Protecting your wealth with insurance

Insurance is, of course, best known for protecting you from the risk of financial loss and can safeguard your wealth in several ways.

That’s an important consideration in developing your Total Wealth Plan, so let’s examine how insurance can help protect your wealth.

You work hard to earn an income to give your children an education, build a strong investment portfolio, and create the lifestyle you want to live. What if that employment income was suddenly not available?

At a minimum, every investor with dependents should consider term life insurance – an affordable way to help safeguard your family from financial struggle in the event of premature death and the related loss of income.

The risk of becoming disabled for a significant period before age 65 is higher than dying before that age. A disability insurance (DI) policy manages that risk by paying a monthly benefit for a predetermined duration if you become disabled (based on the policy’s definition of disability). In addition, policies usually include a waiting period before benefit payments begin.

Speaking of which, although many employers provide group DI plans, there are a variety of limitations to a corporate disability policy you should be aware of. For instance, plans are owned by the employer and may be cancelled or changed at any time. Secondly, coverage is often terminated if you leave the company.

The definition of disability usually changes after a short period (one or two years), after which your ability to make a claim may become more difficult, and you may be forced to consider a role you wouldn’t usually take if the benefit payments stop.

Finally, benefits may be capped and are taxable as income if the related insurance premiums are employer paid (unless premiums are a taxable benefit, then benefits are tax-free). Therefore, if you already have group disability coverage, you may consider supplementing that plan with your individual disability insurance policy.

You spent significant energy building your wealth, so it’s worth protecting it from the effects of taxation. This is especially critical for registered investments like RRSPs and RRIFs that become fully taxable at death. And remember, taxation concerns extend beyond your retirement assets with other investments or the family cottage possibly subject to capital gains tax.

The proceeds of a life insurance policy are tax-free and may be immediately available on death, providing the necessary funds to pay these taxes. However, in the absence of a tax-free insurance payout, beneficiaries have to consider other options to fund their tax liability, which might force them to sell assets that were not meant to be sold.

In addition to funding tax liabilities at death, some insurance policies can protect your wealth from the effects of taxation as it grows during your lifetime.

With a tax-exempt insurance policy, part of the policy premium pays the insurance cost and the rest is invested, allowing these assets to accumulate on a tax-deferred basis within the contract. Like other policies, death benefit proceeds are paid out tax-free, allowing the wealth distributed to be significantly enhanced compared to a tax-exposed alternative.

Many Canadians are retiring earlier and living longer. While a longer retirement is appealing, it does present a risk that, at some point, you may need additional financial resources to maintain your quality of life.

Three insurance solutions can help:

1. Critical illness insurance provides you with a tax-free lump sum if you’re diagnosed with a covered medical condition, such as heart attack, stroke, or cancer, so you and your family can focus on getting better without worrying about household or related costs.
2. Long-term care insurance specifically addresses the costs associated with receiving care at home or in a facility. With facility-based long-term health care costs across Canada increasing and financial support from governments shrinking, this protection can ensure quality care without placing undue pressure on family members.
3. Life annuities can provide a guaranteed lifetime income stream, ensuring you don’t outlive your capital. Each income payment is a combination of original capital and interest, where only the interest portion is taxable, so the income is tax-efficient. Annuities can be a valuable part of a fixed income strategy and can be established jointly with a spouse, ensuring income continues until the last partner dies.

Although risk is an inevitable part of life, having the right insurance solutions in place can act as a hedge and help you protect what you’ve worked so hard to build. Our Total Wealth Planning process helps you determine how you can best structure, enhance, protect and distribute your wealth, and where insurance solutions might fit into the big picture.