Welcome to the fifth and final challenge Smart Money Training Camp. Our final section is about an important but often overlooked aspect of personal finance: getting ready for your life.
Of course, we all know to at least plan for some worst-case scenarios. Car insurance is mandatory. Home insurance is a smart choice. Many people buy life insurance when they have a baby.
But if you are a renter, do you have renters insurance? Have you written your will? Do you know what a power of attorney is? (No judgment: I didn’t know that until I started covering personal finance.) You may not even realize that these should be on your crisis preparedness list, too.
Even some of the obvious line items on that list aren’t as straightforward as you might think. For example: Does your home insurance protect you from floods or sewer backup? Will your employer’s disability policy continue to pay if you are unable to work for more than two years? You’ll be amazed what’s in the fine print.
Here’s an overview of common holes you might want to plug into your disaster plan, along with tips on how to go about it.
Home and Renters Insurance Pitfalls
Just because you — or your landlord — have a home Insurance Doesn’t mean you have enough coverage. Beware of these three pitfalls:
- Renters insurance (also known as renters insurance). Do you think your landlord’s insurance policy will cover the cost of repairing or replacing your stuff if it is damaged or stolen? Think again. If you rent, you need tenants insurance, which also protects you if someone sues you for damage to other units or if you injure themselves or cause damage to their property while you are renting out. The general rule is to get at least $100,000 in insurance, but some suggest $1 million, depending on your belongings and the value of the rental unit.
- flood insurance. Standard home or renters insurance policies will be in effect for things like broken pipes and leaky dishwashers. But if outside water is flowing or backing up through your windows and doors into your basement, you’re likely on your own, unless you’ve signed up for additional water damage insurance, which is optional. This doesn’t just apply to people who live near rivers, lakes or oceans.Climate change makes flooding No. 1 source of Canadian home insurance claims – estimates 1.7 million households exposed to this risk.
- Condo Insurance. Condominiums — also known as strata in parts of British Columbia and Alberta — have commercial policies that cover the building structure itself and common areas. Apartment owners often think that’s all they need. In fact, you’ll need to buy your own condo policy if you don’t want to pay out of pocket for things like damage to items, additional living costs if the apartment becomes uninhabitable, or compensation to neighbors if your shower leaks into their living room. You may want to talk to an insurance broker to make sure your policy is a good fit with your condo company’s coverage so you don’t have to pay for anything that isn’t covered by either plan. Finally, choose your apartment carefully in the first place. Soaring Insurance Rates and Deductibles Has become the bane of many apartment owners. Before buying, make sure your building has adequate coverage and that the condo company has enough money set aside in its reserve fund to cover repairs and maintenance. Your real estate attorney can help you.
Watch out for this condition in your disability insurance
Long-term disability (LTD) insurance will replace a portion of your paycheck if injury or illness causes you to lose your commission for an extended period (or even permanently).
- Your workplace coverage. If you have a group benefit plan at work, it may include an LTD policy. Some employers provide coverage for work-related injury or illness through provincial workers’ compensation boards, which are mandatory in certain industries. These employers may also offer supplemental group plans.
- catch. If you have a group plan, check your insurance brochure. Some plans only provide coverage for a limited period of time, such as 10 years. But even if your maximum coverage period is extended to age 65, many insurance companies apply stricter eligibility rules after you become disabled for two years. Typically, you will lose coverage after two years unless you are deemed unfit not only for your original job, but for any job for which you are reasonably qualified, known as the “any occupation” test. The risk is that you will lose your income while you are still too ill or injured to return to your normal income. If you’re not sure if your insurance company will switch to any occupational testing after a while, it’s worth emailing HR for clarity.
- Then what? You can buy a supplemental individual policy, but it will expensive. One way to limit your premiums is to choose to wait two years before receiving benefits from your individual LTD insurance. Remember: your workplace program may cover the first two years.
- If you don’t get insurance through your job. If you work for yourself or for a small employer that doesn’t offer a generous benefit package, it’s worth considering an individual policy that can replace at least some of your income. Remember, generally, disability income from individual plans is tax-free. That means you can match your normal take-home pay with benefits that are significantly less than your pre-tax paycheck.
Who needs a will and what is a power of attorney?
Writing a will isn’t just for celebrities and rich uncles. It’s also a good idea to have a Power of Attorney (POA), which is a legal document that sets out who should make decisions on your behalf and how you can be instructed if you are unable to make decisions yourself.
Here are some things to know:
- Everyone needs a will – even if you are single. If you are a parent, your will sets out, among other things, who you want to care for your children after your death. If you’re in a common-law relationship, a will can help your partner make a claim on your assets, which they might not automatically receive if you were unmarried. Even if you’re single and don’t have strong feelings about who deserves your stamp collection, you may want to make a will. Generally speaking, an up-to-date will can make it easier for your survivors to settle your affairs. Without it, the court will have to appoint someone to manage your estate (what you own, as well as any debts), which may take a while. Making a will also helps reduce the possibility of family legal disputes.
- There are two types of POAs. Unlike a will, which only comes into effect after your death, a power of attorney applies while you are alive, setting out your wishes for your care and who will act on your behalf if you become incapacitated. With a property POA, you authorize others to make decisions about your property and finances. A Personal Care POA appoints someone to make decisions about medical care on your behalf. It also lists your wishes, such as whether you want to be kept on life support if the doctor thinks you have no chance of regaining consciousness. Admittedly, none of these are enjoyable scenes to contemplate, but they certainly are. A personal care POA may also be called a health order or representation agreement.
- Low-cost options to get it done. online services such as capricious.co and Legal Will Network Works a bit like tax software — you’re prompted to enter information and answer questions — and allows you to create a will and POA at an affordable cost. If you want more help, some law firms have built barebones services that can guide budget-minded clients through the process.
try this at home
- Check your home or renters insurance policy: Does it cover flooding?
- Pull out your workplace benefits booklet now. What does it think about disability insurance?
- You can get disability insurance quotes online from a variety of insurance companies – start comparing. Also don’t forget to check how your premiums will change if you choose a longer waiting period (but don’t try to save money by choosing stricter eligibility criteria or shorter coverage periods that won’t let you retire) .
The last sentence
This is it! Congratulations on passing the MoneySmart Bootcamp. I hope that everything you’ve learned over the past five weeks has helped you handle some of the money decisions you face with more confidence. But remember, a one-time bootcamp isn’t enough to achieve a healthy lifestyle—you have to stick with it. The same goes for personal finance: it’s a lifelong learning journey.
If you liked this newsletter course, you might also like pressure test, The Globe’s award-winning personal finance podcast for Gen Z and millennials. Listen to podcasts for free anytime, anywhere.