Deciding on the Right Life Insurance for You

 

The Value of Life Insurance

With unwavering certainty, we can see the value for life insurance. Even though we do, sometimes our budget doesn’t.  This disconnect creates a contrast between knowing what is right and doing what is right to put insurance in its rightful place.  If anyone thinks paying insurance premiums is like throwing money away then maybe they don’t have the right type of insurance.  If you could see the value in your premiums providing protection and generating savings, then your attitude about insurance might change. Understanding the differences between the two types, term insurance and permanent insurance, helps differentiate their purposes for different stages in life.

Term Life Insurance

As the description suggests, “term insurance” means “protection for a specific period of time” and is often viewed as “temporary insurance”.  Term insurance is designed to provide a fixed amount of coverage for periods of 10 and 20 years until age 85 at which time the coverage will expire.  As expected, the cost of premiums increases with each renewal period.  Term insurance fills a need when the risks are the greatest. Some examples are when you have a large amount of debt or when you have dependents relying on financial support.   

Permanent Life Insurance

“Permanent insurance” is designed to remain “fixed” both in relation to the amount of coverage and the cost of premiums. The benefit of a permanent life insurance is to provide ongoing protection for a lifetime.  Because we don’t have an expiration date stamped at the bottom of our feet, timing our deaths is impossible.  If you need insurance to support your spouse, pay income taxes on registered investments, or capital gains on your death, then permanent insurance fulfills these needs. Certainly, if you can’t come to grips with rising insurance premiums, which can be expected with term insurance, you will appreciate having a permanent insurance policy because the premiums are constant.   

The chart below illustrates the premiums for $100,000 of coverage with both term and permanent insurance, for a 20 year old, non-smoking male.

 

Age	Monthly Premiums for Term Insurance	Monthly Premiums for Permanent Insurance
20-39	$    13.56	$51.36
40-59	$    49.79	$51.36
60–79	$  275.97	$51.36

 

 

 

The teeter-totter outcome shows that the term premiums are lower when a person is younger in comparison to the permanent premiums.  As one ages, the term premiums are higher in comparison to the permanent premiums. All the while, the permanent insurance premium remained constant. The interesting fact is if this male lives to 100 years old, he will pay total premiums of $49,305.60 ($51.36 x 12 months x 80 years) and his estate will receive a pay-out of $100,000.

The above example of permanent insurance is a Term-100 policy where the premiums are required to be paid until a person is 100 years old. Then the policy is considered paid-up. With a permanent life insurance policy, you can choose a fixed annual or monthly premium, like the example above, payable for an entire lifetime or you can choose a fixed annual or monthly premium set for a specific period.  Choosing a paid-up permanent life insurance policy of 10, 20, or 30 years makes financial sense since you can finance the premiums while you are working. You will have protection in place for both the present and the future. The benefit of a paid-up policy is the premiums retire when you do. 

Participating Life Insurance

Another twist is if you are interested in sharing in the profits of the insurance company, you could choose a participating life insurance.  As a policyholder you would receive dividends which allow you to build additional value within your policy.  This type of insurance has more frills than a Term-100 but the cadillac of permanent insurance is Universal Life.

Universal Life Insurance   

Universal Life Insurance (UL) provides flexible coverage, deposits, and investments.  This type of permanent insurance combines both your need for insurance protection and an investment savings account. When you contribute more than is required, you trick your mind into “over-funding” your insurance policy. A portion is paying for the pure insurance component with the balance accumulating in a “savings” plan which allows you could do a number of things with the cash, including paying for future premiums.

Deriving value from the premiums may not be a sole reason for choosing to purchase life insurance.  Perhaps the main concern lies in the affordability.  Having an attitude that says “I don’t expect anything to happen but I am prepared in the event it does” speaks to the value of buying peace of mind. 

What’s the Right Choice for Me?

Think of a single person today who may someday marry and eventually have four children.  Think of an entrepreneur who has a business and a family to protect.  Think of someone who currently has more debt and limited savings but will turn his situation around to have less debt and boundless savings.  Now think about your own situation. Your protection needs will change with time. Since everyone’s life patterns are different, your needs will be different too.

Blending both term and permanent insurance may make financial sense.  You are trying to optimally match protection with cost and needs now and in the future. Even if you begin with term insurance, you have the option to convert your coverage to permanent insurance when your budget permits you to do so.  With so many strategies available, the only way you will know what is right for you is to meet with an insurance representative.

Here’s your motivation.  

“Just Do It” may have been a highly successful campaign launched in 1988 for Nike, the shoe company.  But I believe there is profound truth in taking action about anything and everything.  Procrastination doesn’t accomplish anything. Making the call to schedule an appointment with your insurance representative means you have to “Just Do It”.   Keep your promise to your family and yourself.  

Be Prepared for the Unexpected

Can you imagine receiving the worst news of your life, the doctor giving you the stark diagnosis that you have cancer? Then imagine receiving the best news in your darkest moment.  A cheque arrives in the mail to ease your worst financial burden.

The need for Critical Illness Insurance was initiated by a South African cardiac surgeon.  This fact may surprise you.  Dr. Marius Barnard, one of the top 25 most influential people in the field of health insurance and protection, identified a need for this type of insurance to financially help patients while they recovered from a critical illness.

Critical Illness Insurance pays a lump sum cash benefit to a person diagnosed with a life-threatening illness.  Typically the four dreaded conditions are: heart attack, cancer, stroke and coronary artery surgery.  Over the years, the insurance coverage has evolved to include other diseases. Now most policies cover between 12 and 26 conditions.  The best part is this tax-free cash benefit can be used for any purpose.  

Marius Barnard didn’t have any previous knowledge of insurance. He simply cared about his patients’ health so much so that he became an advocate and convinced insurance companies to develop an insurance product that put much-needed cash in a patient’s hands.  The focus could then turn to their recovery and away from their financial needs. His argument was that as a medical doctor, he could repair a patient’s physical body, but only insurers could repair a patient’s finances.  As we know, financial stress is detrimental to any person’s health and even more so when they are recovering.

Thanks to Dr. Barnard’s efforts, the first Critical Illness (C.I.) insurance policy was launched in South Africa on August 6th, 1983, and eventually spread to other parts of the world as the need for Critical Illness insurance grew. 

Don’t discount the need for this type of insurance.  When you need the coverage the most, you will be grateful you have it.  No one knows what health challenges they will face. 

I convinced my son (now 34 years old), a father of two, to have some Critical Illness coverage. The expectation wasn’t to insure for the maximum amount.  I knew that if he incurred an unexpected illness, like cancer, a heart attack or stroke, he and his family needed this type of protection in addition to life and disability insurance.   

The realization is that an illness comes with unexpected expenses: medication, travel costs, and loss of wages while you wait for the disability benefits to start.  Where will the money come from if your savings are limited?   You can choose the amount you feel would adequately fill the need:  $25,000, $50,000, $75,000 or higher.  Having this extra cash will ensure you don’t exhaust your savings (or worse, withdraw RRSPs which will create taxable income and deplete your future retirement fund).

With the different kinds of insurance, it’s a matter of determining the right coverage and linking the premiums to your budget. My two latest blogs talk about the need for life and disability insurance.  Now the attention is critical illness insurance.  In the diagram below, Sun Life Financial depicts the need for health coverage for every stage of your life. In the working years, you protect your income while in the retirement years you protect the savings built from the years of hard work.  

Making the Premium Affordable

To blend your insurance needs with an affordable premium, you may consider increasing the elimination period on your disability insurance in order to lower the premiums and free up cash to fund a critical illness policy.  While you wait for your disability benefits to start in 90 days, the good news is the wait time for Critical Illness insurance is 30 days. With any unexpected event or emergency, a prudent strategy is to have sufficient savings to fund a minimum three months of expenses.    

To illustrate, the cost of including three blankets of protection for a 29 year old non-smoking male construction worker would be a monthly premium of $168.33 for the following coverage:

$500,000 Life insurance

$125,000 Critical Illness Insurance

$  2,500 Monthly Disability Benefit (with 90 days waiting period)

If the same individual wanted only Critical Illness insurance for $50,000, the monthly premium would be $35.96. 

These illustrations are a starting point to show that if the costs are high then you tweak the coverage to fit your budget.  You may lower either the amount of life, disability or critical illness insurance.  The consequence of having coverage too low is that any shortfall would be funded from other resources.  

Tailoring insurance coverage to your personal needs should be discussed with an insurance representative.  Since I am a CERTIFIED FINANCIAL PLANNER® and not an insurance representative, you should not feel like you are being sold an insurance product.  But I want you to consider what you are being told for your own protection. Manulife Synergy Insurance Package offers blended coverage: one premium equals the coverage of the three different insurance types.  You will not have to determine your greatest risk: death, disability or illness. You will be covered for all three.  If you’re familiar with Dairy Queen’s full meal deal, this is similar, except you are ordering insurance products, not food to fill the need.

The Balance Between Cost and Need

If Marius Barnard can recognize a need for insurance to help patient’s recover from a critical illness, can you recognize the need too? 

If Marius Barnard considered that physical and financial health are connected to the recovery of an illness or disease, would you consider the consequences too?  

One last question: Do you have the means to manage the unexpected costs associated with your recovery?   If the answer is “No,” this calls for action. 

Determine where in your spending plan you can make room for insurance premiums.  What’s one less thing you can eliminate so you can buy the one thing you need most, peace of mind knowing you are prepared for the unexpected?    

 

Mind the Gap

 

If you travel to the United Kingdom and board the underground trains, an automated voice announces: “Mind the Gap.” “Mind the Gap.” “Mind the Gap.”  The repeated reminder insures everyone is protected against an injury in case they aren’t paying attention to the spatial gap between the train and the station platform.  When I think about disability insurance and how little attention people pay to its importance, I remember this warning, “Mind the Gap”. Many think they may be adequately covered when a disability occurs. Perhaps they are but there’s the chance they aren’t.  Benefits offered through an employer’s group plan, the government’s employment insurance (EI) program, or the Canada Pension Plan Disability Benefit, may mislead many into believing they are adequately covered. If someone is self-employed, then the onus of funding disability insurance is entirely their responsibility.

What about you? Have you given any attention to the gap in your insurance coverage?  A long term disability can be detrimental to your life’s plans.

 

The Facts

Did you know that the probability of suffering a disability of 90 days or more before the age of 65 is considerably greater than the probability of death before that age?  We generally think nothing could ever happen to us. We feel invincible until the facts presented in the chart below stare at us and show us the reality.  

Age	Probability of a disability lasting 90 days or more before age 65	Average duration of disability, in years
25	58%	2.1
30	54%	2.5
35	50%	2.8
40	45%	3.1
45	40%	3.2
50	33%	3.1
55	25%	2.6
60	16%	1.6

Source: 1985 Commissioner’s Individual Disability Table A. Developed from actual claims experience on insured lives. Note that, although this data is over 20 years old, it is still commonly used as a general reference throughout the industry.

Accidents, unexpected injuries, and illnesses can change your life in a second.  The intention is not to put the fear in you but rather take the fear away by encouraging you to investigate your options for disability coverage. Although you may discount the above chart as being dated, here is additional proof that disability is a common occurrence.

Even though the focus is on creating safe workplaces through “Mission Zero” initiatives, injuries still occur.  According to this latest report in 2014, the number of Saskatchewan workers covered by Workers' Compensations Board was 402,894.  Although the injury rate had declined, the total injury rate in Saskatchewan was 6.99 percent for 2014.   This statistic is shocking. You can easily be one of these statistics.

Injuries are also very common as a result of traffic accidents. Saskatchewan’s Traffic Accident Information System (TAIS) Report provides detailed information on the number of collisions occurring on Saskatchewan highways.  I researched two popular highways, #1 and #16, which are travelled by the most people at any given time of the year.  In 2013, the number of persons injured travelling Highway #1 were 279 while the number of persons killed was 11. On Highway #16, the number of persons injured was 152 and the number of persons killed was 10.  Living in rural Saskatchewan, people are accustomed to driving.  We are putting ourselves at risk every time we take control of the steering wheel.   

Other “doom and gloom” statistics can be found at the Canadian Cancer Society website. Although all the National Statistics are relevant, one particularly addressed the need for long term disability protection: At the beginning of 2009, there were about 810,045 Canadians living with a cancer that had been diagnosed in the previous 10 years.  At the Heart and Stoke Foundation website, we learn there are 500,000 Canadians living with heart failure and 50,000 new patients are diagnosed each year.  Again, these statistics are staggering.

If these statistics don’t jolt you into action, then I encourage you to think of the people in your life: family, friends, colleagues, neighbors, or acquaintances who have faced an unexpected injury or illness.  Can this be your wake-up call?  Have you considered ways you would deal financially with the identical challenges?

 

Options for Coverage

Investigating your options in case you face a disability is a sensible thing to do. Checking benefit programs which may replace your income and determining the amount you will receive, provides a clear indication whether you have sufficient coverage.

If your injury happens at your workplace, Workers’ Compensation will pay 90% of net earnings in addition to medical and travel expenses incurred as a result of the injury. In terms of disabling incidents, an injury at work would be the one where the benefit matches most closely to your net earnings.

Employment insurance sickness benefits are based on only 55% of your average insurable weekly earnings up to a maximum amount for a maximum period of 15 weeks. This source of income is valuable only for short term disability.

Only if your disability is severe and prolonged, preventing you from work, will you be entitled to receive a disability pension from the Canada Pension Plan.  Also, you would only qualify if Canada Pension Plan contributions were made for at least four of the last six years.   In 2013, the average monthly CPP disability benefit was $841.95. 

Insurance coverage offered through an employer and association group disability plan is popular.  However, these plan policies are only available as long as you remain with the employer or the association. Since group plans have limitations with regards to benefits and other factors, understanding your coverage is crucial.    Knowing the waiting period, maximum benefit period, and amount of your coverage will determine the financial responsibility you will need to assume. For example, the waiting period for short term disability income benefits may be 30 days; the maximum benefit period 26 weeks; and the amount of benefit 65% of your weekly earnings. Therefore, you will be financially responsible for the first 30 days of lost income in addition to funding the balance of 35% of your weekly earnings for the 26 weeks. Group Benefit Plan booklets provide specific details of the coverage. They’re worth reading.   

If you determine a gap exists, you may choose to fund an individual insurance policy. Because there are so many variations with individual policies, matching the benefits, limitations, and exclusions to the premium costs and your needs is important.  Analyzing your best options should be done with an insurance representative.   

 

The Recovery

A person’s life can go spiraling downward when faced with a disability, just as quickly as a plane can lose control. But like a pilot can maneuver a plane back to safety, you too can recover from an injury or illness with the appropriate medical attention and healing time.  The most important thing you want to do is concentrate on getting healthy again. The last thing you want to concentrate on is your finances.   

Take a few minutes today to focus on your current situation.  Ask questions if you don’t know about your current coverage.  Don’t say, “Nothing will ever happen to me.”  It’s better to have peace of mind, knowing that if your life goes off-kilter, your financial circumstances won’t. You will be covered with the right “financial products”.  So heed the warning: Mind the gap between what you currently have and what you need.   

Do Your Family a Favor

When family members depend on you for financial support, you never want to intentionally disappoint them.  Yet accidents and illnesses are the sharp turns in our lives we never expect. When you hear the news about a tragic vehicle accident resulting in a fatality or you read an obituary for a father of two young children who passes away because of cancer, you may contemplate your own demise. Death brings heartache, grief, and loss.  The financial stress is an additional burden which can be avoided with life insurance yet insurance can be “a sensitive topic” simply because of its link to death. 

Put yourself in the situation of these family members coping with the news of their loved one’s death. Do you consider whether the family will survive financially without that second income?   An insurance benefit cannot replace the life lost but it can help cope with the financial loss. I believe the benefit of having insurance is to ease the financial burden that results from death, allowing the family to grieve only for the person rather than both the person and the change in their standard of living.

Five Important Reasons for Life Insurance 

My list of five important reasons is compiled to show how life insurance fills the gap in a financial plan. Generally, people are concerned about having sufficient assets to retire but we know retirement only occurs if we live.  Our focus has to also include other aspects:  survivor and estate needs.  

1.    Income replacement.  You are an income producing machine. When you earn an income, you have the means to enjoy life, pay bills, make loan payments and save for retirement. No surprise here. When you leave this life, your income immediately stops. Your potential earnings were intended to support loved ones, your family who depends on you. Having insurance is the replacement for your potential earnings. Your surviving children’s plans for post-secondary education will not be jeopardized.  

2.    Pay off debt.  A lump sum insurance benefit will pay outstanding debt. Your surviving partner will not have the responsibility of both living expenses and debt payments on a single household income.   

3.    Pay taxes, funeral and administration expenses.  The event of a death may trigger a tax liability on any assets held solely in your name. Provisions are made for certain assets held in joint names to automatically be transferred to the spouse without any immediate tax consequences.   When business assets are owned solely in one’s name or when both husband and wife died together accidentally are situations where an estate may face a huge tax liability. Death brings with it an entourage of expenses.  In addition to taxes, money is required to fund funeral expenses, lawyer and probate fees.  Having insurance is one way to pay these expenses rather than sell assets needed for your survivor(s).    

4.    Create an estate for family or charity.  Your intention may be to leave money to family members or charity when you die. However, you are concerned you need the money to support your lifestyle and can’t possibly do both.  You could consider paying the insurance premiums towards a permanent insurance policy the same way you would deposit money to a savings account.  Upon your death, the cash benefit would be paid directly to your beneficiaries as you intended.  Funding the premiums would not be a financial burden.  

5.    Buy-Sell Agreement.  When you are a partner in a company or shareholder in a corporation, you may consider insurance as a means to purchase your vested interest in the event of an untimely death.  Your beneficiaries may not have any interest in taking part in the business operation.  The sale proceeds would then be passed to your beneficiaries through your estate.  

Why Insurance is Important?

I believe the real tragedy is when people do not take the time to calculate the financial loss that would be imposed upon their families if they were to die.  Their income dies with them.  Just as tragic is when people disregard life insurance because it is an additional cost with which to contend. The premiums should be viewed as reassurance:

q  That their loved ones will continue to maintain the standard of living they are accustomed to enjoying.

q  That their loved ones will not struggle with unnecessary debt;

q  That their loved ones will be cared for financially.

Unfortunately, many view insurance as something they would only purchase if they knew they were going to die.  That’s not the way it works.  Insurance is something to be considered sooner rather than later.  The reason is “insurability”. Pre-existing conditions could prevent people from being insured. In certain cases, premiums may be risk-rated depending on the present health condition(s) which may result in increased premiums. As expected, insurance premiums increase with age.    

With so many insurance products you would want to discuss your greatest risks with an insurance representative to match the right insurance products for your needs.  Scheduling a date with an insurance representative is a commitment you want to keep not only for yourself but for your family. Do your family a favor and set up the appointment soon.  

Money Left Behind

 

 

Do you recall the story about Hansel and Gretel?  Remember the part when Hansel used bread crumbs to create a trail so he and his sister could find their way home since their wicked step-mother’s plan was to desert them in the forest?  Unfortunately, the birds scooped up the crumbs.  The birds didn’t waste any time devouring this treasure of food. Poor Hansel and Gretel became lost in the forest. They didn’t have a trail to help them find their way home.

I hear your confusion. Why am I sharing this children’s story?  What does this have to do with money?  Stories, like this, link us to our own situation and are a great reminder to change our behavior.  

Imagine that your story isn’t about bread crumbs but rather money. Maybe you are leaving a trail of money for someone else to scoop up for their benefit.  I know I have been guilty of this and have since become conscious of my laziness.

Here’s your test. Read through the questions. Place a check mark for the items you faithfully do to determine that you are carefully watching your money so you are not leaving a trail of dollar bills behind.

q  Do you check your grocery bill after your shopping trip?  On occasions, items may accidentally be scanned twice. The same block of cheese (as expensive as it is) was charged twice on my bill.   Even a sale item may register at the regular price.  Taking the time to quickly check your grocery slip is a good habit to develop. 

 

q  Do you check the transactions processed through your credit card or bank statements? An Air Canada baggage handling fee was processed twice on my statement, proof that it does happen. Transactions may be charged to your account which you cancelled or didn’t agree to receive.  As a matter of convenience, a business sends an email changing their offering and if you don’t reply within a specific period, then the assumption is you agree to the new terms and charges. 

 

q  Do you have a subscription to a magazine you never read or a gym membership you never use?   Do you keep telling yourself that when you have time you will read or exercise? If months pass and you haven’t kept your promise, are you likely to keep it?  This scenario sounds too familiar with me.

   

q  Do you check your order at a fast food restaurant?  Have you ever been charged for a meal when all you ordered was the sandwich?  By the time you realized the mistake, the order has been processed and you accept the consequences.  You eat the french fries.

 

q  Do you regularly submit your medical and dental bills on time to be reimbursed by your health service provider?  I missed a deadline for remittance.  Be sure to check the timeline for remittances because each health service provider has different guidelines.

 

q  Do you faithfully claim your charitable receipts on your tax returns?  The federal charitable tax credit rate is 15% on the first 200 and 29% on donations above the $200. Provinces also provide tax credit incentives. In Saskatchewan, the tax credits are 11% on the first $200 and 15% on donations above the $200. These are too valuable to dismiss.  

 

q  Do you have gift cards or coupons lurking around that you haven’t used?  You may have Canadian Tire money, Superbucks, or reward points with your credit card sitting idle.   

 

q  Do you return the “extra” supplies which are not required when you are doing home renovations? This is a definite money killer.   The items may not be pricey but even small items add-up. 

 

q  Do you have household items or clothing you’ve purchased and have never used? Initially you thought they were a good fit, only to bring them home, and discover that’s not case.  The ugly blue sweater or the nose pinch pliers are items you have no intentions of utilizing. Do you take the time to return these items?

 

q  Do you inquire whether the sales tax on your purchases and expenditures is refundable when you travel outside of Canada?  For example, the state of North Dakota permits a tax refund on certain purchases.  Checking other states and countries for their tax refund policies, especially if you are a frequent traveler, may generate cash for your next trip.

I am curious about how you did when you tallied your score.   Do you have room for improvement or do you already diligently track your claim to money?

The above items may be relatively small in comparison to big give aways.  For example, a couple of years ago, the government offered grants for energy efficient improvements to homes.  One client who didn’t take advantage of this offer said, “I wanted to do it on my own.”  My belief is you should not say, “No thank you” to money.  The very purpose of money is to keep it circulating to purchase other things. Another example is the Saskatchewan government’s Graduate Retention Program which offers assistance to university degree students.

I realize life gets busy. The task of chasing your money is dropped to the bottom of your to-do list when other important and urgent tasks grab your attention.   I encourage you to slot time in your busy schedule to reclaim money that rightfully belongs to you.  Don’t shrug off the insignificant amount.  In a year’s time, every dollar adds up to a grand total that you could use for other purposes.

In the end, Hansel and Gretel had a happy ending. They found their treasure and were reunited with their father.  Your story is destined to have a happy ending.  When you receive a refund cheque in your mail box, this treasure has rightfully found its way back to you.  If you have discovered other unique situations where money can be left behind, please share your experience.