Early Death and Disability – How They Affect Real Estate Investors

How Death and Disability Can Affect Young Real Estate Investors

Death and dis­abil­ity are no one’s fa­vorite topic, but they do oc­cur, and they of­ten oc­cur at the worst pos­si­ble time.

Younger real es­tate in­vestors are of­ten busy, busy, busy!

Young kids, work, side-gigs, and of course a newly ac­quired port­fo­lio of rental prop­er­ties all eat up your time and cash-flows, leav­ing you with no en­ergy or cash at the end of the day to con­sider build­ing up a sig­nif­i­cant pool of emer­gency funds.

This is all great when you’re healthy, but what if you’re not?

The fi­nan­cial risk to such fam­i­lies stems pri­mar­ily for the lost earn­ing po­ten­tial when the fam­ily is not yet fi­nan­cially es­tab­lished.

This can be a mas­sive un­de­tected risk for your fi­nances, like a hid­den can­cer wreak­ing havoc on your long-term fi­nan­cial plan.

For ex­am­ple…

Frank and Kristine are a 40-year-old cou­ple:

• Frank works as an IT man­ager for a ma­jor bank earn­ing $150,000 per year
• Kristine works as an HR man­ager for a mid-sized pro­fes­sional firm earn­ing $150,000 per year
• Both are healthy, non-smok­ers
• Own their home (mortgaged) and two rental prop­er­ties (mortgaged)
• Have some RRSP/RPP sav­ings and no TFSA or RESPs
• 2 kids aged 5 and 8
• Not much in the form of emer­gency sav­ings and only lim­ited ac­cess to an un­se­cured line of credit

The fi­nan­cial cost of early death or dis­abil­ity to ei­ther Frank or Kristine would be DEVASTATING.

Have a look at the fig­ures be­low…

The death of ei­ther spouse would cre­ate an im­me­di­ate cash need of roughly $2,000,000! Without this type of sav­ings, the fam­ily would ex­pe­ri­ence a sig­nif­i­cant de­crease in their fi­nan­cial well-be­ing and likely de­rail their long-term fi­nan­cial plans.

Further, a ma­jor ill­ness or dis­abil­ity could leave ei­ther spouse un­able to work, cut­ting their earn­ings to zero and they would still need fi­nan­cial sup­port to main­tain them­selves.

In fact, the chances of ei­ther spouse be­com­ing dis­abled are higher than death, and the fi­nan­cial con­se­quences could be even worse!

SOLVING THE PROB­LEM

Saving $2,000,000 is both im­prac­ti­cal and im­pos­si­ble for this cou­ple. Yet, ac­cess­ing this type of money in a cat­a­stro­phe would be nec­es­sary to en­sure the fam­ily main­tains its stan­dard of liv­ing.

Rather than at­tempt­ing to fund the risk them­selves, the smarter move would be to use in­sur­ance to cover the risk.

Life in­sur­ance is sim­ply a con­tract be­tween an in­sur­ance pol­icy holder and an in­surer, where the in­surer promises to pay a des­ig­nated ben­e­fi­ciary a sum of money upon the death of an in­sured per­son.

In a sim­i­lar man­ner, Critical Illness in­sur­ance and Disability Insurance are con­tracts be­tween a pol­icy holder and an in­surer, where the in­surer promises to pay a des­ig­nated ben­e­fi­ciary a sum of money (or a se­ries of pe­ri­odic sums in the case of Disability Insurance) upon the di­ag­no­sis of a Critical Illness or oc­cur­rence of dis­abil­ity of an in­sured per­son.

Life, Critical Illness, and Disability Insurance al­low in­di­vid­u­als to pool their risk of fi­nan­cially pun­ish­ing out­comes to­gether, thereby spread­ing the risk among many in­di­vid­u­als.

The re­sult is both AFFORDABLE and EFFECTIVE.

In the case of Frank and Kristine, sim­ply set­ting aside a mere 3% of their an­nual in­come pro­vides them with the cov­er­age they need in the worst pos­si­ble case sce­nario.

Further con­sid­er­a­tions

But we don’t end it there.

One of the beau­ti­ful things about the term life in­sur­ance poli­cies that Frank and Kristine chose is the con­vert­ibil­ity fea­ture.

Most ma­jor life in­sur­ance com­pa­nies al­low their term poli­cies to be con­verted to per­ma­nent poli­cies within the first 5 years of the pol­icy, with­out ad­di­tional med­ical un­der­writ­ing.

As Frank and Kristine con­tinue down their real-es­tate jour­ney, they will in­evitably be­gin to grow their wealth through smart in­vest­ing, hard work, pos­si­ble in­her­i­tance, etc. etc.

When the time is right, and the cash flow al­lows, the cou­ple can con­vert their term poli­cies to per­ma­nent poli­cies and em­ploy more com­plex fi­nan­cial and es­tate plan­ning tech­niques.