Financial Planning For Couples: Protecting What You Have
Insurance is one of those expenses we all hate to pay for, but we are very glad we have it if we ever have to make a claim. Auto insurance is a necessity for all drivers and if you have a mortgage on your house, home owner’s insurance is a requirement by your lender. All other types of insurance are optional, but now that you are a family – even if it’s only the two of you, it’s necessary to have a discussion about your protection.
Review your current insurance coverage
Review your policies – homeowner’s or renter’s, and auto for appropriate coverage and ensure you are not under-insured. Make sure you have enough coverage to protect your household goods, especially items that typically have limited coverage such as jewelry, collectibles and electronics. Save money by combining your policies and negotiate, negotiate, negotiate for the best rates.
If both of you work and are covered by insurance plans through your employer, co-ordinate your benefits and look for duplicate coverage. Which plan will be the most beneficial? Figure out if joining a spouse’s medical or dental plan offers better coverage and/or pricing. If one of you has a good policy with a deductible, the other may be able to choose a “top-up” plan through their employer.
Life insurance
Life insurance is used to replace lost income on the unfortunate death of a spouse. Replacing that lost income is crucial in helping to keep your financial house in order. Your family must be properly taken care of so as not to suffer financially. Furthermore, any debts, especially your mortgage, can be paid off.
If someone else is relying on your income you need protection in place. If a stay-at-home parent were to die there would still be financial challenges. You would need to pay someone to care for your young children and manage the house while you are working.
The key is to get the right kind of insurance. Start by doing a needs analysis with your insurance broker. Your priority is to get the right kind of insurance that will provide adequate coverage at a reasonable rate. For most young families this is term life, especially if you are young and healthy and willing to commit to a specified time frame.
Is your employer’s group life insurance plan the best for you? What happens if you switch jobs later on? There is the possibility you’ll have to pay higher premiums as you get older. It may be more cost effective to opt-out of your group plan and replace it with a 20-year term policy with fixed premiums.
Another option, permanent life insurance policies are designed to last the lifetime of the insured and eventually pay out a benefit. They have a savings component commonly known as cash value, but these policies are much more expensive.
How much coverage do you need? You want enough life insurance coverage to ensure that your family is taken care of. For a couple, a good rule of thumb if you are both working is to replace anywhere from 5-10 years’ worth of your respective salaries. If you are a sole income provider, life insurance should comprise at least 70-75% of the replacement value of your annual income for the number of years you plan to continue working.
Disability insurance
Your largest asset is your future income-producing ability. This makes disability insurance the most important coverage you can get when you have a family, but it is often overlooked because people simply don’t perceive the risk of becoming disabled.
If you work for a large company, long-term disability insurance is probably part of your benefits package. But if you work for a smaller company, or are self-employed, you should purchase this coverage on your own.
Coverage differs among plans. Typically, if you suffer from an accident or disease that prevents you from working, the plan will pay you a percentage of your monthly income until you return to work or reach age 65. You can be covered for either “any occupation” or (more desirable) “own occupation.” Make sure you fully understand the policy, renewal, waiting periods, and most important, its definition of a disability.
How much disability insurance do you need? Look for a policy that covers at least 60% of your pay.
Keep in mind that payments from a private plan are tax-free, but payments from most employer plans is taxable.
Estate planning
Yes, you do need a will – even if you are just starting to accumulate assets.
Consider these steps:
- Draw up a list of all your assets and liabilities.
- Decide on how you would like your assets to be distributed in the event of your death and do up a list. You and your spouse may want to do separate lists and then compare notes and come to an agreement.
- Select an executor or trustee (trust company) of your will.
- Decide on a guardian for your young children. This is obviously a very important decision and great care should be taken with the selection.
- Consult a lawyer to draw up your will.
- Review your will whenever you experience major changes in your life.
Be sure to review the beneficiary designations on your RRSP, TFSA and insurance policies. You can designate those assets in your will, but keeping beneficiary information up to date is the easiest way to ensure that those assets transition smoothly to your spouse.
Further reading in the Financial Planning for Couples series:
- Planning your new life financial together
- First things first: Establish a budget
- Dealing with debt
- Buying a home
- Starting a family
“Keep in mind that payments from a private plan are tax-free, but payments from most employer plans is taxable.”
The one loophole to look into, that my employer has set up, is that our employer-sponsored plan has the employees specifically paying 100% of their disability insurance. It costs us more per month now, but if we ever need to claim against it, the payments are tax-free because we’ve paid 100% of the premium so it’s not considered a taxable benefit. Definitely worth asking your employer about – it can make a huge amount of difference if you need to use it!
Yes, Desirae. The key is who pays the premiums and employer-paid premiums are taxable. It’s definitely something to look into to see if it can be an advantage to you, but I’ll bet most employees won’t bother.
“Select an executor or trustee (trust company) of your will”
Beware of horrendous fees trust companies (e.g. big banks) charge for those services in Canada. The executor services will cost your beneficiaries around 2.5-3.5% of total estate assets value.
In addition, trustee services will incur extra fees annually. Here is what TD Wealth quoted to me recently: 0.8% (care & management) + 2.5% (disbursement) + 1.25% (investment management) = 4.55% total fee charged on total assets value every year. That is over 45.5% of the total assets over 10 years! Also, they will take another 0.5% initial admin services fees of the total assets value in the first year and out-of-pocket charges as and when they deem necessary.
If Trust company wants to avoid future legal suits from beneficiaries, they will likely keep the trust funds in conservative investments, which will inherently have very low returns. So, one should ask themselves what will be left to the beneficiaries after the company takes their fees (regardless of the trust funds investment performance) and lets the funds value dwindle gradually from inflation?