Insurance –During this period there will be a large financial impact on your family “IF” you’re unable to bring in income. Your financial plan is in the early stages, so you need to replace future earnings and wealth accumulation. It is also the most cost-effective way to cover your bigger obligations.
- Critical Illness Insurance – Think of this as your short-term emergency fund in the event of a serious illness (cancer, stroke and heart attack, to name a few). It provides an immediate tax-free cash injection to help with short-term expenses or liabilities.
Early Income-Earning-Years Summary:
The proper insurance protects your paycheck and large assets against setbacks in this life cycle.
Wealth Accumulation Years (35-55 years old)
During this period, many experience the following life events:
- Income increases based on years of experience and inflation
- Children transition to post-secondary school and leave home
- Larger debts are either paid off or have a lower outstanding balance
- Investments have grown and accumulated
A GOOD LINE OF DEFENSE:
Disability Insurance – During this time, one would look at having their disability insurance increase with their income to cover increases in spending/lifestyle. Increases in income generate a greater opportunity to grow your wealth plan.
Term Insurance – With debts being paid down, and wealth accumulating, the need “IF relating to Term Insurance decreases. The conversation of “when” may enter the conversation towards the latter part of these years. This leads to the need for permanent insurance.
Permanent Insurance – The role of permanent insurance in any strong defense can come in many forms. It can be used to help with estate planning (taxes, equalization of an estate to its beneficiaries, or cash values that may be used to supplement retirement). One may think this is early to start thinking about this stage, but at this point, insurance cost is lower and there is potential to have insurance paid off before retirement.
Transition to Retirement (55-65 years old)
During this period many will experience the following life events:
- Transition out of career, either full time or part time
- Start to utilize savings and investments as income sources change
- Finalize retirement plans
A GOOD LINE OF DEFENSE:
Disability Insurance - Depending on life goals, some may retire at the start of this stage and some may retire after. At this point, your need for Disability insurance would slowly decrease and potentially transition to a Long-Term Care need (requiring facility or in-home nursing care) depending on your health and financial situation. This can be accomplished through a specific Long-Term Care policy that can be transitioned from some older Disability products or purchased as a stand alone policy.
Permanent Insurance – Some permanent insurance policies have cash value that can act as an income source to subsidize long-term care should you need it in retirement. This is the opportune time to revisit any estate and taxation needs one may have, and put additional permanent insurance in place. At this life stage, Term insurance is typically cancelled or converted to permanent as the larger debts should be gone and the “IF” scenarios pose less financial threat.
Insurance plans are typically finalized in this stage to encompass all estate and taxation needs.
Retirement Years (over 65 years and onward)
Retirement lifestyles can vary. The following is true for most:
- Spending habits change and are not linear: as people age they tend to spend less money on lifestyle
- Health may play a role in retirement plans, either one’s own or that of a loved one
- Wealth deaccumulation begins
A GOOD LINE OF DEFENCE:
Permanent Life Insurance – How retirement plays out will impact what one may do with their permanent life policy. The right policy will give you options:
- Cash Values: Some policies contain cash values that are accessed in retirement. They can be used for lifestyle, long-term care needs or to give to the next generation while you are still alive.
- Death Benefit: Some policies will continue to grow over time. As your investments and estate grow and change, these policies can help take care of that growth upon death.
- Charitable Giving: Some will use their policy to give to a charity of their choice creating a tax benefit (either now or on the final tax return).
When putting together any financial plan it is important to focus on the defense as well as the offense. Tall Oak Private Wealth has experts in both aspects who work to ensure your plan is feasible every step of the way.
Reach out to us to review and ensure your defense and offense form a winning combination.
Your Tall Oak Private Wealth Team (Written by Mehendi Kamani)
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Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, David Szalkai and Tall Oak Private Wealth, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investorâ€™s circumstances and risk tolerance before making any investment decision. Securities-related products and services are offered through Raymond James Ltd., member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member - Canadian Investor Protection Fund.