Insurance for Your Wealth - Part 1
Marissa Mah, B.Comm., LL.B., LL.M. - Jun 13, 2023
In this two-part Mah Mail, we’ll take a closer look at insurance and explore what a high-income earner needs to know about it. Part 1 will focus on differentiating some of the most common types of personal insurance
Achieving a high-income level is often a risky endeavour. It usually takes years of hard work, sacrifice, and a considerable amount of up-front cost – all with no guarantee of success. However, for those that do succeed, earning a high-income can provide strong financial stability and a pathway towards the creation of intergenerational wealth.
Unfortunately, all risks do not disappear once the big pay cheques start arriving. Indeed, even the most successful individuals are vulnerable to unexpected events that can have devastating impacts on their financial well-being. Imagine finally landing a high-paying job that allows you to get a mortgage for a brand new house… only to be diagnosed with a serious illness one month later. Suddenly, the stable future that was finally within your grasp might no longer be a reality.
Thankfully, the consequences of this dreaded scenario can be managed with one of the most important components of a comprehensive financial plan: insurance.
In this two-part Mah Mail, we’ll take a closer look at this topic and explore what a high-income earner needs to know about insurance. Part 1 (this post) will focus on differentiating some of the most common types of personal insurance, while Part 2 will elaborate on specific insurance-related topics that are especially relevant to high-income earners.
What is insurance?
At its most basic level, insurance is a contract between a policyholder and an insurance company that provides financial coverage of an insured individual (which may or may not be the policyholder) for a specific event or circumstances that might lead to financial loss. In other words, it is a safety net that can protect an individual and their family from the potential financial ruin that might come from certain unexpected occurrences. Typically, when a person purchases an insurance policy, they pay a set amount of money every month (the 'premium') to have ongoing coverage for the specific circumstances set out in the policy. As long as the premiums are paid, the insurance company guarantees the beneficiary will receive a financial payout if one of those specific circumstances were to arise.
There are many different types of insurance available, and which ones are relevant to a given individual depends on that person’s needs. When it comes to high-income earners, there are a few specific types that are incredibly important to consider.
Life insurance policies provide financial coverage in the event of the death of the insured. It is often used to cover expenses such as funeral costs and outstanding debts (including estate income taxes), but it can also be used as an estate planning tool to achieve goals such as providing financial security for family members that survive the deceased; executing a charitable legacy with tax efficiency; or if you are a business owner, facilitating a transfer of wealth or allowing your family to exit the business without causing the company financial strain.
There are different types of life insurance available, but the most common are ‘term life insurance’ and ‘whole life insurance’.
Term life insurance provides coverage for a specified period of time, known as the ‘term’ of the policy. This term can range in its number of years and is typically chosen based on the insured’s needs and financial goals. If the insured passes away during the term, a death benefit will be paid to the individual(s) that the policyholder designates as who will receive the money (also known as the 'beneficiaries’). If the insured does not pass away during the term, the policy will simply expire and no benefit will be paid. Term life insurance is typically less expensive than other types of life insurance and is a popular choice for individuals looking to provide coverage during a specific time period, such as the term of a mortgage or until their children have reached a certain age.
Whole life insurance, on the other hand, is a type of permanent life insurance that provides coverage for the insured’s entire lifetime. Unlike term life insurance, whole life insurance does not expire as long as the premiums are paid. In addition to providing a death benefit like term life insurance, whole life insurance also includes a savings component, known as the ‘cash value’. The cash value of a whole life insurance policy grows over time and can be accessed by the policyholder through policy loans or withdrawals. Whole life insurance is typically more expensive than term life insurance due to its permanent coverage and savings component. However, it can provide peace of mind that an individual’s family will be financially protected no matter when they pass away.
Disability insurance provides financial coverage in the event that a person is unable to work due to illness or injury. When a disability insurance policy is activated, the insured receives a portion of their income – usually via tax-free payments – to ensure that they are able to continue to meet their financial obligations and maintain their standard of living.
There are two main types of disability insurance available: short-term and long-term. As the name suggests, short-term disability insurance provides financial coverage in the event of a temporary disability – the coverage period is typically only for a few months. Long-term disability insurance, in contrast, provides financial coverage in the event of a longer-term or permanent disability. In this case, the coverage period often lasts for several years or even until the policyholder reaches retirement age.
Overall, disability insurance acts as a safety net to provide financial stability if a person’s income is lost due to unexpected impairment.
Critical Illness Insurance
Critical illness insurance provides financial coverage in the event the insured experiences a specified ‘critical illness’, such as cancer, heart attack, or stroke. When this type of unexpected health crisis occurs, individuals can be faced with significant medical expenses and care needs that might represent a significant financial burden. Furthermore, such an occurrence can lead to a sudden loss of income that might not be recuperated by the benefits of disability insurance. With critical illness insurance, an individual receives a lump sum payment to use as they see fit, whether it be to pay for medical expenses, make lifestyle adjustments, or to replace lost income. This added financial security can provide peace of mind and allow a person to focus on recovery without the added stress of financial strain.
You got to start somewhere
As we can see, there are many important distinctions between the common types of personal insurance – and we have only just scratched the surface in the explanations above. In our next post (Part 2), we will elaborate on why carefully considering the use of these various types of insurance is especially important to high-income earners.
In the meantime, if all of this seems confusing or overwhelming, don’t worry – you are not alone. Understanding the intricacies of insurance is something that many professionals spend years learning, so it is certainly expected that a person might have questions after only reading a brief blog post!
One of the best ways to get those questions answered is by working with an experienced insurance advisor that can help simplify the information and explain further considerations that are relevant to your unique life circumstances. When paired with a trusted investment advisor, you can establish a team of financial experts whose primary goal is ensuring that you can continue to build – and secure – your future wealth.
If you want to start learning more about what insurance options might be important for you to consider, we would love to speak with you.
You can also check out these articles to learn more on your own:
- Protecting Your Wealth discusses several considerations to help safeguard and enhance your wealth.
- Planned Giving – Optimize Your Gifting Strategy With Insurance discusses several strategies for maximizing your charitable donations using insurance.
- Insurance Considerations for Individuals explains the types of insurance coverage available to help individuals safeguard themselves, their family and their wealth.
- Insurance Considerations for Business Owners & Incorporated Professionals explores insurance strategies that can supplement a business owner’s retirement savings, and help to protect your business and maximize the value of your estate.