360 Private Wealth Management’s Natural Wealth® Process: Person Risk
In the Natural Wealth Process, we divide Risk into three categories; Person Risk, Portfolio Risk and Property Risk. We begin our review of Risk with Person Risk.
Simply put, Person Risk encompasses any financial risk you and your household may suffer as a result of injury or illness, and of death. It also includes the financial risk of loss of employment, while working. Person Risk starts by quantifying the risk of these potential dangers.
A household tends to be most vulnerable when they have dependents and high levels of debt. Individuals and families also have greater exposure when they are in their peak earning years, which, coincidently, tend to be in the years just prior to retirement when people are often bulking up their savings and investments. A catastrophic injury or illness can wreak havoc for an individual and their family, not just in the potential lost income, but also in increased non-insured medical expenses. The death of an income earner can potentially devastate a family’s future, financially and emotionally. It is important to not ignore the emotional impact on survivors that comes with financial hardship, whether by disability or death of an income earner.
Begin with asking yourself, “What would happen if I were to get sick or injured today, to the extent that I could not work for an extended period of time?” (If you are retired, reframe the question. Ask yourself, “What would happen if I were to suffer an irreversible disability due to an illness or injury?”) “What would change for me and for those around me? What would be the financial impact? How would such a situation affect me financially in the first 6 months? The first year? What would be the financial impact if I were disabled for 5 years or even for the rest of my life? How would such situation impact my household and family?” It is important to not just focus on the impact of lost income, if working, but also on the additional financial burdens that can come from additional uninsured medical expenses and other expenses that stem from the disability. Be frank and honest in answering the questions. If you do not have clear idea of your actual household expenses, monthly and annually, (something we focus on in the Cash and Cash Flow element), there is NO better time to stop and calculate what your household cost of living is.
You can use the same track in assessing the risk of a loss of employment in households still in the workforce and not retired. If there is a constant in today’s economy, it is change. Companies and governments constantly analyze and adjust their workforces. Very few people will work for the same employer for their entire working lives anymore. Ask yourself similar questions that you would ask in assessing your exposure to financial risk if you were disabled. “How much is our household cost of living? How does this compare to the remaining income that would be available (the income from a working spouse, any severance that might be receivable and any employment insurance income)? How much does your household have in banked savings?” There is a strong case for building a fund of say, the equivalent of three to six months of household expenses. Aside from the actual ability to meet expenses while finding another job, there is the confidence that comes from knowing you don’t have to take just any job because of the need for cash flow. With a savings cushion you may be a bit more mindful and selective in your search.
Premature death is also a significant Person Risk. While the statistics might point to a smaller percentage risk than say job loss or disability, the risk is real! Ask yourself, “What would happen if I were to die today? How would things change for those around me whom I love and care most for? What would be the immediate expenses and estate settlement costs (funeral expenses, legal fees, probate and taxes)? What would be the ongoing income needs to make sure that our families do not suffer significant loss of lifestyle or financial hardship? How much capital would be needed, which if invested, would meet lump sum expenses and ongoing income needs of my survivors?” Again, be honest and frank in your answers. Facing the issue of death is uncomfortable. However, the fact is we will all die. (Harry Houdini has not come back yet . . . maybe this Halloween?) Losing someone close to us is often a very catastrophic emotional event. It would be nice if we could make it a non-catastrophic financial event, if at all possible. Planning can make that a reality.
Once we have an assessment of the Person Risks we are vulnerable to, we need to take inventory of our existing savings and investments (our Portfolio Wealth), insurance and other sources of income available in the event of a disability, loss of employment or death. How much savings do you have on hand (three to six months of household expenses is advisable)? If you are working, how much disability income insurance do you have through your employer or personally? What are the terms and conditions (READ THE FINE PRINT!)? If you are in a situation with Employment Insurance Benefits do you know what your entitlement would be if you were laid off or disabled? How would Employment Insurance Benefits or Canada Pension Plan (CPP) disability benefits be integrated with a disability insurance plan, if you have one?
How much life insurance do you own and, what type of insurance is it? Is it coverage through your employer or professional association, if working? Do you have coverage that you own personally? What kind of insurance is it; term insurance or permanent insurance? If term insurance, do the premiums increase periodically as you age (this is the most common type of term life insurance)? If premiums do increase, when is the next premium increase?
Do you have supplemental health insurance to cover medications and paramedical services not covered by your provincial health care plan? While provincial medical plans will cover medical, diagnostic, surgical and hospitalization expenses, many supplemental costs are not covered. Supplemental health insurance plans, whether through an employer group plan or through a privately-owned plan, can help bridge the gap in coverage between payments from provincial health care and prescription drug plans and actual costs incurred.
In summary, take time to clarify the Person Risks you and your family face: disability, death, and job loss, while working. These situations arise every day and they do not just happen to the person or family next door! Determine the financial loss that could result. Develop a plan for covering the risk whether through savings and investment, which build slowly and over time, or insurance. Insurance buys time; which most individuals and families need in order to build portfolio wealth to be able to withstand the financial shock that comes with disability, death, and job loss.
If you need help assessing your Person Risk issues and protection plan, call or email us and we will guide you through the process and provide you with solutions that fit your needs and budget.
David J. Luke, CFP, RFP, CLU, CH.F.C., CIM | Financial Advisor
360 Private Wealth Management | Manulife Securities Incorporated
Unit 1 – 25 Scurfield Boulevard, Winnipeg, MB R3Y 1G4
Main Office 204.925.5868 | Direct 204.925.2073| Fax 204.925.2263 | Toll Free 844.688.3656