|Posted on 29 May, 2018 at 14:30|
Your Financial House
Part 1: The Secure Foundation - Insurances
As most of us already know, building a house upon a strong foundation is important. I recently read an article about building a house that read: “A proper foundation does more than just hold a house above ground. It also keeps out moisture, insulates against the cold, and resists movement of the earth around it. Oh, and one more thing: It should last forever.. without a good one, you’re sunk!”
When it comes to our financial houses, the foundation to build our house upon is the personal insurances. These insurances are Life Insurance, Critical Illness Insurance, and Disability Insurance. Just like a proper foundation of a house allows it to stand strong when elements out of its control are happening around it, insurances allow our financial houses to stand strong when things we cannot control happen to us and around us. And as we all know life doesn’t often go as planned and things that we don’t want to happen, happen all the time. If are foundation isn’t built properly - just like a house without a proper foundation - we’ll be financially sunk.
The role of all three insurances is to protect you, your family, your income, your current lifestyle, and offer you financial stability in the midst of hardship. Most people view insurances as an expense but they really are investments in yourself and your family, ensuring financial stability no matter what happens. And the younger you get them cheaper they will be.
Life Insurance is designed to protect your loved ones in the case you pass away. This applies to both the income earner and the stay-at-home parent. The stay at home parent does a lot of work that has ecumenic value, and thus replacing their efforts would cost a significant amount of money. Would the income earner be able to afford those extra costs? The wage earner makes a lot of money in their lifetime. How will the family live without that income for years to come? A good rule of thumb for life insurance is 10 x ones annual salary plus all debts owed. Realistically, the rule of thumb is still not enough to match most peoples economic value.
Term insurance is cheap to start but gets expensive later on in life, however, often we need a lot of insurance when we’re young and this can be a great way to make sure your family is well protected at a affordable cost. Permanent insurance lasts forever - like a strong foundation should - and it grows in value every year if properly set up, so this is can also be a really great option.
Death is mandatory, so ensuring you have a well valued life insurance policy is a good way to start building your strong foundation.
Disability Insurance (DI) is designed to protect you and your loved ones in the case you cannot work due to a disability or critical illness. Stay at home parents unfortunately do not qualify for DI, but it would be very wise of the wage earner to ensure they have a disability policy that covers their income. DI pays 60 - 70% of ones gross monthly income tax free, on a monthly basis. This ensures that ones needs and expenses can be met whether it’s groceries, bills, daycare costs etc. Six months of disability can wipe out 5 to 10 years of retirement savings. Having a monthly income from an insurance company helps protect those savings or prevents going into debt, when your typical paycheque is not available.
Critical Illness Insurance (CI) - just like DI - is designed to protect you and your loved ones in the case you are diagnosed with a critical illness. Cancer, Heart Attack, and Stroke are the 3 major illness but most policies will cover 20 - 25 different illnesses. This pays out a lump sum of money (starting at $25,000) when diagnosed with a critical illness. This lump sum payment allows you and your loved ones to cover the costs of the illness without having to use regular income, retirement savings, or borrow. You can use the money however you choose: pay for medications, for personal care, travel for specialized treatments. It can also allow a loved one to take time off work to support and provide care without having to worry about their own income. A good rule of thumb for CI is 1 to 2 times your annual salary and - if set up properly - CI can last forever, and if you don’t ever use it your family can receive all the premiums back - meaning that in the long run you haven’t lost a penny.
When something unexpected happens insurances provide financial stability, allowing us to continue paying off debt, meeting todays’ needs, and saving for the future. It also allows us to deal with the emotional turmoil of such an occurrence without having the financial stress. When uninsured or under insured, an unexpected illness, disability, or family death can have a tremendously negative and lasting impact on our finances.
Session 1 of our Summer Series Financial Planning for Young Families will dive deeper into all three of these insurances, and more. Check out the Financial Education page for more information and to register.