For most people as time passes the value of our assets should go up as shown by the green line in the graph to the right. As this happens, the amount of financial security required from life or disability insurance should decline. The risk of financial loss is eventually transferred from the Insurance Company to the individual as their wealth increases and debt diminishes.
It also may make sense then that if a disability or death occurred to the breadwinner of a family the amount of financial loss or “Risk” to his dependants is highest at the younger ages. On the other hand, if a Business Owner has just secured a million dollar loan for a five year project which is dependent on the skills of a key executive, the financial risk to the business is highest at the beginning of the project irrespective of the Executive’s age. A pre-mature death or disability to this Executive could wipe out the project and affect the credit of the business.
A young professional – a Dentist for example, may have completed 8 or more years of Medical school and is starting employment much later in life than someone who has an undergraduate degree. In addition, many professionals start their vocation with a significant amount of debt and their key earning years are well into the future. If an accident or illness or pre-mature death occurred to a professional at the age of 30 earning $200,000 per year, the financial consequence to her survivors or dependant(s) is much greater, in general, than to someone of the same age who is earning $75,000 per year.
A successful independent business owner who enters into a succession plan and joint venture with another individual may have significant financial risk if a disability or pre-mature death occurred to his new partner. Normally the survivor(s) of the deceased do not have the required skills or knowledge to take his place in the business and have their own new financial needs. If a buy-sell agreement states that the surviving business owner is required to buy-out the shares at the time of death or disability of his partner, but funding is not in place, the business may experience years of financial stress. Often businesses operate with high volumes of debt which may represent a low credit risk to a Bank at the time that the loan was secured as long as the Key Executives are in place to produce the sales needed to operate successfully and make their loan payments.
Risk Management and the placement of the right type and amount of insurance is a very important aspect of financial planning. Normally the cost or “premium” to do the right job is a fraction of a person’s earnings and current wealth. However an unforeseen accident or illness could wipe out years and years of financial success for you, your family or your business.
After 33 years as a Financial Advisor I have the knowledge, systems and experience to ensure that you have the risk management products and documents in place. Where necessary I will work with your Accountant or Lawyer as well.
One of the programs we developed to help our clients with this process is called “Estate Capital Management System™ or ECMS. It is a great tool to ensure the right questions are asked to calculate your life insurance needs.
The risks of an accident or sickness occurring at any age is higher than the risk of death, so disability insurance and a critical illness program should be considered. Manulife has created “Insure Right”. You can calculate your life insurance and other insurance needs at the same time. Take a look at it, but give us a call. You should obtain professional advice to complete your Risk Management program.