Risk management through the wise use of insurance removes the concern for the unknown from a financial plan.

How Do I Manage Risk?

There are four basic techniques for managing risk:

• Risk Avoidance - This technique involves the avoidance of exposure to loss; either by not owning specific property that could be exposed to loss; or by not engaging in a specific activity which could create liability.
  
• Risk Reduction/Loss Management and Control - This technique involves lowering the probability of a particular hazard occurring; and lessening the severity of the hazard by taking some positive action.
  
• Risk Assumption/Retention - This technique involves the acceptance of the risk. Generally, this technique should be used only when the potential exposure is very small or has a low probability of occurrence. In other words, you should only self-insure what you can afford to lose. Unfortunately, many people self-insure by default. They do not consciously decide to take-on the full risk; they merely fail to plan and provide for an adequate risk management program.

Sometimes partial risk retention is used, wherein the person at risk chooses to accept part of the potential liability for a certain hazard.

Life Insurance

The first application of Risk Transfer through insurance that we will address is the risk of death. Death always involves a loss, but in its financial sense, a loss due to death is measured in terms of incomplete financial goals and objectives.

How Do I Determine My Potential Financial Loss Due to Death?

Some of the financial needs that may be created by a death are as follows:

• Final personal expenses - final medical expenses, funeral, burial, etc.
• Estate / death expenses - estate settlement costs to include federal and provincial estate taxes, probate, legal, accounting, appraisal fees, etc.
• Family income - support for surviving spouse and dependent children
• Additional expenses - necessary additional household services, childcare, etc.
• Liquidation of debts - payoff of mortgage, auto loan, credit cards educational loans, etc.
• Special financial needs - care of aging parents, special needs child, or other family member
• Liquidity - emergency fund; necessary immediate cash flow
• Bequests - church, school, family members, friends employees, charities
• Funding of established financial goals - completing college funding; purchase of second home, pay off the mortgage, etc.

There may also be additional financial needs of a business nature such as funding the transfer of an existing business through; or protecting a business from the loss of an owner/key-employee.

How Much Life Insurance Should I Buy?

There are many formulas used in the calculation of life insurance need. The most meaningful methods consider both financial needs created at death and what available resources exist to address these financial needs. You should also remember that your needs will vary at different stages during your life.

The first step is to establish the dollar value of the needs. Some of these may be expressed as lump sums; others as cash flows.

The next step is to identify what available resources may be used to eliminate or reduce the financial shortfall. These resources will vary greatly from family to family, but may include:

• Other sources of income from family members
• Survivor benefits (Social Security, employer-sponsored plans, etc.)
• Assets that may be easily liquidated and used to meet the established needs
• Once available resources are applied against the identified needs, the amount of life Insurance needed can be calculated. Various calculators exist to assit with this type of assessment but we strongly recommend tha you visit our office for a personal consultation.

Once the amount of life insurance needed is determined, the next decision is what kind to purchase.

What Kind of Life Insurance Should I Purchase?

There are several types of life insurance; each with numerous variations. The type of coverage that is best for you depends on a number of factors. First, a brief familiarity with the basic types will be helpful:

Term Insurance

Term is insurance that is purchased for a certain period of time (its "term"). During that term, premiums are paid, and a death benefit will be received, if death occurs. There is no cash value build-up. Premiums on term plans are considerably less expensive than with other plans.

At the end of the term, the insured will be faced with one of several choices, depending on the type of term policy purchased. If the need for insurance still exists, the insured will have to apply to purchase a new term policy; generally requiring evidence of insurability (good health); or may be allowed to continue with the existing plan, but at a considerably higher premium. Term plans are sometimes compared to renting a home. During the time premiums is being paid ("rent"); the insured receives the benefit of coverage. Once the premium period has ceased, the insured must "move" or pay higher "rent". There is no "equity" (cash value).

Advantages of Term Insurance

• Policy is considerably less expensive than permanent cash value plans.
• Policies can be structured to meet specific dollar and timing needs (i.e. a 10 year level term plan to match the maturity of a bank loan).

Disadvantages of Term Insurance

• Policy is only cost effective during "term" of coverage. If need extends beyond coverage period, premiums can become prohibitively expensive.
• There is no cash value or "equity" in the policy.

Permanent Insurance

Permanent insurance, unlike term, is intended for long term needs. Premiums are generally level (although they may not be guaranteed), and the policy accumulates cash value. Types of permanent plans are:

Whole Life

This is the oldest form of permanent/cash value life insurance. It features a guaranteed premium ; a guaranteed cash value ; and a guaranteed death benefit . The cash value earns a minimum guaranteed rate of return, and may also receive dividends or additional interest.

Advantages of Whole Life Insurance

• Policy is a permanent plan, so future insurability is guaranteed.
• Policy costs, and therefore, premiums are guaranteed
• Death benefit is guaranteed
• Minimum cash value is guaranteed.

Disadvantages of Whole Life Insurance

• There is little flexibility, with respect to premium and death benefit.
• Cash value accumulation may be at returns lower than other financial investment products.
• It provides less death benefit per premium dollar than other forms of insurance.
• Policy cash values may be accessible only by loan or surrender of policy.

Universal Life

These policies contain two components; insurance costs (which increase with the age of the insured) and the cash value component. Interest is paid on the cash value, with returns being similar to current money market returns. Death benefit may be structured to be level (Option A) or may increase as cash values increase (Option B).

All aspects of coverage (pure insurance cost; policy administrative charges; premiums; interest credited to cash accumulation, etc.) are detailed separately and disclosed on an annual policy statement.

Advantages of Universal Life

• Policy is a permanent plan, so future insurability is guaranteed.
• Premiums are generally lower than with some other permanent plans.
• Policy is very flexible, allowing increases or decreases in death benefit and premium.
• Policy cash values may be accessed by loan or withdrawal.
• Lump sum deposits may be made to the policy (within certain limitations).
• Detailed policy statement disclosure makes it easier to understand actual policy costs and benefits.

Disadvantages of Universal Life

• Policy costs may vary throughout the life of the policy (pure insurance and administrative costs) which can cause premiums and/or death benefit to fluctuate.
• Cash value accumulation will generally not be significant at money-market-equivalent rates.

Variable/Variable-Universal Life

These policies allow policyholders to make decisions concerning where the cash value portion of premium is invested. Policies generally offer a variety of investment alternatives, to include money market, growth and aggressive growth, income, bond, and specialized options.

Advantages of Variable Life

• Policy is a permanent plan, so future insurability is guaranteed.
• Variable-Universal plans have the same flexibilities and features described above for Universal Plans, relating to premium and cash value availability.
• Policy cash values have an opportunity to grow at returns comparable to returns experienced in the equivalent market. (ie, stocks, bonds, real estate, etc.)

Disadvantage of Variable Life

• Insured assumes full investment risk, and lower than anticipated returns can result in higher premiums, lower death benefits, or both.