Don’t forget insurance when retirement planning
From life insurance to annuities and segregated fund products, insurance products can provide the peace of mind clients are looking for
By: DAVID ISRAELSON
Date:July 7, 2016
Insurance tends to be one of the more neglected aspects of financial planning, yet it should be at the top of the list when advisors are discussing retirement with their clients.
“When it comes to making a significant contribution to clients’ lives in the face of adversity and death, insurance goes a long way,” says Sandra Foster, Toronto financial author and president of Headspring Consulting Inc.
As the population ages, more and more Canadians will be living with long-term illness and disability. According to Statistics Canada, disability rises with age – 26.3 per cent of Canadians aged 65 to 74 reported having a disability in 2012, while 42.5 per cent of Canadians aged 75 or over reported having a disability.
“Insurance is an important part of a full financial plan,” says Dean Chambers, vice-president, individual insurance at Sun Life Financial. “Health insurance can help if a family member suffers a serious illness or has an accident. Life insurance is a crucial component of estate planning and can hasten settlements. It gives people options after there has been a death in the family.”
Mr. Chambers adds that life insurance can also provide investment opportunities, “through cash value in a permanent policy, as well as tax-deferred savings opportunities.”
Advisors should explain to their clients that the amount of coverage clients need and the type they buy will depend on their individual circumstances and needs.
“Individuals should carry sufficient life insurance if they have liabilities and/or dependents to take care of should they die,” says George Christison, British Columbia-based advisor and founder of the InvestingForMe.com website.
The two most common types of life insurance are term life and permanent life, says Mr. Chambers.
“Term life insurance provides temporary protection that you can customize with clients to meet changing needs,” he says. “It’s simple and affordable, providing a fixed amount of insurance for a specific period of time. In the event of death, the policy pays a cash benefit, tax-free, to the beneficiaries.”
Permanent life insurance provides lifetime coverage, with the potential added benefit of accumulating cash value over time.
“The costs of permanent life are usually guaranteed when you first buy the policy,” says Mr. Chambers. Some permanent insurance plans enable you to pay for a limited number of years and then never pay again, he adds.
Age can make a big difference when it comes to the cost of insurance.
“In most cases, the older you are, the more the insurance premiums will be,” says Mr. Chambers. “The cost of individually purchased life insurance depends also on your gender, health, medical history, and lifestyle.”
When it comes to health insurance, there are four different types of healthcare products that can provide protection at different stages in a client’s life, he explains.
“Personal health insurance provides coverage for health expenses not covered by your provincial plan, and you choose the plan with the health benefits that best suit your personal drug, dental and supplementary health and wellness needs,” says Mr. Chambers.
Critical illness insurance helps pay the costs associated with surviving a life-altering illness.
“If you suffer a covered illness, once the waiting period expires, you’ll receive a tax-free cash payment that’s yours to spend any way you wish,” he adds.
The third type, long-term care insurance, helps cover the cost when you require substantial assistance from others due to diminished physical or mental abilities. Finally, disability insurance helps protect your income if you become disabled and can’t work.
Another insurance product that is often overlooked by investors is the life annuity. This product offers regular payouts, or guaranteed income, for as long as the insured individual lives, in exchange for a lump sum payment or series of regular payments.
“Locking in guaranteed income now, even for a portion of your portfolio, reduces the risk that market changes could ultimately lower the value of your assets and the risk that you could outlive your money,” says Brennan Kennedy, vice-president, individual wealth at Sun Life.
Like life annuities, segregated fund products are insurance-based investment products that provide guarantees for investors. Segregated fund contracts allow investors to participate in the growth potential of markets and retain access to their funds, while guaranteeing 75 to 100 per cent of a purchaser’s premiums when the contract matures or the annuitant dies. Some segregated fund products also offer income guarantees.
Advisors have a great opportunity to educate clients about the peace of mind that insurance-based investment products can provide, says Mr. Kennedy. According to the 2015 Canadian Guaranteed Lifetime Income Study, a joint survey conducted by CANNEX Financial Exchanges Limited and Greenwald & Associates, fewer than half of Canadians said they were familiar with income annuities, and only 26 per cent were familiar with segregated funds.
“Yet nearly two out of three retired Canadians who were surveyed said that guaranteed income is a source of happiness,” he says.
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