• – By Al Emid. As read in Silver & Gold, Fall 2012

Protecting inheritance: Don't lose it all now!


We buy most types of insurance as a means of protecting something or someone, afact which has not changed since the earliest form of insurance over 5000 years ago. Historians believe that early Babylonian traders contracted with caravan operators for safe transportation of products to faraway markets. The famous code of Hammurabi provided for ships and cargoes to be used as security against possible losses.

Another historical explanation suggests a form of insurance closer to the modern day version. Chinese families on the Yangtze River would band together to protect themselves from loss. In one example, four families put some of their property in each other’s boats so that if river pirates sank one boat each family lost only part of its possessions.

Today, the basic principle of insurance remains the same: transfer and sharing of risk and protection of loved ones and cherished assets. An insurance policy usually amounts to a written undertaking for these reassurances.

A well-constructed insurance portfolio might contain one or more of several types of insurance. We look to critical illness insurance to provide payouts if we are diagnosed with one of a variety of illnesses ranging from cancer to heart surgery or kidney failure. We look to disability insurance to cushion the financial shock of being unable to work and long-term illness insurance to see us through longer-term medical problems. When accepting an offer of employment, we may trade off salary expectations against better employer insurance benefits, again recognizing the need for protection.

While we usually associate these types of insurance with adults, they are suitable for children under specific circumstances, and when finances allow for the cost of premiums. Children whose parents arrange for critical illness insurance at an early age will often pay less for their premiums as adults. In an idea world, insurance coverage begins at an early age and continues throughout the entire life span.

By around the time we reach the age of 55, we may have benefitted from one or more of these types of insurance and perhaps payouts from these policies meant that we could protect investments and savings from medical bills in times of emergency.

At this stage, we may be slowing the accumulation phase of investments and savings – or preparing for a slowdown as we contemplate retirement and start to look upon the major uses for what we have accumulated.

We may enter the de-accumulation phase in which we start using the wealth that we have put away for our retirement and start thinking more seriously than previously about leaving some of these assets to grown children or grandchildren. Where finances allow we may contemplate laving a legacy to one or more favourite charities.

Leaving an inheritance intact for beneficiaries may increasingly loom large in our thinking for one or more of several reasons: perhaps we inherited assets from our own parents and want them to stay in the family; perhaps we only gave our children limited financial help during their early years because we needed to safeguard limited funds for our later years; perhaps we worry about their financial situation due to a hazy employment picture.

Notwithstanding intended generosity, plans to leave a substantial inheritance to help beneficiaries after decease face several threats including our own longevity. How long are we going to live, drawing down the assets we have accumulated? What kind of medical bills or possible nursing care expenses will we face? Will government cutbacks shift more of the onus on us to pay for these expenses?

To a point, we can control and anticipate some of those factors. At the same time, various domestic and global forces beyond our control can potentially erode the assets we have worked so hard to leave for our beneficiaries. Globally, the continued crises, an apparently decelerating recovery, and the very real possibility of continued economic tumult next year combine to hang a question mark over our assets and the stability of their values.

Here at home, we face some inflationary forces that could have the same effect. At time of writing, analysts speculate that the severe drought in the United States will lead to higher grocery prices in both countries.

Also at home, long-term care costs can only rise, a harsh reality that many baby boomers accustomed to provincially-funded medical plans may not factor into their calculations. Costs for even a simple funeral can range from $10,000 and upwards.

Moreover, we feel entitled to enjoy some of life’s pleasures – such as the extended travel that we postponed during the accumulation years. We want to travel more – and for longer durations -- in retirement than previous generations, but we may not feel ‘up’ for doing it on ‘the cheap’ in the way that teenagers and twenty-year olds may choose...

Additionally, we’re living longer, meaning more years of travel or medical expenses or both. According to Statistics Canada, the national average life expectancy for a male reached 79 years, effective 2007-2009. That amounts to a full two decades longer than the expectancy of 59 years in 1920-22. The national average life expectancy for a female reached 83 years of age, effective 2007-2009. That amounts to a full 22-year increase from 61 years of age, also in 1920-22.

In fact, seniors make up the fastest-growing age group. This trend is expected to continue and double in the next 25 years.

In order to provide a substantial inheritance to our children, however, we also have to take measures to protect assets from the inevitable expenses on decease. Alternatively we may not have accumulated sufficient assets to leave a large inheritance and still want to leave something to be remembered by or to help adult children deal with life milestones such as making a house down payment or paying for their children’s education, or to provide for a surviving spouse.

Meanwhile we may not have enough life insurance to cover all of these bases. Alternatively we may not qualify for traditional life insurance due to health problems or perhaps earlier life insurance coverage has lapsed.

Dealing effectively with these obstacles to leaving an inheritance large enough to care for a surviving spouse, and assist children and grandchildren and shielding assets from heavy funeral expenses can be accomplished with life insurance.

Guaranteed acceptance insurance – often simply called ‘GA’ can provide the solution, especially where the individual may not qualify for more traditional life insurance. In effect, GA can be an important tool in estate planning since it provides a lump sum benefit at time of decease, reducing or eliminating the impact of final expenses on estate assets.

In practice, choosing GA means that the individual does not have to face medical examinations or answer embarrassing medical questions. Provided that the applicant is a Canadian citizen and in the prescribed age group they cannot be turned down – acceptance is literallyguaranteed.Coverage is for life and the premiums will never increase after policy purchase. The policy pays five times the face amount in the event of accidental death.

One such provider is RBC Insurance, which provides GA insurance products through its own brokers as well as those at national financial institutions. As with most forms of insurance, the premiums represent only a fraction of the money at stake. Arguably the potential payout – whether at face value or at five times face value, far exceeds premiums. The policy terms provide for advancing up to 50% of the face value in cases where the policyholder is diagnosed with 24 months or less to live, thereby easing the palliative phase. In this situation the other 50% remains intact for funeral expenses and/or for inheritances to beneficiaries.

Contrary to what some may believe, insurance is not just a rich-folks priority. It applies to anyone who has even a modest estate and wants to ensure that the intended beneficiaries benefit from the inheritance you protected for them. It also applies to anyone who wants to leave a lasting memory of themselves with their loved ones, or anyone who wants to ensure they do not burden their loved ones with large funeral expenses.

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Al Emid is an author and financial journalist covering investing, banking and insurance, and has received a journalism fellowship in topics related to retirement issues.

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