Life insurance is a plan where you pay money to an insurance company while you are living, and the insurance company pays your chosen beneficiary upon your death. The longer you live, the more profit the insurance company makes. Life insurance is a must for anyone with family responsibilities and little personal wealth.
Understanding Life Insurance
Typically this type of insurance is misunderstood by the general public. The industry has a perception of over-selling gimmicky products that play on your emotions, leave you underprotected, and offer little in the way of real value.
Here are a few terms that you need to learn when understanding life insurance:
- Beneficiary – The person who receives the death benefit or face value of the policy
- Death Benefit – The dollar amount that will be paid to the beneficiary if the insured dies
- Group Insurance – A plan which a number of employees or associates and their dependents are insured under a single policy, usually with lower premiums than an individual policy
- Policy Term – The period of time in which the insurance is in force. The term can range from one year to an entire lifetime
- Premium – The dollar amount you pay to the insurance company. Premiums can be paid annually, or in monthly installments
- Rate – The cost of a unit of insurance. For example a rate of $30 per $1,000 unit means that $300 would buy you $10,000 of life insurance
- Universal Life – Term insurance bundled with an investment plan. The premiums are variable, with the amount in excess of the insurance premiums going into the investment plan
Life insurance is a trillion dollar industry and with all of the marketing and sales out there targeting your money and playing on your emotions, it is important to arm yourself with some knowledge about the terminology as well as the products that are available to you so that you can choose what option (if any) is best suited for your needs.
Here are a few tips to help you determine how much life insurance you may require:
- If you are single with no dependents, don’t buy life insurance – Life insurance should only be purchased to prevent a financial hardship that would occur if the insured died. If you are single, invest your money for retirement. Who are you going to leave the insurance proceeds to, your dog?
- Never buy life insurance on children – Here’s where the emotional games come into play. Although your children are an emotional asset, they certainly are not a financial asset. Unless your child is the next Miley Cyrus, your money should be placed in an RESP or savings account for them.
- Insure the income earning spouse – If your spouse is the sole bread-winner in the family, they are a financial asset and purchasing term insurance for them makes sense. If you have no children and your spouse stays at home or works part-time, even cheap term life insurance is unnecessary.
- For two-income families, live on one salary instead of buying life insurance – For the double-income-no-kids couples out there, you need very little life insurance, if any. A good career represents far more substantial financial security than a life insurance policy.
- Buy life insurance on a spouse at home if you have dependent children – Your stay-at-home spouse can be a full time caregiver, chauffeur, teacher, and cook. While more difficult to quantify, this still has tremendous monetary value. Inexpensive term life insurance will provide the financial protection you would need if your family were to become a one-parent household.
- As you get older, replace life insurance with other income sources – Your need for life insurance will decrease over time as your dependents grow older and your net worth increases. And the greater your passive income streams are, the less life insurance you will need. Income from dividend paying stocks are a perfect example of how to transition from buying life insurance to becoming self-insured.
Next week we will look at insurance products and some do’s and don’ts when purchasing your life insurance policy.
There was once an experiment done with young children offering them one cookie now, or two cookies later (perhaps after a nap or bath). In the majority of cases the youngster accepted the one cookie immediately thereby proving that one cookie in the hand is worth a lot more to them than two cookies in the distant bush.
Of course, this is the major premise of credit cards and other buy now-pay later plans that can get a lot of people into financial trouble. But there are other ways that instant gratification grabs hold.
For example, in my many banking years I sold hundreds of RRSP loans. The premise was that once the tax refund was received, the loan was paid off. Or, alternately, if no loan was required, the refund would be applied as a lump sum payment on the mortgage. We all know this theory.
However, I saw very few people (hardly anyone really) who actually did this. It seems that as soon as the tax refund was in hand there were a lot of other, more desirable, ways it could be spent. After all, the monthly loan payment is affordable, and you hardly see the decrease in the mortgage balance.
A common budgeting practice is to annualize the cost of your small indulgences and vices. You can see that your daily specialty coffee comes to $1200 and your weekly carton of cigarettes cost you $4000, etc which could be the start of (or added to) an investment portfolio or put toward another goal. But it’s really difficult to see the big picture – it’s so far away and one drink (this time only) won’t make much of a difference.
I have a friend, let’s call her Gladys, who is over 65 and whose only income is her pension and a small salary from working ten hours a week as a sales clerk. Since retirement, Gladys, with a seniors group, has travelled all over the world.
She is currently on a six-week tour of China and surrounding countries and in the coming years she plans to take an African safari and travel to the South Pacific. She has admitted that she has made a lot of daily sacrifices in order to afford her trips, but you should see her face glow when she talks about where she has been. This is a dream of a lifetime.
Related: Why Do We Save?
This story shows that you have to have a very compelling goal to work towards that’s always in the back of your mind so that it’s easier to walk away from that cookie when it’s offered. Otherwise, you’ll be constantly wondering where your money went and complaining that you can never afford realized your future dreams.
With the recent announcement of Jim Shaw stepping down as CEO of cable giant Shaw Communications and handing the reigns over to his brother Bradley, succession planning seems to be in the spotlight these days.
Jim Shaw led the company that his father JR Shaw founded for the past 12 years, but with the recent $2 billion acquisition of Canwest/Global TV it was apparent that Bradley’s more strategic style and vision would best lead Shaw into the future.
Business Succession Planning
Business succession planning is critical for the future success of your company, especially if you run a family business. It is a well known fact that family business succession planning fails by the third generation. In fact, more than 70 percent of family owned businesses do not survive the transition from founder to second generation. Perhaps this failure from successive generations comes from a lack of communication and vision from the company founder.
Follow these tips to ensure a smoother transition from one generation to another:
- Start Early – The more time you spend on business succession planning, the more successful you are likely to be. Five to ten years is a good time frame to build an exit strategy into your business plan
- Talk To Your Family – Just having a vision in your head of how the company will survive after you move on is probably not the best strategy for a successful transition. You need to talk to your family and ensure that your plan in tune with the goals and ambitions of everyone concerned
- Plan Accordingly – You may want your first born to run the business, but does he have the business skills or even the interest to do it? Perhaps there is another family member more capable, or someone outside the family better suited for the job.
- Train Your Successor – Don’t just appoint your successor and walk away. You need to choose your heir apparent and then work with them on the nuances of the business before you hand over the keys.
- Get Outside Help – Accountants, Lawyers, Financial Planners can all help shape what your business succession plan will look like. Sometimes it is best to get an outside perspective to avoid a myopic view on the future of your company.
One of the most inspiring business leaders of all time was Jack Welch, Chairman and CEO of General Electric. In 1994, years before he retired from GE, Jack Welch had started the succession planning process. He developed a list of qualities, skills and characteristics a CEO should essentially have. So, GE was ready for its next CEO, years before it finally had to make the decision in 1999.
GE had three candidates – Jeff Immelt, James McNerney and Robert Nardelli. All three were ideal candidates and aspirants for the top job. All three exceeded every expectation required. Finally, the youngest of the three, Immelt was chosen. McNerney and Nardelli, moved on as the CEOs of 3M and Home Depot, respectively.
While this isn’t an example of a family business succession plan, all leaders and companies can take inspiration and should devise succession plans, the Jack Welch style.