When people take stock of their finances, they usually start with the assets they can put a value on. Home equity, investments, retirement savings and business interests all contribute to net worth and provide a useful picture of financial progress.
Future income deserves a place in that picture as well.
Consider someone earning $100,000 a year with 20 years remaining in their career. At their current income, they could earn another $2 million in gross employment income over that period, even before considering raises, bonuses or other increases in compensation. That income could fund mortgage payments, retirement contributions, education costs, investments and everyday household expenses for decades.
For many working Canadians, their future earnings represent an enormous source of financial value, particularly during the years when they are still building their wealth.
The Role Income Plays in Building Wealth
A growing net worth can provide greater financial flexibility, although many households continue to rely heavily on employment or business income throughout their wealth building years.
Financial commitments often increase as careers progress. A household may purchase a more expensive home, have children, increase retirement contributions, begin investing more aggressively or simply take on a lifestyle that requires more monthly cash flow. Each of these decisions can be perfectly manageable while income continues to arrive as expected.
An extended interruption in that income can change the financial picture considerably. Savings may need to cover regular expenses, investment contributions may be reduced or stopped, and assets that were intended for long term goals may need to be accessed earlier than planned.
The Financial Consumer Agency of Canada recommends reviewing insurance needs as circumstances change and specifically identifies major life events such as purchasing a home, starting a family and starting a business as times when coverage needs may change.
This makes income protection particularly relevant during periods when a large portion of someone's financial plan still depends on future earnings.
Putting a Value on Your Earning Years
Looking at income over an entire career helps put its value into perspective.
Someone earning $150,000 annually with 20 working years remaining could potentially earn another $3 million in gross income at their current salary. Someone earning $80,000 with 25 years remaining could earn another $2 million.
These are simplified examples and do not account for taxes, periods of unemployment, salary changes or inflation, but they illustrate the scale of the income that can still flow through a household during the later stages of a career.
That cash flow can also have an impact well beyond the amount earned. A portion may be invested each year and allowed to compound for decades. Another portion may reduce a mortgage or other debt, gradually increasing household net worth. Future income therefore plays a central role in determining how much wealth someone may ultimately accumulate.
This is one reason an extended inability to work can have consequences that extend beyond the immediate loss of a paycheque.
Understanding Disability Coverage
Disability insurance is designed to replace a portion of income when an illness or injury prevents someone from working, subject to the definitions, limitations and conditions of the policy.
According to the Financial Consumer Agency of Canada, disability insurance generally replaces between 60% and 85% of income, subject to policy limits, while long term disability plans commonly replace approximately 60% to 70% of normal income.
For someone with significant monthly financial commitments, understanding that replacement percentage can be important. A household accustomed to living on a certain level of income may need to determine how mortgage payments, household expenses, debt obligations and savings goals would be handled on a reduced amount.
Policy details also matter. Waiting periods, benefit periods, coverage limits and the definition of disability can affect when benefits begin and how long they continue.
Tax treatment should also be considered. The Financial Consumer Agency of Canada states that disability benefits are generally tax free when an individual pays the entire premium personally. When an employer pays all or part of the premium, benefits are generally taxable.
Life Insurance and Future Financial Obligations
Future income can also be relevant when determining life insurance needs because other people may depend on that income continuing.
The Financial Consumer Agency of Canada notes that life insurance proceeds may be used to replace income, provide for children or other dependants, pay debts and cover final expenses. Life insurance generally provides beneficiaries with a one time, tax free death benefit.
The amount of financial support required can vary considerably depending on someone's stage of life. A household with young children, a large mortgage and many working years ahead may have substantial future financial obligations. Someone approaching retirement with significant investments, little debt and financially independent children may have a very different set of needs.
Looking at those obligations alongside existing assets can provide a clearer picture of how much financial exposure remains.
Where Workplace Benefits Fit
Many Canadians receive life and disability insurance through their employer, which can form an important part of their overall financial protection.
The Financial Consumer Agency of Canada notes that many employers provide disability coverage and that individual policies are also available. Group coverage may end when someone leaves the group or reaches a specified age, so it can be useful to understand how much of a financial plan depends on benefits connected to a particular job.
Reviewing workplace coverage means looking beyond the existence of the benefit and understanding what it actually provides. The amount of income replaced, maximum monthly benefit, waiting period, benefit duration and policy definitions can all affect the level of protection available.
For higher income earners in particular, it can also be useful to compare the maximum benefit available through a workplace plan with the household's actual monthly financial commitments.
Insurance Needs Can Change as Wealth Grows
The relationship between income, assets and insurance changes throughout a person's financial life.
Someone early in their career may have limited savings and decades of earnings ahead. Twenty years later, that same person may have accumulated investments, paid down much of their mortgage and reduced the number of people who depend financially on their income.
As personal wealth increases, there may also be a greater ability to absorb certain financial risks using existing assets. A household with substantial liquid investments and relatively low expenses has more financial flexibility than one with limited savings and significant monthly obligations.
This is why periodic reviews can be useful. Changes in income, debt, family responsibilities, business ownership, investments and retirement plans can all affect how much protection is appropriate.
Include Future Income in the Financial Plan
Building wealth involves more than deciding where to invest. It also requires understanding the resources that will fund those investments and financial goals over time.
For most people in their working years, income provides that funding. It supports current expenses while gradually creating home equity, retirement savings and investment capital.
Looking at the value of your remaining earning years can therefore add another dimension to financial planning. Consider how much income you are likely to earn over the remainder of your career, how much of your long term plan depends on that income and how your household finances would respond to an extended interruption.
As your assets grow and your financial obligations change, the answers will change as well. Reviewing them periodically can help ensure that the protection side of your financial plan continues to reflect the wealth you are working to build.
Sources
Financial Consumer Agency of Canada, Life Insurance Financial Consumer Agency of Canada, Disability Insurance Financial Consumer Agency of Canada, Determining Your Insurance Needs Financial Consumer Agency of Canada, Getting an Insurance Policy
Disclaimer: The information in this article is provided for general educational purposes only and does not constitute financial, legal, or tax advice. Readers should consult qualified professionals before making decisions based on this content. View our full Disclaimers & Privacy Policy →
When people take stock of their finances, they usually start with the assets they can put a value on. Home equity, investments, retirement savings and business interests all contribute to net worth and provide a useful picture of financial progress.
Future income deserves a place in that picture as well.
Consider someone earning $100,000 a year with 20 years remaining in their career. At their current income, they could earn another $2 million in gross employment income over that period, even before considering raises, bonuses or other increases in compensation. That income could fund mortgage payments, retirement contributions, education costs, investments and everyday household expenses for decades.
For many working Canadians, their future earnings represent an enormous source of financial value, particularly during the years when they are still building their wealth.
The Role Income Plays in Building Wealth
A growing net worth can provide greater financial flexibility, although many households continue to rely heavily on employment or business income throughout their wealth building years.
Financial commitments often increase as careers progress. A household may purchase a more expensive home, have children, increase retirement contributions, begin investing more aggressively or simply take on a lifestyle that requires more monthly cash flow. Each of these decisions can be perfectly manageable while income continues to arrive as expected.
An extended interruption in that income can change the financial picture considerably. Savings may need to cover regular expenses, investment contributions may be reduced or stopped, and assets that were intended for long term goals may need to be accessed earlier than planned.
The Financial Consumer Agency of Canada recommends reviewing insurance needs as circumstances change and specifically identifies major life events such as purchasing a home, starting a family and starting a business as times when coverage needs may change.
This makes income protection particularly relevant during periods when a large portion of someone's financial plan still depends on future earnings.
Putting a Value on Your Earning Years
Looking at income over an entire career helps put its value into perspective.
Someone earning $150,000 annually with 20 working years remaining could potentially earn another $3 million in gross income at their current salary. Someone earning $80,000 with 25 years remaining could earn another $2 million.
These are simplified examples and do not account for taxes, periods of unemployment, salary changes or inflation, but they illustrate the scale of the income that can still flow through a household during the later stages of a career.
That cash flow can also have an impact well beyond the amount earned. A portion may be invested each year and allowed to compound for decades. Another portion may reduce a mortgage or other debt, gradually increasing household net worth. Future income therefore plays a central role in determining how much wealth someone may ultimately accumulate.
This is one reason an extended inability to work can have consequences that extend beyond the immediate loss of a paycheque.
Understanding Disability Coverage
Disability insurance is designed to replace a portion of income when an illness or injury prevents someone from working, subject to the definitions, limitations and conditions of the policy.
According to the Financial Consumer Agency of Canada, disability insurance generally replaces between 60% and 85% of income, subject to policy limits, while long term disability plans commonly replace approximately 60% to 70% of normal income.
For someone with significant monthly financial commitments, understanding that replacement percentage can be important. A household accustomed to living on a certain level of income may need to determine how mortgage payments, household expenses, debt obligations and savings goals would be handled on a reduced amount.
Policy details also matter. Waiting periods, benefit periods, coverage limits and the definition of disability can affect when benefits begin and how long they continue.
Tax treatment should also be considered. The Financial Consumer Agency of Canada states that disability benefits are generally tax free when an individual pays the entire premium personally. When an employer pays all or part of the premium, benefits are generally taxable.
Life Insurance and Future Financial Obligations
Future income can also be relevant when determining life insurance needs because other people may depend on that income continuing.
The Financial Consumer Agency of Canada notes that life insurance proceeds may be used to replace income, provide for children or other dependants, pay debts and cover final expenses. Life insurance generally provides beneficiaries with a one time, tax free death benefit.
The amount of financial support required can vary considerably depending on someone's stage of life. A household with young children, a large mortgage and many working years ahead may have substantial future financial obligations. Someone approaching retirement with significant investments, little debt and financially independent children may have a very different set of needs.
Looking at those obligations alongside existing assets can provide a clearer picture of how much financial exposure remains.
Where Workplace Benefits Fit
Many Canadians receive life and disability insurance through their employer, which can form an important part of their overall financial protection.
The Financial Consumer Agency of Canada notes that many employers provide disability coverage and that individual policies are also available. Group coverage may end when someone leaves the group or reaches a specified age, so it can be useful to understand how much of a financial plan depends on benefits connected to a particular job.
Reviewing workplace coverage means looking beyond the existence of the benefit and understanding what it actually provides. The amount of income replaced, maximum monthly benefit, waiting period, benefit duration and policy definitions can all affect the level of protection available.
For higher income earners in particular, it can also be useful to compare the maximum benefit available through a workplace plan with the household's actual monthly financial commitments.
Insurance Needs Can Change as Wealth Grows
The relationship between income, assets and insurance changes throughout a person's financial life.
Someone early in their career may have limited savings and decades of earnings ahead. Twenty years later, that same person may have accumulated investments, paid down much of their mortgage and reduced the number of people who depend financially on their income.
As personal wealth increases, there may also be a greater ability to absorb certain financial risks using existing assets. A household with substantial liquid investments and relatively low expenses has more financial flexibility than one with limited savings and significant monthly obligations.
This is why periodic reviews can be useful. Changes in income, debt, family responsibilities, business ownership, investments and retirement plans can all affect how much protection is appropriate.
Include Future Income in the Financial Plan
Building wealth involves more than deciding where to invest. It also requires understanding the resources that will fund those investments and financial goals over time.
For most people in their working years, income provides that funding. It supports current expenses while gradually creating home equity, retirement savings and investment capital.
Looking at the value of your remaining earning years can therefore add another dimension to financial planning. Consider how much income you are likely to earn over the remainder of your career, how much of your long term plan depends on that income and how your household finances would respond to an extended interruption.
As your assets grow and your financial obligations change, the answers will change as well. Reviewing them periodically can help ensure that the protection side of your financial plan continues to reflect the wealth you are working to build.
Sources
Financial Consumer Agency of Canada, Life Insurance
Financial Consumer Agency of Canada, Disability Insurance
Financial Consumer Agency of Canada, Determining Your Insurance Needs
Financial Consumer Agency of Canada, Getting an Insurance Policy
Disclaimer: The information in this article is provided for general educational purposes only and does not constitute financial, legal, or tax advice. Readers should consult qualified professionals before making decisions based on this content. View our full Disclaimers & Privacy Policy →
Read Next
Beyond the Rate: How Inflation Can Impact Mortgage Decisions
The Chain Canadian Homeowners Need to Watch: Oil, Inflation, Interest Rates and Mortgage Renewals
Assemble Your Financial Team Before the Offer: Six Professionals Every Prairie Home Buyer Needs in Place
Double Your RRSP Growth by Leveraging the Tax Refund You Already Earned