Use My Risk Management – A Review of Insurance Issues and Related Matters
January 2005
The purpose of risk management is to protect you against unforeseen losses that you cannot afford. You need to review all areas where such risks exist and take appropriate steps to minimize them. An important part of this risk management process is to use appropriate insurance, but there are other procedures to employ also. This article will provide you with some general comments in this important area.
Life Insurance – “Needs and Wishes”
Life insurance is used primarily to supply the money that will be required to provide for life’s necessities to the individual’s dependants as well as to provide cash for the protection of other valuable assets in the event of death. The amount and type of insurance depends on the value and/or composition of estate assets in conjunction with the individual’s desires with regards to providing for his/her family.
For example, if one member of the family is a breadwinner (only one main income earner), and his or her spouse and children cannot live without that source of income, there is a need for insurance. If the breadwinner dies, how will the family meet their basic living needs, or carry on a lifestyle to which they are accustomed? Often, the remaining spouse will return to work, but then there may be childcare expenses and re-training costs to meet. The parent may also wish to establish an education fund for the children and/or pay off the family’s loans. In such circumstances, there is a real need for life insurance.
In other circumstances, there will be enough continuing income to meet all required costs, either from investments, the spouse’s employment, or other sources, or there may be no dependants. In such cases, a person may wish to leave a larger inheritance to a beneficiary, such as a family member or a charity. In such cases, life insurance can be purchased to increase the value of the estate. An individual may wish to bequeath the full value of their estate to his or her beneficiary before income taxes are paid. A typical example is where a person has a large investment portfolio, or an RRSP, which will be subject to taxes on death. If life insurance is purchased equivalent to the amount of taxes to be paid, more money will be available for estate distributions. These latter situations are examples of a wish for insurance. It is not essential, except to meet the wishes of the person.
It is important to compare the costs and features of various insurance products to ensure you are getting a good price, and the coverage that you need or want. Life insurance falls into three basic categories: term, whole and universal. Term insurance (except Term to 100 policies) are normally aimed at short-term coverage. For example, families with young children who will be self-sufficient after they finish their education. Whole and universal life policies are two forms of long-term or permanent insurance that may be appropriate for permanent needs, such as payment of income taxes on death, or to provide support for a disabled child. Ensure you understand the nature of each type before selecting one of these products. Your insurance broker can provide you with this information, or we can advise you on the different characteristics of these products.
Disability, Critical Illness and Long-term Care Insurance
A major disability whether from illness or accident, often forces retirement in advance of expected retirement age, creating problems in planning for financial security. Not only is present income significantly affected, but also the ability for providing future income, including survivor income for dependants, is very limited. A life threatening illness even in retirement can create significant financial burdens. There is often an increased need for ongoing income to meet costs of medical care, to buy medical equipment and /or make necessary modifications to a residence or automobile. Illness may also require full-time nursing care, either at home or in a nursing care facility. There are insurance products now available to deal with all of these uncertainties. You may wish to review your options with your broker.
With respect to disability insurance, if you considered a private plan instead of or in addition to a group plan, personalized options would be available, such as “own occupation” coverage, and proportional payments so that you would never be disqualified if you obtained lower paying work in an alternate occupation. Increased coverage may also be available. Other key riders of disability policies include:
- Medical insurability rider (guaranteed eligibility for increased coverage);
- Cost of living rider to adjust benefits with inflation;
- Guaranteed renewable to avoid disqualification for various reasons;
- Zero day qualifying period, removing the requirement for a period of complete disability before qualifying for benefits.
Home and Auto Insurance
It is our opinion that automobiles should be insured with a minimum liability coverage of $2,000,000 in addition to collision and medical benefits. Many advisors recommend up to $5,000,000, and you should look at the extra safety versus the cost of this higher limit. Your house should be insured adequately for fire and theft, with replacement value insurance, and should also covered by at least $2,000,000 of liability coverage. Liability claims are increasing in recent years. Also consider an endorsement to cover water and flood damage.
For insurance claim purposes, you should list or videotape your possessions so that you have a permanent record in the event of a claim. This list or videotape should be retained in a safety deposit box or other secure location away from your premises to avoid loss.
If you wish extra protection for your personal belongings, especially if you have frequent absences from home, you should consider physical protection with burglar and smoke alarms, as well as light timers. Such protection would cost in the range of $1,000 – $2,000 to install, plus annual costs of about $200 for monitoring, if considered necessary.
Reductions in house insurance premiums are available for installation of smoke alarms, fire extinguishers, burglar alarms and similar safety devices. Also, major repairs or improvements to home will sometimes result in a premium reduction. You should ensure that you advise your agent accordingly to take advantage of discounts.
Group Insurance
We have two comments with respect to group insurance coverage through your employment. First, group insurance coverage will likely discontinue upon your retirement and you should investigate whether private coverage is appropriate, at least until you are covered under the government senior citizens plan. Medavie Blue Cross sells an insurance plan called Assured Access that you may wish to consider, especially if there is a risk of job loss or if you are a separated spouse still covered by your former spouse’s group insurance. If you meet the qualifications, this insurance guarantees you the right to acquire your own personal health insurance coverage in the future (based on your health today) if you should lose your existing coverage. Second, as discussed above, disability insurance is typically not as comprehensive in a group plan as in a private plan. You should also be aware that disability pensions are fully taxable if your employer pays any part of the premium on your behalf. (Employer payments towards life insurance are taxable benefits when the premiums are paid, but life insurance proceeds themselves are tax-free).
Travel Insurance
If you are planning a trip, especially outside of Canada, travel health insurance is a necessity. The cost of a medical emergency in the U.S.A., for example, can cost you tens of thousands of dollars for a few days in the hospital. This will NOT be reimbursed by your provincial health care plan (other than a very small portion). Trip cancellation and interruption insurance can also protect you against substantial costs, should you need to cancel your trip before departing, or should you need to return home early. Travel insurance policies are not created equally, and you need to read them carefully to see what is and is not covered. Warning – an incorrect answer on the application could invalidate your coverage, so read the questions carefully. In addition, if you leave home with a pre-existing health condition, you may also have coverage issues, and such conditions should be discussed with the insurer before leaving. Your doctor is neither an insurance specialist nor a lawyer, so do not take his or her advice on whether your coverage will still be intact. See this Travel Insurance checklist from First Rate Insurance Inc. for some cautions.
Other Insurance and Creditor Proofing Issues
There are many areas where we all face risks during life. In many cases, insurance products are appropriate; in other cases, there are steps you can take for protection. A few other areas we wish to review follow.
Personal umbrella liability insurance is a product that you may wish to review with your insurance broker. Basically, it is additional liability coverage that fills in after your other policy coverage is fully utilized. For example, if you are in an automobile accident and are required to pay a claim that exceeds your automobile liability coverage, your umbrella policy would cover you for the additional amount up to your limit for umbrella coverage. Similarly, it simultaneously covers you for any shortage in liability claims that would otherwise be covered by your home insurance.
If you act as a director for any corporation or non-profit organization, you should realize that you may be held liable for certain financial liabilities of the organization under certain circumstances.
You should also be aware of the risks of joint ownership if you hold any of your assets in this form. If the other owner encounters financial difficulties, a creditor may seize the asset and jeopardize your part ownership.
You may wish to note that provincial legislation in PEI protects Islanders’ RRSP investments from creditors in the event of financial difficulty. In addition, certain investments held with a life insurance company are also protected under certain circumstances, even if not with an RRSP. Discuss the requirements with your insurance broker.
At some time in the future, you or a family member may require full-time care in a nursing home. Government subsidization is dependent on an individual’s income and assets. If you wish to discuss possible ways to protect your estate value, please contact us.
Business Matters
If you consider becoming self-employed, either alone or in conjunction with someone else, you should meet with a professional accountant to discuss a myriad of important issues. A partial list of topics to discuss with respect to risk factors include:
- Incorporation
- Director’s liability
- Buy-sell agreements and insurance coverage
- Title of personal assets between spouses
- Personal guarantees
Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum