And the knowledge that they fear is a weapon to be used against them.
-- Rush, The Weapon (Part II of Fear)
Actuaries measure and manage risk (the probability of harm). I focus on financial risks. Here are the four main ones- longevity: outliving your savings
- mortality: dying too soon
- morbidity: getting sick
- disability: getting disabled
Who would think that living a long life would cause financial risks? As we live longer, we need more money. If we're healthy, we may have expensive hobbies such as travel or cottages. If we're ill, we may face additional medical expenses.
We no longer believe that the government will be able to take care of us. Or rely on a company pension plan. We must save for ourselves. The sooner the better. There's plenty of (conflicting) advice on investing elsewhere. So I'll defer to those experts.
You can get guaranteed income as long as you live with a life annuity, which enjoys preferred tax treatment: each payment is a blend of interest (taxable) and return of capital (tax-free).
Mortality Risk: Dying Prematurely
If we have dependents, we need life insurance to cover the expenses of mortgages, education, etc. Inexpensive term insurance is available widely. The consumer site winquote.net provides price quotes. Term 10 is the most popular choice.
Tip: for Health Risk, select "Regular". If you're healthier, you'll get lower rates. very few qualify for "Super Preferred".As we age, term insurance becomes increasingly expensive. When we reach the ages where death is more certain, the term coverage unavailable. Why would you need life insurance when you're 70 or older? For estate planning --- for example, to offset the taxes on the capital gains from your cottage, investment real estate or shares.
Morbidity Risk: Losing Health
As we age, we realize how feeble our bodies can be. Even people who take excellent care of their health can be stricken with cancer, heart attack, stroke or require heart bypass surgery. Critical illness insurance can help by paying a lump sum in these situations. Some plans refund your premium if you make no claims. So you get another source of retirement income to tackle your longevity risk.
Disability Risk: Losing Income
If we become disabled, does our income go up? Expenses may rise, but income usually drops. The disability could last for years. Who has that much in savings? Or friends and relatives who are that generous? That's where disability income replacement insurance can be helpful. Maybe your employer provides this for you.
The Costs
How can we afford to insure against every risk? We can't (see Stagnant Family Incomes). We wouldn't even if we had the money. Everyone's situation is different. You'll need to see which risks are more likely and more financially devastating.
This is the point where you're tensing up because you're expecting me to tell you that I can solve all your problems ... for a price. Relax. I'm simply here to provide education and insights. A different perspective. Why? I've been helped by so many people. This is my way of giving back. With interest :)
Feel free to leave comments on topics you'd like to see addressed.
Visit A Canadian and Her Money for links to the other participants.
