Insurance vital to financial planning

A financial plan is not complete without a well-thought-out insurance strategy. Here are the two most common types of insurance, along with points to consider when evaluating the best solution for one's needs. Successful investing involves a long-term commitment with regular installments in a well-diversified portfolio. But what if the investor is rendered disabled due to a serious accident, or worse? Insurance protects one's assets from unknown risks, helping to secure their financial future and the future of their families.

This is why a well-thought-out insurance strategy is vital to financial planning. A disability or untimely death can render a financial plan ineffective, and leave a family without finances to cover expenses and replace your income. Assessing one's insurance needs and selecting the most suitable options is a fundamental step in the financial planning process.

The first step is to analyze your present financial position (i.e. current income, debt load, expenses) and consider the impact of an immediate loss of income before insurance benefits begin. Will you or your family have enough for day-to-day expenses and cover any immediate additional costs? What does the picture look like after the insurance payout? Will you or your family be able to meet expenses and eliminate debt over the long term? Will you or your family be able to cope with ongoing costs for personal care and possibly travel to another province (or country) for treatment, if need be? Will you or your family have sufficient savings to produce the income required in retirement? If the cash flow statement comes up short, you should consider insurance.

There are many types of insurance you can choose from. Two of the most common are described below, along with points to consider as you evaluate which options provide the best solutions for your specific needs.

This type of insurance is commonly introduced through an employer -- through group benefits -- and will generally replace from 65 to 70% of an employee's total gross earnings. The amount of disability insurance you qualify for will depend entirely on how much income you will lose due to your illness. It is very important to understand that most 'group plans' offer only short term disability, meaning coverage will typically last for 90 days to one year. These plans must be augmented by permanent disability plans, which typically cover an insured to age 65.

There are basically three types of disability insurance. A conditionally renewable policy provides coverage for someone in a fixed profession. If this person switches to another profession, the policy could be discontinued or the premiums may change. A guaranteed renewable policy can never be cancelled (unless the policyholder fails to pay policy premiums), but the premiums can go up. A non-cancelable policy cannot be cancelled (unless the policyholder fails to pay policy premiums), nor will the premiums go up.

Different disability policies have different terms. You, in conjunction with your advisor, should carefully review the definition of disability and other variables that can help you to customize the policy and control costs.

Life insurance is probably the type of insurance that is most familiar to most people. There are three main types of life insurance. Term insurance -- one of the simplest and most popular types of insurance -- provides "temporary" coverage for a set period of time, with set premiums determined at the time of purchase. When the term of the policy expires, the coverage also expires (many term policies come with a 'renewable' option, meaning that at the end of the term, the policy-holder may renew the policy without a medical exam, however at a rate based on the attained age at time of renewal. There is also a 'convertible' option, that allows the policy-holder to convert the policy into a permanent policy during the term, provided the policy is in good standing.)

Permanent or whole life insurance combines lifetime coverage (as long as premiums are being paid), a level premium, and a "cash value" (a lump sum building up inside the policy).

Universal life is a form of whole life policy that includes a self-directed tax-sheltered investment component. Many people do not realize that insurance can play a very important direct role in investment strategies, in that investments made inside a life insurance policy, under certain conditions, grow on a tax-sheltered basis, similar to growth inside an RRSP. This is a very useful strategy when business owners are trying to develop tax-advantaged strategies to deal with surplus funds trapped in their corporations.

For people who do not want, or cannot afford to pay a high premium, term insurance may be the best solution since it offers the maximum death benefit for the least amount of money. The trade-off is that term insurance is for a set term, and at time of renewal the cost will increase based upon your age at that time.

You and your financial advisor should carefully evaluate the insurance options available to you so that you can tailor a risk management plan that best meets your needs. Being properly insured will go a long way towards securing your financial success, and protecting you and your family from catastrophic financial loss in the event of an untimely illness, injury or death.

* Joel Attis is a Financial Advisor with AttisCorp Financial Group, Inc. in Moncton.