Deciphering the Insurance Puzzle – II (Universal Life, Disability, Critical Illness)
In the last article, I briefly went over CMHC, mortgage life and term life insurance, lets continue with other insurance options that are out there.
Universal/Whole Life Insurance
This insurance option, I’ll admit, I’m not a fan of. Although I don’t have direct experience with Universal or Whole Life insurance, I know that they are expensive. With both, the monthly premiums are significantly higher as the policy holder is paying for a term life portion plus an investment portion. While the investment portion can grow tax sheltered, the investment options are typically limited to money market or segregated funds with higher than average MERs. The policy for this type of insurance usually lasts for the life of the policy holder.
As I mentioned in the last article, you’re better off buying term insurance and investing the price difference. Here is a fairly opinionated article on the pitfalls of Universal Life Insurance.
While this one can be a bit expensive, it’s a must have in my opinion. In the case of an injury or illness that prevents the worker from doing his/her regular work duties, this insurance will pay monthly benefits to replace lost income. There are a few details of this insurance of which you can learn about them in our disability insurance article.
Essential insurances basically cover lost income. With term life, it covers income or debt balances in the case of death, but with disability, it protects the income stream if the worker is unable to function in the work place. A quick tip, some work places offer disability insurance, but note that if you leave the employer, the insurance typically does not follow. If you want reliable coverage, it may be best to go with a third party insurer.
Critical Illness Insurance
This insurance pays out a lump sum in case on the listed critical illnesses occur. Some of the more common critical illnesses include:
heart attack, stroke, cancer coronary artery bypass surgery, multiple sclerosis, kidney failure, paralysis, blindness, deafness, rheumatoid arthritis, benign brain tumour, loss of limbs, major organ transplant (or on waiting list), Alzheimer’s disease, Parkinson’s disease, motor neuron disease (a.k.a. ALS or Lou Gehrig’s disease), coma, loss of speech, severe burns, occupational HIV infection, late onset insulin dependent diabetes, aortic surgery, heart valve replacement, loss of independence.
Critical illness insurance may be required for situations where the critical illness requires a large sum of money during the healing process. For example if the policy holder is paralyzed and requires modifications to their home and vehicle. Or a Cancer patient that requires expensive medication not covered by medical insurance. I personally do not have critical illness insurance, nor do I plan to as we typically have cash savings on hand. You read more details on critical illness insurance here.
Credit Card Balance Insurance
I do not like this one at all. This is the one where the credit card rep always tries to push on you when applying for a new credit card. The reason? It’s extremely profitable for the company! Credit card balance protection will cover the minimum payment of your balance should the card holder become ill, injured or faced with involuntary loss of employment.
For one, it’s expensive as they usually charge a fee per $100 in spending. In MBNA’s case, they charge $0.99 + tax per $100 in spending. If my average credit card bill is $2k/month, that’s $20 in premiums every month to cover slight chance of requiring insurance to pay the 3% minimum payment of $60. Sounds like a great deal for the credit card company – no thank you!
I thought I would throw this in there as the local electronics shop will always try to push this warranty/insurance with almost every purchase. Basically, if you pay the extra fee and the product breaks within the insured period, they will pick up the electronics and fix/replace it for you free of charge. I tend to avoid this insurance as the premiums are quite high and I usually use a credit card to extend the warranty without any extra fees! Curious? The MBNA Smart Cash, one of my favorite free credit cards, will extend the warranty for up to 1 year extra. While the Capital One Aspire Gold, also free, will extend the warranty up to two years extra.
The original reader email questioned about typical insurances offered and how to distinguish which are required. Insurance, in my opinion, is all about protecting your dependents. Besides the essentials of home/fire and auto insurance, out of the list, in my opinion, there are two insurances that are a MUST for every household with dependents - term life and disability insurance. One to protect family cash flow in the event of death, and the other to protect cash flow in the event of injury.
What do you think? What insurances do you consider essential?