Financial Considerations
Your financial needs evolve as you age, grow your income, assets and family, take on new debt or a new job, etc. This series will follow sample profiles to get a feel for the financial needs at various stages of life.
David is 32 years old. He and his wife have a 2 year old son and are expecting their second child in a few months. He is a Dentist and is earning a significant income. They bought a home and have a mortgage of $500,000 and a $50,000 line of credit. He has adequate disability insurance and life insurance and reviews his coverage annually with his advisor. He has started saving in an RRSP and TFSA and self-directs the investments using an online platform. Now that he is more established it’s time to build from the good foundation that is already in place to ensure that he continues to meet his financial goals.
Business Overhead Insurance:
David already has the proper amount of disability insurance in force to ensure that his income is replaced should he be unable to work due to an injury or illness, but what about the business expenses that he is responsible for? Business overhead insurance is designed to help self-employed individuals pay ongoing fixed business expenses, such as salaries, rent, utilities, licensing, professional fees, etc. should a disability occur. Eligible expenses are reimbursed up to the maximum monthly benefit. The premium is paid for by the business and is a deductible business expense. This coverage ensures that his fixed business expenses are covered and prevents him from dipping into savings or using his personal disability coverage to pay for them.
Insurance for Children:
David and his wife will soon be the parents of two children under age 3. They should consider life and critical illness insurance on their children, as there are many advantages to doing so:
It protects their children’s future insurability should something happen to their health down the road.
It provides cash flow should something happen to their children, allowing them to take time off of work.
The premiums are relatively inexpensive.
Permanent Life insurance can be implemented as a tax-sheltered investment option and/or used to pass assets down to the next generation.
Some of these plans are fully paid up after 20 years and/or include options to convert/add additional coverage without a medical.
Incorporation:
David has been a self-employed dentist for a few years and he is starting to develop excess cash flow. He can now start thinking about incorporation. In doing so, he can retain his savings in his corporation which is taxed at a much lower tax rate than personal income giving him more money after tax to invest for his future. He can also transfer some of his insurance policies to his corporation and use lower-taxed corporate dollars to pay for his premiums.
Financial Planning:
David is self-directing his investment portfolio and is unsure if he is allocating the right amount of money to the right accounts, or if he should be paying down his debts more aggressively. The best way to determine the right course of action is to complete a financial plan. A financial plan will take into account their incomes, spending, investments, debts, assets, and future goals to provide them with a snapshot of where they are at, a projection of their future financial health, and recommended actions to enhance that future.
Investment Planning:
At this stage, David feels comfortable managing his own investments, especially with the guidance of his financial plan. However, with a second baby on the way and a growing practice, he may not be able to devote the time needed to manage his investments forever. He should start exploring other options and look for investment managers to work in harmony with his financial planner to ensure a holistic approach to his financial affairs.
Health and Dental Insurance:
Now that David is more established, it would be beneficial for him to set up a health spending account, traditional group benefits, or a combination of both for him and his employees. Health Spending Accounts provide you with an allowance of funds to claim a wide range of health and dental expenses. The account would be a deductible business expense for the corporation and it would reimburse the expenses to David and his employees tax-free.
He could also implement a traditional group insurance plan to provide his family and his employees with health and dental insurance, or a combination plan that includes some traditional benefits such as drugs and extended health care with a supplemental health spending account.
Implementing coverage will not only benefit him and his family, it will also help attract and retain employees for his practice.
If you would like to review your personal financial situation, connect with one of our trusted advisors using the link below.