Don’t be careful with insurance

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Dear Money Lady:

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We recently became grandparents (finally!). We were concerned that our son has no insurance of any kind and none on his mortgage. We are retired, do we need it too? Could you talk about insurance in one of your next columns?

Thanks Jeanie

Yes I can Jeanie – thanks for asking!

Most people know they need to have insurance to pay for up-front one-time costs such as funerals, taxes, and debts (mortgages and loans). Others will go further and plan the current expenses that will continue after their death to support their spouse and children.

If you’re retired I’m not saying you should run out and get insurance. Insurance is something most would have bought when they were young, and the premiums were at their lowest. Many retirees use insurance for tax planning purposes to pay the capital gains tax their estate will owe upon death, and this is something you should discuss with your advisor to see if it’s worth it. Others may purchase insurance to provide a personal heirloom of remembrance when they die, leaving money to a special charity, hospital, or even an educational or religious organization.

But to meet Jeanie’s request for her son; insurance is definitely something you need during your working years when you have consumer debt and a young family. There are several types of insurance. The basics are income protection, mortgage loan insurance and survivor benefits. Most people have life and disability insurance from their employer, which is a very inexpensive way to acquire coverage. It’s easy to set up a direct debit from your payroll which can often provide additional insurance for your spouse and children.

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Mortgage insurance is also something you should have, but it might not be something you want from your financial institution. You see, this is an important source of income for the banks which will always provide mortgage and loan insurance to their customers. Bank insurance is very easy for the average person to purchase, but remember that the bank is the beneficiary, not you. Insurance is used to pay off the outstanding amount of your mortgage when you die. So if you took out a mortgage for $ 400,000 and the premiums were based on that amount, but you die when the mortgage balance was $ 150,000, the insurance will only pay off the outstanding balance of $ 150,000. $.

Good advisors have always had a habit of talking to their clients about insurance. It would be much better for clients to purchase term insurance, usually at a much lower premium than mortgage / bank loan insurance and for a fixed guaranteed amount. With term insurance, your coverage never decreases, your premium is fixed, and you can choose the beneficiary. So if you take out a term policy for $ 400,000 to cover your debt, but die when your debt is $ 150,000, as in the example above, your family receives the full $ 400,000. They can then pay off the unpaid mortgage and use the balance for something else.

Term insurance is cheaper than permanent life insurance, so it’s easy to afford additional coverage for a specified period during your working years. Payments are still blocked and will not change for the length of time you choose. It’s a good idea to choose a 20-year term to lock in a lower premium for a longer period. You can cancel it at any time, or you can convert your policy to permanent life insurance, usually without having to re-qualify.

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Planning for the future should always include planning for possible unexpected events. Avoid the temptation to put your plans on autopilot. It is important for you to have a well thought out strategy that provides for loss of income and protection against the unexpected. This means that you must have a will, power of attorney, and insurance. Don’t make foolish decisions not to protect your family and property to save a few dollars. It’s not worth the shot. Smart financial planning means you should never leave yourself unprotected. Really, it is the only way to ensure the stability of your family in the event of an unexpected death.

It is your responsibility to have a say in your will, to make sure your requests are known and addressed in your power of attorney, and to make sure your family is not deprived by having life insurance.

Good luck and best wishes,

Christine Ibbotson

Christine Ibbotson is the author of three books on finance and the Canadian bestseller “How to Retire Debt Free & Wealthy”. For more information, go to www.askthemoneylady.ca or send a question to [email protected]

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