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Monday, March 27, 2017

You Are Dying, So Plan For It

Posted by Tim Stobbs on April 27, 2009

Right now you are slowly dying.  The key word in that sentence is: slowly.  Death is something people shy away from but when it comes to personal finance and retirement planning facing certain realities is a good idea.

Life insurance is not a fun topic to discuss with anyone, but the question becomes do you want to die without it?  If you are single and have no debt, then the reality is you likely don’t need much if any life insurance.  If, on the other hand, you have a few kids and/or a spouse who partly depends on your income you will want to consider having some life insurance to protect them in case your life is suddenly cut short.

Generally speaking term life insurance is the best bang for your buck for the majority of people.  Shop around for prices as they can vary by a lot.  Also consider dumping your mortgage insurance from your bank if you have it.  My experience has been that it is expensive coverage compared to what you can find elsewhere.

How much you need is highly dependent on your lifestyle (spending), what you want your kids to do (ie: post secondary education), and what your spouse and you have for income and what other coverage you already have.

For example, with my wife and I we decided to take the difference between my wife’s daycare income and our spending and times it over 18 years and then times it out to get a rough estimate.  Since our spending also contains an amount for RESP contributions we decided that was enough for the boys education.  Then we deducted what I already have for coverage and bought insurance for the remaining amount.  Then for my wife we just made that amount equal to my coverage to give me the option of working part time while the kids were young if she died.

In retirement planning you do need an estimate of your death, unless you are planning to leave a large pool of money to your kids.  If that is the case you might not actually need an end date to do a plan since you can just plan to live off the interest and dividends and not touch the capital.

For everyone else you do need to pick a death year to plan how long your money should last.  That year is often based on either a wild guess on the conservative side, typically age 95 or even 100.  Or you can do a bit more research into when you expect to die and try to come up with a better estimate.  After all there is an entire science to planning when people are going to die, how else do you think insurance companies issue annuities?

The trade off of picking a conservative date versus a bit more detail is the standard one.  If you lean to the conservative side you have to save more and work longer than actually required.  If you lean too far to the other side you can run out of money or have to face a reduced standard of living if you live past your planned death year.

So what did you pick for your death year in your retirement plan?  I picked 95, but I’m in good health, don’t smoke and my grandparents all lived well into their 80’s.

Comments

6 Responses to “You Are Dying, So Plan For It”
  1. Mintycake says:

    I would highly stress that people go to an independant insurance broker to assess insurance needs. Term is usually best for families with young children, but universal life might be more appropriate for higher wage owners with a lot of assets (use it as a savings vehicle once RRSPs are maxed out). You can do a lot of interesting financial planning with insurance.

    Also, consider disability and critical illness insurance. You’re more likely to become disabled than die when you’re younger. Critical illness is important – especially considering 1 in 3 people will develop cancer. Critical illness pays out if you develop one on the list, so you can use that money to hire someone to take care of your kids, pay for treatment in the US, or just pay the bills while your spouse is sick so you can take a leave of absence from work. And with return of premium options, if you don’t get sick, you get your money back.

  2. A somewhat dark article, but something we need to be reminded of. We need to plan our death effectively and live our life to the fullest. Thank you for making me reflect on my life and assessing what’s important in my life. Cheers!

  3. Hazy says:

    I plan on annuitizing much of my remaining nest egg in my later years.
    But it is too far in the future to say for sure.

  4. Canadian Dream says:

    Mintycake,

    True, in higher wage earners it is good idea to check out other options.

    Actually I have a guest post on disability insurance later this week. Thanks for bring it up!

    CM,

    Dark? A bit, but let’s face it death isn’t a nice topic.

    Hazy,

    That thought has crossed my mind too. I’m considering doing a portion of it rather than the entire amount.

    Tim

  5. Jordan says:

    If you’ve paid off your house doesn’t that also add considerable leeway if you live beyond your retirement funds?

    Couldn’t you still conservatively trim a decade off your death age of 95 because if your house is worth say $300k and assuming it beats inflation by 1% a year for 40 years… it would be worth $450k. So say you run out at 85, you could easily sell and rent (or more likely live in a home) for another 8-10 years before you’re completely broke.

  6. Canadian Dream says:

    Jordan,

    Yes, back up plans do allow things like that to happen. Frankly selling the house is one of my backup plans when I retire. I may never need to do it, but at least I have that option.

    Tim

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