Risk management is an essential element to any financial plan. Identifying risks and how to address them is important whether you are a millionaire or just starting out financially.
In a financial plan, the importance of having a budget and seeing where your money is going is crucial. Developing an emergency fund that is available if unexpected event occurs such as temporary lay-off or roof repair, is also a key component. However, the risk management component of planning is often overlooked. This component of a financial plan accounts for events that can happen that are out of our control.
These three events are:
- Injury (Disability)
- Sickness (Disability/Critical Illness)
- Premature Death (Life)
Although it is not the most glamorous topic, if not addressed properly, it can have a significant impact. Specifically, when looking at risk management through insurance planning, you are planning to meet your needs as well as those who are dependent on you.
Disability Insurance:
Although a disability claim has the highest chance of occurring, disability insurance is one of the most under-utilized solutions in planning. Most people rely on their group benefits to provide this coverage; however, it is important to confirm that disability it is part of your benefits coverage, and what you are entitled to in the event of a claim. Many individuals (eg. contractors, small business owners) do not have the benefit of a group plan to cover this risk. It is important to properly assess your risk in this area, and review options to complement your group benefits disability coverage if necessary, or secure the right individual plan if no coverage is currently in place.
Critical Illness Insurance:
Nowadays it is rare to not know someone who has suffered from a severe illness. Should an event arise where additional cash flow is needed due to a critical illness, the most common place people go is to their long-term savings, often their RRSP. In this case, not only would you have to pay tax on withdrawing this money, it would also hinder your retirement plan in a way you may not be able to recoup. A critical illness insurance policy can effectively mitigate this risk. The influx of tax-free money will help deal with unexpected costs like medical expenses, while dealing with on-going bills and expenses.
Life Insurance:
The risk of premature death is probably the most common event for people to address with insurance. Life events such as a taking on a mortgage, getting married, or starting a family trigger this type of risk and need for planning. Debt management and on-going family and individual needs should be accounted for in assessing your life insurance need. More comprehensive estate planning opportunities can emerge as life advances.
In risk management planning, the main focus should be how much coverage would be needed to handle each unique situation. Once that is determined, then you can look at the best insurance solutions to suit your planning needs and budget.
