Life Is a Gamble

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MANAGEMENT

An insurance plan today can support your business
and family tomorrow.

No one, with the possible exception of a professional
gambler, expects to build a reserve of funds by gambling.
Nevertheless, purchasing or not purchasing life
insurance is a gamble in itself. If you buy life insurance,
you only win if you die early because the insurance
pays off your debts; if you don’t purchase life
insurance, you only win if you live a very long life and
pay off your debts without having paid life insurance
premiums. What you must decide is whether you want
to gamble that you will live to pay off all your obligations,
or take a more conservative position and accept
that you might die younger and be willing to pay the
insurance premiums to ensure that your debts will be
paid off at your early death.

Factors to Consider

To understand why you would need to provide these
funds, ask yourself: Will my spouse be able to pay for:

  1. my funeral?
  2. our home (including any outstanding mortgage)
    and way of life for the children?
  3. outstanding credit card debt?
  4. funds borrowed from the RRSP to put a down
    payment on the house?
  5. the monthly mortgage/rental, utility and
    maintenance?
  6. day care?
  7. my personal income tax liability as an ownermanager
    if I have not repaid draws or have not
    deducted sufficient taxes at the source?
  8. short-term loans from the company?
  9. personal guarantees to financial institutions
    if there is no other source of income?
  10. our children’s future education or future medical
    costs should they currently have special needs or
    develop them in the unforeseeable future?
  11. RRSPs, investments or TFSAs for the future needs
    of our family?
  12. the capital gains tax (if) the second residence
    (e.g., a cottage) has to be sold?
  13. an equalization of my estate? For example, the
    family cottage has been left to three survivors, but
    only one has a real interest in preserving it. What
    will happen to the cottage if that person does not
    have the financial means to pay out the two other
    survivors? Does that mean the property would have
    to be sold to meet the terms of the will? Should life
    insurance be purchased to provide a cash payout
    to the other two beneficiaries to prevent the sale of
    the property and therefore keep it in the family?
Entrepreneurs should not defer
purchasing life insurance.

What about Now?

Term life insurance provides coverage at a fixed
premium for a limited period of time (i.e., the term).
After the term expires, coverage at the previous rate is
no longer guaranteed. Term insurance is usually the
lowest-cost way to purchase a substantial death benefit.
Putting off purchasing life insurance is not an option
entrepreneurs should consider because (in the event of
your passing):

  • your business associates will need cash flow to fill
    your vacancy
  • life insurance becomes more expensive as you get
    older: your province of residence, your life style,
    the amount of the payout and your gender will
    impact the insurance premium; for a non-smoking
    25-year-old man, for example, the yearly premium
    for $600,000 of renewable five-year term life insurance
    may cost you $600* per year; however, as you
    age, the amount goes up: at age 46 (around $900)
    and age 55 (around $1,500); the problem with term
    life insurance is that, after the term expires, the
    policy has no value.

    *Please note that all amounts and calculations are
    generic estimates. Each individual’s circumstances
    will impact the premium.

  • even if you paid an annual premium of $1,500
    (hypothetically) from age 25 to 55, the total cost
    of your premiums would be only $45,000, but the
    payout would be $600,000, which is an excellent
    return on your investment
  • conversely, if you invest $1,500 per year at 5% compounded
    annually for 30 years, you would have
    only about $100,000 at age 55
  • if you incur serious physical problems or develop
    a medical condition, you may not be able to purchase
    life insurance.

Key-Person Insurance

Key-person insurance is paid for by the company,
with the company as beneficiary. This type of insurance
is designed to cover the consequences of losing
an indispensable person such as the founder or owner
who can no longer contribute to the business through
death or disability. Funds will be available to keep the
operation going while restructuring is taking place
after your death.

Key-person insurance can provide funds to buy
your share from your survivors without the business
assuming additional debt. A key person payout can
be used to back your personal guarantees on business
loans as well as pay deferred taxes and other regulatory
deductions.

How Much Should You Buy?

How much insurance you need depends upon what
you need to insure: self-employed earnings, current
assets, debt, savings, cost of living, business and family
structure, as well as the future needs of family and the
business. To determine this amount, first put together
a summary of the collective assets and debts of your
business and your family unit along with details of the
cost of your current life style and future expectations.
Contact an insurance agent, discuss your situation and
design a policy that will meet your needs.

Something to Think about

Don’t gamble with your future. Accidents and illness
happen. Hope for the best but plan for the worst. Think
about your business and family situation and what
would happen if you were not there. Do not leave your
survivors in jeopardy when you can take care of their
futures today.

 

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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