Insurance plays an important role in protecting your wealth

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You get insurance to cover possible damage or loss to your home and car, but have you considered insurance to protect your finances?

Insurance is a valuable planning tool when it comes to wealth. Yet its importance is often overlooked or misunderstood, even by financially-savvy individuals, says Trent Hamans, Vice President, Private Banking & Wealth Planning at ATB Wealth.

“In the context of personal finance, insurance is a bit of a mystery for many folks,” says Mr. Hamans, who serves high-net-worth clients at the Alberta-based financial institution. “Insurance, at its most basic, is about risk management.”

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“That involves a three-step process,” he says.

The first step is to define your risk based on your specific situation.

For instance, take someone with a young family who is the prime income earner. “Their risk would be what happens if they are no longer able to provide that income for their family,” says Mr. Hamans.

Other scenarios may be less obvious. For example, insurance offers protection to business partners. If one dies, the other may require cash liquidity to buy the deceased’s share of the company. In this case, insurance can help secure the future of the business.

Insurance can also mitigate portfolio risk. Consider an investor who has a significant balance in registered accounts like an RRSP or RRIF (registered retirement income fund).

When that person dies, there may be qualified rollover opportunities, such as to a surviving spouse. If not? At death, the balances are taxed as income in the deceased’s final tax return. Depending on the income in the year of death, as much as 48 per cent of the RRSP or RRIF could be subject to income tax in Alberta. Insurance can be a tool to help manage that tax liability at death.

Value the risk

Once the risk has been defined, Mr. Hamans says the next step is to value it—how much might the risk cost in dollar terms. “This is where an advisor comes into play, to provide a realistic assessment of how much insurance coverage may be required,” he says.

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He notes that the insurance policy’s dollar value is often shaped by factors such as time horizon—the term of coverage—and what type of risk an individual is trying to protect against.

The third step of risk management involves selecting the right insurance product.

“There are so many to choose from that it’s advantageous to have a professional advisor explain all the differences,” says Mr. Hamans.

He explains that individuals can consider three categories of insurance, broadly, with respect to managing risks to their wealth: critical illness, disability and life insurance.

Each of the three types of insurance are designed to provide income or capital if the insured can’t work due to injury, illness or death.

Look beyond employer insurance plans

Many individuals may have group plans through their workplace that offer disability and life. Yet employer-provided plans have limits.

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Disability insurance purchased through a group plan often provides one to two years of income. In contrast, a privately purchased, individual life policy can replace income for much longer.

“The other big issue with employer group plans is the coverage is only in place as long as you work for that employer,” Mr. Hamans says. “What happens if you lose your job?”

He says a financial advisor can identify these gaps. Likewise, wealth professionals can help you decide whether you require whole life or term life insurance.

Whole life policies are often useful for families with significant assets. Upon the death of the parent(s), assets that have accumulated over a long period may create large tax liabilities for the estate.

People should look to a professional financial advisor, who can help find the right insurance policies to address the risks specific to them.”

“The trouble is, most people don’t realize they may face this problem until they are in their 60s or 70s. At that point, they may not see value in life insurance, as the premiums rise as we age and can be very high,” Mr. Hamans says.

Yet whole life insurance is often worth considering, particularly joint last-to-die policies that can pay a tax-free benefit when the surviving partner passes away.

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“Because you’re buying a policy that only pays out on the death of the second person, the premium costs are generally reduced,” says Mr. Hamans.

He notes that in other instances, individuals may only require a term policy to address this risk. For example, a 10-year term life policy may allow just enough time for a retired couple to withdraw from their RRIFs, so that these assets are no longer a substantial tax liability for the estate.

What about situations involving a family cabin, which often does not qualify for the principal residence tax exemption? When this happens, the property may be subject to taxes on its gains in value. In some cases, that tax bill to the estate may be significant, especially if the property has been held by the family for several decades. Whole life policies are worth closer examination here.

Borrowing against a policy

Insurance can also open up other interesting strategies. As Mr. Hamans explains, “Many financial institutions will consider allowing insured individuals to borrow against a portion of the value of their whole life policy.”

“This can prove useful for many reasons,” says Mr. Hamans. “Maybe individuals can help their business buy more equipment, or they can assist an adult child in need.”

He says the diverse and complex considerations surrounding insurance can be intimidating for many individuals and their families. While nobody can predict the future, insurance is a critical way to protect yourself, your family and everything you’ve worked so hard to gain.

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“That’s why people should look to a professional financial advisor, who can help find the right insurance policies to address the risks specific to them,” Mr. Hamans says.

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ATB Wealth consists of a range of financial services provided by ATB Financial and certain of its subsidiaries. ATB Investment Management Inc., ATB Securities Inc., and ATB Insurance Advisors Inc. are individually licensed users of the registered trade name ATB Wealth. ATB Securities Inc. is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada./p>

Advertising feature produced by Globe Content Studio with ATB Wealth. The Globe’s editorial department was not involved.

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