The foundation of any financial security plan begins with the proper insurance. There are three types of insurance that are necessary for a well-crafted financial security plan: life insurance, critical illness insurance and disability insurance. This post is going to deal with the most common form of insurance: life insurance.

Life insurance allows people to address the financial risks of dying too soon. If you die too soon you may still have financial obligations that will be passed on to loved ones. Some common uses of life insurance are to provide an estate for heirs, funds to provide an income to survivors or financial resources to help children pursue their education.

There are two questions that you need to answer when thinking about life insurance: How much? What kind?

How much?

The first question can only be answered by figuring how much money you need to cover final expenses. Final expenses include such things as burial expenses (they average $10,000 to $15,000), taxes due upon death, total debt and any amount you want to leave to support loved ones or a charity upon death.

Once you have the amount of life insurance that is necessary you need to ask yourself the next question: What kind?

Term or perm?

The next step for figuring out the right need for insurance is to decide which of the above needs are temporary and which are permanent. Term insurance is the most cost-effective way to insure against risk that will disappear over time. Typical uses of term insurance are to cover debt, pay for a child’s education and cover replacement income.

Term insurance provides coverage for a certain specific period of time. You can usually find term insurance policies with durations of one, five, 10 or 20 years or sometimes for a period that ends when the person turns 65 years old.

Most term policies provide an option that allows the insured to renew the policy with the same death benefit without medical questions. This is a renewable term insurance policy. Another useful option to add to a term insurance policy is a convertible option. Adding this option offers an opportunity to convert a portion of the contract or the whole contract to a permanent insurance policy.

Adding renewable and convertible options to a term policy mean that if your final expenses unexpectedly increase you will be able to increase the amount of permanent insurance you have without medical questions.

Permanent coverage

My favorite form of permanent insurance coverage is whole life insurance. With permanent coverage, as long as you pay your premiums you will always have coverage in place.

I prefer whole life insurance because it offers a cash surrender value (CSV). The policyholder can take out loans against the CSV; this isn’t an option available with term insurance contracts.

Another benefit of a whole life policy is that there are non-forfeiture options available to the policyholder. Non-forfeiture options can protect the policy from lapsing if, for some reason, you miss a payment. Again, term insurance contracts don’t provide policyholders with this option.

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The first step in creating a plan to achieve financial security is the most overlooked. It’s not insurance, saving or investing. The first step is taking the time to craft a plan. While each person’s situation is different, there is a safe way to work your way towards financial security and independence. There are a few steps:

1. Get insured
2. Get liquid
3. Get rid of debt
4. Get into the market
5. Get rid of your mortgage
6. Get ready to give

When you work your way from step number one through to the final stage of financial security you are gradually managing risk, becoming liquid and creating and protecting wealth.

A financial security plan involves planning for both the wealth accumulation and distribution phases of your life. During the wealth accumulation phase you pay down debt and invest your money to increase your net worth. The steps listed above will help you plan the wealth accumulation phase of your life.

The steps listed above will not only help you craft a plan that will increase your net worth, but will also put wealth accumulation in the context of risk management. With proper insurance coverage and a liquidity fund you will be prepared to handle the unexpected events that can come your way when you least expect them.

My first post elaborating this plan will be out tomorrow and will be titled: “Insurance – net sexy, but necessary”.

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One of my new year’s resolutions is to have an official launch for Savings Chronicle in 2009. Another feature I will be adding to this site is the SC US Equity Portfolio. I have been selecting US based stocks based on certain value-based calculations. Beginning tomorrow, I will be updating my portfolio’s contents and performance on a monthly basis.

Happy New Year’s and best wishes for 2010,

Kent

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Thanks again for the mention,

Kent

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Every Wednesday, I will share my favourite items from my RSS feeds with you. Here is the first edition of Savings Chronicle’s Link Love.

Personal Finance

PT Money discussed how to rebuild your credit score.

Canadian Tax Resource debunks three common RESP misconceptions.

Larry MacDonald reports on further growth of ETFs as measured by assets under management in Canada.

The Financial Blogger goes back to the basics of personal finance.

Jonathan Chevreau at the Wealthy Boomer blog reports on the increasing number of Canadians that are looking beyond banks for their savings accounts.

Another post from the Wealthy Boomer that tackles the question, “Is saving too hard?”

General Business

A guest post at Venture Beat by Jeff Bussgang from Flybridge Capital Partners titled, “Negotiating VC funding? Look beyond ‘the pre’”.

Steve Blank at Venture Beat talks about how to fire a customer. I’ve had to do this several times and no matter how many times I do it, it seems counterintuitive.

Venture Beat reports on Google Adsense for mobile devices.

A great video from the Entrepreneur Corner at Venture Beat that talks about looking to the distant future, not the near future, to find profitable market trends.

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