Jillian Carr, an associate advisor with Riverview Insurance Solutions in Red Deer, Alta., received a phone call in 2013 from her very first clients, a young, local family who had bought disability and critical illness (CI) insurance only months before. The wife had crushing news.
Her husband, an executive with a good salary, had just been diagnosed with multiple sclerosis (MS), the unpredictable autoimmune disease of the central nervous system that affects an estimated one in every 385 Canadians. Fortunately, despite a two-year contestability period in which insurance companies can investigate and deny claims on new accounts, the insurer paid the couple’s CI insurance claim within 90 days.
Ms. Carr delivered the six-figure cheque – a year’s worth of tax-free income – but remembers wishing out loud it had been for much more.
“Their comment to me was, ‘Jillian, no amount of money could ever make me feel better or get my health back, but you have given our family so many choices right now,’” she says.
As any financial advisor knows, not all stories have a similar ending. Serious illnesses can lead to serious financial consequences – particularly for younger clients who miss out on their prime earning years. Not only are they dealing with lost wages for a prolonged period of time, illness brings unexpected expenses ranging from hospital parking fees to medications insurance won’t cover. According to data from Sun Life Financial Inc., 42 per cent of Canadians who reported they’d had experienced a serious health event said they suffered some degree of financial hardship.
That’s precisely why taking clients through an exhaustive financial planning exercise that covers everything from retirement, taxes, wills and estates and emergency planning is so important, says David Spencer, director, private client group, at First Avenue Investment Counsel Inc., in Toronto.
“The goal is trying to do the planning before something bad happens,” he says. “When something like that happens and you haven’t planned for it, there are only so many tools you have at your disposal, unfortunately.”
After an insurance payout – if there’s one at all – and any employment benefits, the remaining available financial tools have a hierarchy in any emergency plan. Getting access to liquid capital is the first step, so Mr. Spencer will look at whether a client has funds in a tax-free savings account (TFSA) or non-registered account. Is there an emergency fund to tap? Money set aside for upcoming vacations?
Then, he’ll recommend having access to lines of credit as emergency reserves – particularly home equity lines of credit with low interest rates. While not ideal, as these tools incur debt, they can be used to “draw capital quickly in a situation in which there’s no other option,” Mr. Spencer says.
In fact, using low interest credit might be a better option than raiding a registered retirement savings plan (RRSP), he explains. If assets from an RRSP are taken out too early, not only does the ill client lose the ability to use the tax-sheltered money later on, but withdrawals can be taxed heavily – especially if the individual worked for most of that year and is in a higher tax bracket.
“Once you start withdrawing in excess of $15,000, you’re giving up 30 per cent right out of the gate,” he says, explaining that financial institutions are required to hold that percentage at source.
Ms. Carr adds that drawing from RRSPs can be especially problematic for extended families. In many cases, millennials simply haven’t been able to build savings. If they don’t have disability or CI insurance, they’ll often turn to parents for support, who then raid their own RRSPs and put off retirement indefinitely.
She’s also spoken to other younger clients who expect to use social media crowdfunding or GoFundMe campaigns to raise money in an emergency.
However, Ms. Carr says that GoFundMe campaigns mean that people have to put their very personal stories out into the world. Instead, she says, “we have the ability to ... maintain our independence as a young generation [and] transfer the risk to an insurance company.”
And if someone falls ill before they have a chance to buy insurance? That’s what happened to one of her clients, a woman who was diagnosed with Stage 3 breast cancer at 23 years of age and has been uninsurable since. Instead, Ms. Carr has helped the client put together a piecemeal plan that includes self-insurance. The woman socks away cash each month to use later if she’s ever sick again.
Not all clients are as financially level-headed – particularly in the weeks and months after a shocking diagnosis.
Dorothy-Anna Orser, a senior investment advisor and portfolio manager at Echelon Wealth Partners Inc. in Toronto, remembers a wealthy client who called her wanting to “sell everything” because he had just been diagnosed with prostate cancer. “And I said, ‘Well, to begin with, you want to start with [the belief] you’re going to beat it, right? You want to look at the best and the worst case.’”
That’s also the approach Mr. Spencer takes when speaking with a client who has been newly diagnosed with a disease. Unless the person has been told their illness is terminal, it’s important to plan as though the person is going to survive.
After all, according to the Canadian Cancer Society, 63 per cent of Canadians who are diagnosed with cancer are expected to survive at least five years. The net survival rate is 93 per cent for prostate cancer and 88 per cent for breast cancer. Chances are good they’ll need savings later.
“You never want to be in a situation in which you’ve outlived your money,” he says.
Ms. Carr agrees, but says advisors still need to know when it’s time to step back and allow people to use their money the way they want. She points to the young family with the father who has MS. He has been able to work for a few years with the disease and just recently made a claim for disability. But that CI money? They use it to take family vacations and enjoy life.
“It’s their money, and unless we’ve gone through a situation like they have, we don’t get to say how they should spend it,” she says.