Remember Aesop’s fable of “The Goose Who Laid the Golden Eggs?” The greedy owner couldn’t wait for the goose to lay the next egg. He killed the goose, thinking he’d get all the gold up front. His eggs went runny!
A smarter farmer would have taken proper care of his champion goose. He would have been rewarded with better quality and frequency of those golden eggs. He would also have done some insurance planning with life, disability and critical illness insurance on the goose!
Insurance Planning Beyond the Fairy Tale
Starting to see the analogy to real life? We spend a lot of money today focusing on the golden eggs, our “stuff.” Although we may insure these assets, we don’t often insure our ability to produce those “golden eggs.” Our households may be devastated by a sudden death disability or critical illness..
We must replace our economic value during the working years and protect our assets from erosion thereafter. Insurance planning helps us determine the right amount and type of coverage to get.
Here’s another issue: do we insure the goose when it retires? After all, the debts are often paid off by that time and there’s money in the Pension, RRSPs and RRIFs. Canada Pension Plan and Old Age Security also start kicking in. There might even be some investment portfolios, revenue properties or a family business. The goose has become financially independent.
The Problem that Insurance Planning Solves
Here’s the problem. All these investments can carry a big silent tax liability! Capital gains and recapture taxes are due upon death, as are income taxes on RRSP and RRIF balances. Mr. Goose can pass his estate along to Mother Goose without any tax. However, the goslings will have to sell off pieces of the estate to pay CRA and others when she dies.
Add to this the possibility that Mother Goose could be short on cash if Mr. Goose’s pension reduces when he dies.
There are other matters, including probate, legal, accounting and executor fees, burial expenses, etc. There is probably little idle cash because the Goose Estate has been so wisely invested. Fire sale prices will further shrink the nest-egg when the surviving family is forced to sell off assets to pay these expenses. The Goose estate should have carried sufficient amounts of permanent life insurance. This would have delivered the needed liquidity when it was needed the most – at the time of death.
There’s a lot of wisdom to be found in fairy tales when life gets complicated! We then have to bring it back to real life and get serious about our financial and estate plans. Insurance planning can play a significant role in smoothing the rough edges, no matter what stage of life we’re in.