Financial resilience gets you to the finish line on time
- David Cooke
- 2 days ago
- 5 min read
Key takeaways
Illness and injury can prevent you from reaching your goals if you can’t replace your income.
Critical illness insurance can pay for things your government or private plan doesn’t.
Disability insurance covers almost anything that prevents you from doing what you do for a living, and provides a monthly income until you recover.
The cost of income protection due to illness or injury is very affordable compared to how it could derail your financial plan.
Imagine your goal is to run a 26-mile marathon, but you can only run it once. Those are the rules.
You’re ready to work hard and set a realistic goal, like finishing in 4 hours, which is pretty good according to the folks at Marathon Handbook. They dug into a dataset of 19,614,975 marathon results from 32,335 races worldwide, which suggests a “good” marathon time across all sexes and ages is 3:48:20.[i] That’s good enough for me.
Now, suppose you’re on Mile 22 with the end in sight. You’re on track to hit your goal, and you’re proud of what you’ve achieved. Then, a race official informs you that you must hop into their golf cart and be driven back to Mile 13, where you’ll have to resume your race, and the clock will not be reset.
You’d be furious
You ask the official why this is happening, and they say, “That’s life. Stuff happens.” Suddenly, your goal of reaching the finish line in 4 hours is shot. There’s no way you can go back to the halfway point and make up the time.
Sadly, that’s exactly what happens to people with no Plan B to cover the cost of getting sick or injured. Forced to cash in some of their savings, they lose ground and have to rebuild the wealth they lost. For example, let’s look at a couple of realistic scenarios.
One partner gets diagnosed with a critical illness
A middle-aged working couple with a net worth of $800,000 in investible assets might feel pretty good heading into the later years of their careers. Using the Rule of 72, they expect the money to double in about 12 years, bringing it to $1,600,000.[ii] That’s a reasonable assumption that relies on no interruption to their current income.
Now assume one of them survives a critical illness, but they need to liquidate about $200,000 in cash to cover expenses not covered by government plans, such as:
Treatment at a private clinic
Counselling
Physiotherapy and massage therapy
Recovery time
Additional child care
Flying in relatives to help around the house
Wigs and prosthetics
Dog walkers (can’t forget the dog)
Lawn-care services and home cleaning
Suddenly, their investments are worth $600,000 and will only double to $1,200,000 in 12 years. The net, long-term loss is the $200,000 they took out of their investment plan and the $400,000 in lost opportunity. The real cost of the illness was $600,000 ($200,000 + $400,000).
Why we recommend critical illness insurance for income-earners If this couple had critical illness insurance coverage, the policy provider would have issued a tax-free, cash benefit to spend any way they wanted. With cash in hand, they could easily manage all the expenses listed above, and their investment portfolio would still be on track to meet their retirement goal. How much does critical illness insurance cost? Had the couple in this example each purchased $200,000 in critical illness insurance, the cost would be under $100 per person per month. Compare that expense to the $600,000 hit their portfolio took by being uninsured. |
Disability
Lots of people get diagnosed with critical illnesses and survive. They go on to lead great lives. The same can’t be said for their wealth. If you are sidelined by one of the most common conditions, like cancer, and you can’t work, you will have to pay for expenses not covered by government insurance plans, such as:
Her salary
A lease on the company van
Insurance premiums
Company debt
Retirement savings
Her mortgage
Plus, she still has to pay all of her personal expenses, such as the mortgage, utilities, personal debt, and everything else we all pay each month. With no way to replace her lost income, she has no choice but to call her financial advisor and create a plan to draw money from her savings until she can get back to work.
If she drains $80,000 from her TFSA, which her advisor says is the most tax-effective way to make ends meet, she loses all the future investment returns she could have earned. At a realistic 6 per cent rate of return, that $80,000, left untouched, could have grown tax-free to just over $350,000 by the time she plans to retire in 25 years
Why we recommend disability insurance for income earners The moment this young entrepreneur temporarily lost her ability to work, she would qualify for disability. Within about a month, she would have started receiving regular payments that serve as income replacement. Her TFSA could stay topped up, and her savings plan stays on track.
How much does disability insurance cost? Two things drive the cost of disability insurance: how much income you need and for how long. A healthy, young entrepreneur looking to replace 65 per cent of their income from now until retirement age would typically pay less than 2% of a year’s salary for coverage. That’s a reasonable price to pay for lifetime financial resilience. |
These are just two examples of how you can create more wealth resilience by having a Plan B that will replace your income and allow your savings to stay on track. If you never need these benefits, consider yourself lucky. You made it to the finish line and met your goals without illness or injury. It’s no different than having insurance on a boat that never sank or a house that never burned down.
This is the kind of practical advice and financial opportunities our process reveals as we learn more about our clients and what they value in life. To learn more about all the ways we can help you build a more resilient financial plan, book an appointment online or give us a shout at 905-361-2026.