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At any point on the continuum to age 75, if
any illness (not just what is covered by the plan)
should manifest he would have more money
than what the policy promises to pay; in short
William becomes self-insured.
Allocation of claim
If William were to exercise all of his rights
with his insurance policies he would have
available, a capital sum of $1,320,000 (Indi-
vidual Policies: $1,200,000 + Group Health:
To answer the question of how best to al-
locate these funds, we first must think about
William's short-term and long-term goals.
Emergency Funds: In any good financial
plan there must be some provision for emer-
gencies, often multiples of monthly income.
Whilst we were not given his salary figure
if we assume his mortgage represents 35 per
cent of gross income, he should have about
$52,000 ($6,068 / 35% = $17,337 x 3 months)
in a relatively safe and accessible investment.
Rental Apartment: It may seem counter-
intuitive to put a construction project before a
medical reserve but the reality is William needs
to ensure some form of passive income is com-
ing in if he is unable to work again. The apart-
ment, which is estimated to cost $350,000,
would achieve some part of this goal.
From an investment standpoint, whilst he
would earn five per cent per annum on his
credit union account, the property would
give him more value for money especially as
rents are expected to increase with inflation.
If a $350,000 capital outlay would generate
$48,000 annually then the return on this
investment would be 13.7 per cent annually
Further, his net worth would also see im-
provements not only from the $350,000 in-
jection but also in capital appreciation as the
property value increases over time.
Debt Elimination: William can choose to
carve out $500,000 from his potential nest egg
to treat with future medical issues and direct
the remaining cash to paying down his mort-
gage. The decision to do this depends on how
likely or how quickly his health deteriorates if
at all. Either way the benefits of eliminating
part or all of his debt are obvious in terms of
interest savings and cash flow.
Based on a loan balance of $800,000 and
monthly payments of $6,068 for 21 years, the
implied interest rate on his mortgage is seven
per cent per annum.
From a purely "return on investment" stand-
point, $100 used in paying towards his seven
per cent debt, will have a more favourable
impact on his net worth than investing the
same $100 in an account that earns him five
per cent per annum.
Debt Option 1: For ease of illustration let
us assume the only asset William had was
$800,000 invested in an account that yield-
ed five per cent per annum (compounded
monthly). On the liability side, he has the same
amount in debt at seven per cent interest per
annum (compounded monthly); his beginning
net worth would be nil ($800,000 - $800,000).
If the debt payments are $6,068, after 21 years,
the loan balance would be brought to zero and
the savings account would have a future value
Debt Option 2: On the other hand, if he
chose to use his $800,000 from his savings
account to clear off his debt of $800,000 im-
mediately, he would still have a net worth of
zero ($0 - $0) but instead of paying a mort-
gage of $6,068 he now directed it towards his
savings account at five per cent per annum
(compounded monthly) for 21 years, William
would accumulate $2,696,266 and with zero
debt thus a net worth figure of $2,696,266 or
$415,127 more than with the alternative option.
Self Insurance: If William chooses to set
aside $52,000 for emergencies, $350,000 for
the apartment and $800,000 for his debt he
would be left with $118,000 to provide self-in-
surance for future illnesses, which would in-
crease every month from the following:
• Previous insurance premiums (inclusive
of the $575 critical illness policy) once claims
are made the monthly premiums are no longer
• Monthly mortgage installment of $6,068
that he no longer has to pay.
• Monthly rent of $4,000 and
• Interest at an annualised rate of five per
If William chooses, instead, to set aside the
$500,000 for self-insurance he would be left
with $418,000 for debt, which he could then
eliminate in 43 months if he added the rent of
$4,000 to the regular installment of $6,068.
Nicholas Dean (CertFa) is a certified
independent financial adviser and is the
managing director of The Financial Coaching
Centre Ltd. If you have any questions or
need advice on today's subject please email:
email@example.com or visit website: www.
MARCH 9 • 2017 guardian.co.tt BUSINESS GUARDIAN
FINANCIAL ROAD MAP | BG17
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