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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.

Disability 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!

Extended Warranty

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.

Conclusions

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?





29 Comments, Comment or Ping

  1. 1. Rachelle

    There’s an insurance some people might be interested in. Employment Insurance is now available for the self employed. Opting in might be a good idea if you are planning a baby or get disabled.

  2. Rachelle, AFAIK, once you collect the benefits from that program, premiums need to be paid every year afterward. In other words, the entrepreneur cannot opt out.

  3. 3. Rachelle

    That is true FT I’d truly have to do a much more in depth analysis of the EI plan to figure out if it’s worth it.

    The main benefit to me would be as income support during maternity leave but even then, I imagine that if I made any other money they would claw it back and I’m not really the type to sit still.

    I’m not sure about the value of it which is why I have not signed up for it.

  4. 4. Tim Landry

    Well – I must admit it is a pleasure to see a decent article on DI – but I will point out one significant “semi-prejudicial” comment. You refer rather often to “injury” – I would like to point out that the split of DI claims is roughly 70% sickness – 30% injury. It is a LITTLE higher (as in 65/35) for young males – but regardless of age or gender more disabilities result from illness than injury. A further weakness to almost all employer provided plans is that they cover only TOTAL disabilities. How would you like to have a fire do – say – $75,000 damage to your $150,000 home and have your insurer say “Well it is not a TOTAL loss, so we pay NOTHING”. That is the situation with almost all group di plans. For any of you whose duties primarily involve knowledge and communication – seriously think if your Group DI will ever pay. It is VERY hard to totally lose those abilities. I could do at least part of my job as a LIVING Christopher Reeve.

    As to your “No” to permanent life insurance – two comments – Most of us do NOT save – so “Buy term and invest the difference” usually becomes “Buy term and SPEND the difference”. Also – the more successful we are at investing, the more we need life insurance to pay the tax man when we die. Secondly – wait to see the renewal rates on term insurance once you pass 40 – 50 – 60. Sure Term is cheap NOW – but it is most definitely NOT cheap when you need it. I still remember a phrase I learned 40 years ago “Term Insurance is actuarially designed to expire before you do”.

    Critical Illness – remember this plan was created by a DOCTOR – not an insurance company – because he saw the financial problems brought on by SURVIVING illnesses which used to kill us.

    I also have to mention the one MAJOR insurance product you left out LONG TERM CARE INSURANCE – this is the product that keeps us OUT OF nursing homes and allows us to age in place. The people who will most need this are the healthiest ones – the runners – bikers – walkers – those whose bodies are strong. Let me end with 9 numbers: Cost of Basic Care in Montreal today $3,000/mth; Quality Care $5,000/mth; Top End Care $10,000/mth. The oldest boomers will pay $6K, $10K and $20K per month – the youngest boomers? $12K, $20K & $40K PER MONTH. Forget the government – they (meaning us) cannot pay. I was born in 1945 – we had 42 taxpayers per retiree. Now we are at about 2.8 – or about 5% of what we had when I was born. I sell 3 products – disability insurance – critical illness and long term care. If I were forced to choose only one – it would be LTC. My email signature? “A saver without Long Term Care Insurance is a skydiver without a parachute” If you think I posted this just to “sell” or market – find the May 25, 1998 issue of Time Canada and look at the last page. I owe it to my brother to try to prevent what happened to him happening to you

  5. According to this article:

    http://www.moneysense.ca/2010/05/13/employment-insurance-the-entrepreneurs-dilemma/

    The payout for 50 weeks of mat and pat leave is worth 30 years of EI premiums which obviously makes it worthwhile.

    However, they also point out that you can’t work or run the business during that time which isn’t all that likely. Maybe if you are a freelancer you can stop working but if you have an actual business then it’s not likely at all.

  6. @Mike, thanks for the info. I did not know that the business had to stop during maternity.

    @Tim, thanks for the feedback. About “buy term and invest the rest”, I can only assume that my readers are financially responsible and savers by nature. If that is indeed the case, then buying term would certainly apply to them. To me, insurance is about protecting dependents from financial liabilities. People should work towards being “self insured” by the time that the term insurance expires.

  7. 7. Rachelle

    When I had my son, I was working a few weeks later. I like my business, I like working, I just significantly reduced my workload. My husband takes care of my son full time but my son is awesome and I like hanging out with him :)

    A program that doesn’t allow me to work at all is stupid, my customers are not going to wait until after my maternity leave to hire me. They’ll go elsewhere and they might not come back!

  8. I ‘m not clear that the business has to be shut down, or can you keep running it and just not withdraw any pay? A lot of businesses can’t be shut down (like a blog) so I guess this program won’t be a good option.

    @Rachelle – EI is for income replacement – if you will still be earning income then obviously it’s a not a good choice (because that’s not what it was intended for).

    From what I can tell, this program would only be of use for the following:

    1) Self-employed
    2) Can take a year off from the business
    3) Can start up with the business again after a year or just quits the business.

  9. 9. saveddijon

    Another dodgy insurance (although I’ve never looked too closely at it):

    New car loan/lease “walk away” protection.

    The way I think it works (and it’s not usually disclosed up front) is: you pay a monthly premium along with the loan/lease payment. If due to disability/job loss/etc. you can no longer make the payment you can simply throw the keys back across the dealer’s desk and free yourself of the obligation.

    But unless it’s a brand new car and the book value is under water, you’re better off selling the car, paying off the loan balance and pocketing the difference. For a lease it’s a bit harder but there are lease resellers out there to whom you might be able to dump the lease.

  10. I normally stay away from the extended warranty as well. However, I recently bought a 42″LCD and I have over heard too many horror stories from several co-workers about them failing. The smarter thing may have been to not buy a new TV at all!

  11. 11. Jenna

    Health insurance no matter what.

  12. 12. Tim Landry

    LMAO I just truly pray that everyone who talks about insuring their “toys” has PROPERLY protected that which pays for those cars and tv’s and other “toys”

  13. 13. Future Money-Bags

    @Tim:
    Term Insurance is almost always the best type of insurance. Paying way higher premiums for permanent Insurance because you cannot save your money does not make sense to me. The only ‘Forced-savings’ plan that I am not against, is a mortgage. I would rather spend $30/m on $300k than $100/m on $150k.

    The real reason and need for life insurance? To cover dependants and debt. When most people are young (30′s and 40′s) That is when the average person is raising a family and has a mortgage. This is the time that people need life insurance in case something bad were to happen and the breadwinner no longer can support.

    Term Insurance can go up to 35 year terms, and you shouln’t need to renew when that runs out. The idea is since your ‘investing the difference’, you plan out your finances. When your insurance term expires, you set up a plan to have reached your FIN. This is the number you can live off of.

    Anyways I could go on about the benefits of term all day since you decided to not like it. I am not trying to go against you or say you are wrong, but you have not been informed or educated on the positives of Term.

    I could go into the ‘cash value’ insurance, and how all that extra money you are paying in super high premiums, are not going into your pocket at all. And If you want to withdraw from your insurance savings, you have to take out a LOAN from YOURSELF; Paying back interest, to the COMPANY.

    All-in-All, I would simply rather pay the cheapest amount for insurance that I KNOW will payout if anything happens, and has CI included in the policy. The money I save? Boy do I save it where I want, not where they tell me.

  14. 14. sco

    I don’t like any form of insurance. My investments are my insurance.

  15. 15. Future Money-Bags

    @sco
    If something were to happen to you, would the beneficiaries of each investment know what to do with each of them; And would they be able to ‘cash them in’ if needed.
    If you do not have people that depend on you and have no family-known-illnesses, and you have enough investments and savings and rrsp’s for everyone to live off of. Than I totally agree. :)

  16. 16. Tim Landry

    I do not have a “problem” with Term – it certainly has its place as a major chunk of the required protection for young people (and not so young) with budgets and many demands on their income. Term – without question – has a major role in insurance planning. However, I also feel that some amount of permanent insurance DOES have a role to play – PARTICULARLY for the wise investor. Before I continue – remember that although I AM an insurance guy I am first and foremost a “Living Benefits” (DI, CI, LTC) guy, I am just giving you what I have seen in my 40 year career. The more successful you are in life – in business or investing or both – the larger the tax bill will be on your eventual death. Yes – you CAN pay the bil from your assets. If you are “rich”, you have the money – but is that the BEST USE of your money. Let’s use me as an example. Assume that there will be $500,000 in taxes owing after my wife and I pass on – obviously if there is that big a tax bill – there is a significant amount of cash or other assets being transferred. So I can afford (my estate can afford) to pay that bill BUT – is my estate liquid? Did we die at a good time to convert our assets to cash to pay that bill? MAYBE it would make good sense to purchase $500,000 of Joint Second Death PERMANENT INSURANCE to pay that billl? I am 65 – my wife is 61. Neither of us smoke. We can buy $500,000 of Joint Second Death permanent insurance for $20,290 annually – GUARANTEED TO BE FULLY PAID IN 10 YEARS. Seems to me that paying $20,290 x 10 = $202,900 is a better choice that HAVING TO LIQUIDATE $500,000 at what might not be a good time. I will also point out that one of the largest distributors of insurance in Canada sells a HUGE amount (in terms of premium AND number of policies) to people in their 60′s, 70′s and even 80′s because they have been successful in life and what to efficiently pay the tax man.

    No – I do not “favour” permanent over “term” – I just know that BOTH SHOULD HAVE A PLACE. Also – I agree that Level Term may be great – but I am sorry to break this to you – almost everyone buys “renewable” because it is cheaper NOW. They do not look down the road – until the renewal arrives.

    And to the one who does not believe in insurance – I just pray that the bad events only occur AFTER you have saved enough to cover them, Do you walk around without home or car insurance? If you do not buy those either – then perhaps you really believe what you preach – but if you protect your home and your car – should you not protect what BOUGHT THEM – and maintains them?

  17. 17. Geoff

    Just a note on the extended warranty option of Capital One – they do extend it up to two years, but only double the manufacturer’s warranty per below. So if the tv has a one year warranty (standard) then this card will only double it, to two years not three which is equivalent for all intents and purposes to the other warranty programs.

    When you use your Capital One credit card to purchase most personal items (and the full cost of the item is charged to your card), Extended Warranty coverage automatically doubles the original manufacturer’s warranty for up to two additional years.

  18. Geoff, good point, something that I overlooked!

  19. 19. Car Guardian

    While I appreciate the use of credit cards to extend warranties on purchased items like electronics and appliances, I don’t think this will cover extended warranties for cars.

    Most automobiles are insured against accidents which, hopefully, are few and far between. An extended warranty for your car will probably come in handy because all cars break. Sooner or later.

  20. There is also good old fashioned “self insurance” — i.e. spending the early years of your career saving like mad to accumulate a large pool of savings that can be deployed in the event of a setback or misfortune (or later used in retirement). For those of frugal disposition and a deep aversion to paying insurance premiums.

  21. 21. Tim Landry

    To Larry – just pray REALLY hard that nothing happens to you before you have accumulated sufficient savings to look after yourself – and anyone who depends on you.

  22. Tim:
    Good points. So that’s why it should be done before marriage. And if one continues to live modestly, “like a student,” 5 years would a reasonable set-up time for a starting sum. If someone in the pink of health (late twenties and early 30s) still feels apprehensive during the saving period, they can purchase term policies for the savings period. Once accumulated, by the way, the savings also bestow a sense a freedom in one’s career — i.e. that they have a choice in what jobs they accept.

  23. 23. Mark

    It amazes me that the majority of responses assume that everyone will save and invest enough that “insurance” will at some point no longer be needed.

    Without going into actuarial data you could claim that 80% of the working public save nothing of significance to retirement. You are preaching to the converted while actually worsening the plight of those these products could help the most.

    At the end of the day those that are not financially “independent” are a tax burden to the 20%. Now what is your cost? Actually, this number is to complex for most so they ignore the real issue…don’t they?

    (real issue: productivity, entitlement and where tax money comes from)

    Be careful what you wish for.

  24. 24. Geoff

    @ car guardian – credit card extended warranty coverage has a list of about 25 items not covered – from cars to golf balls. Also they have limits on total coverage and total individual item cost replacement.

  25. FT,

    The key with insurance is you are off loading risk to an insurance company.

    What some people don’t understand is taxes. If you review my “Using Universal Life Insurance with Corporations” in this blog.

    You may recall assuming a guaranteed 7% rate of return (assuming you can get that from stocks, mutual funds etc. vs. 3% (with life insurance) because of taxes you are ahead with life insurance.

    Larry McDonald’s comments of self insuring, sounds great on paper but for anyone who has a family owns or their own business and pays taxes, this does not wash.

    I have on my site http://www.rightinsurance.ca (under free financial tools) Person A vs. Person B

    Person A (with more money non-registered) vs. Person B (who has less money but permanent life insurance)

    Person B pays 20% less taxes and has more money to spend every year in retirement with less risk!

    If you want, I can expand on this in a more detailed article in the future.

  26. 26. Future Money-Bags

    @Mark
    Yes, some people do just that. Spend early years (20′s, 30′s, 40′s) saving money and using term insurance. Why do the majority of people, that DO HAVE insurance, have Permanent or whole life or universal? Because that is what Insurance Agents, SELL them.

    If someone comes along, and offers you 2-3x the coverage, for less premiums, for 10/20/30/etc years, many people will take it. But this does not benefit them UNLESS they save (invest) the difference. If you refinance a tonne of debt, and have lower payments, but spend the difference; Than you are in a worse position.

    But if you consolidate your debt, and pay less each month to pay it off, and use the extra and apply it back to your payments, you will be out of debt much faster.

    Back to the Term Insurance:
    Term insurance is meant to insure you for the years that you need it. You say that not many people will have saved enough money for retirement to not need Insurance? Well that is because the majority of people think the same way. The same thing with raising CPP contributions…it is a FORCED savings plan to make people save for retirement, because we all know canadians generally do not/can’t do this for themselves.

    We need to start helping people learn how to save and invest for their future and get out of debt. To accumulate more earnings and passive money and have money put aside for retirement. People need to start getting out of their confort zone to start planning their lives and making goals they can keep. Travel the path less travelled and do not follow the pack; You may just run off the cliff with the rest.

    @Brian
    I have people to support, I own my own business, and I have a job in which I pay way more tax than I should. I also save more money than the majority of people ‘choose’ to, due to lots of budgetting and focusing on what is important.

    To end, This blog is about helping people spend less on life. Make more money, Not work so hard, succeed at what others failed at, learn from others mistakes, get the most ‘bang for your buck’, and to help people spend what is needed to be spent (Not what companies want you to spend).

  27. @ Future Money Bags,

    I think you may not understand how taxes is the number one problem. Saving money helps but saving taxes you are unknowingly or unnecessarily saves money.

    Do you do your own taxes or review your taxes? Both personal, and for your business?

    You may want to reread my comments again. If you need some help to understand what I talking about, feel free to drop me a line.

    cheers,

    Brian

  28. 28. Mark

    If anyone has had a family member suffer from Cancer, MS, Stroke or any disease that needs a care giver knows that a little extra cash would help a lot. There are drugs and other sources of treatment that may not be covered by private health plans or company health plans. Where do you get the money for such things? My investments? So if I don’t die from my disease and it takes me years of treatment and recovery how long do you think my investments are going to last? If I am not fortunate enough to have Investments, I am on my last bag of oats. If I do have RRSP’s and I take them out for treatment, I am taxed, could have redemption fees and withholding tax. So what the cost of treatment didn’t take, the government did.

    I’ve been too a lot of benefit dances for people suffering from cancer that didn’t have investments or some other source of income. Twenty or fifty dollars in a card doesn’t go far when you have to pay for treatment and other costs. Yes you could have Disability (DI) but that is about 70% of your wages. Woopie! Unemployment Insurance lasts about 15 weeks and is 55%? Looks like the Financial Stress is going to kill you.

    I would much rather a $50,000 tax free cheque from my Financial Advisor at my benefit dance so I can get the treatment I need and have no financial stress. For a policy that is relatively cheap, could save you and your family a whole lot of headaches. If you live for 2 – 5 years, who is going to bath, dress and do other activities of daily living that you can’t do for yourself?

    I am sure your family could put you in a home or the hospital. Nursing Homes are expensive and you may not be lucky enough to get a bed in the hospital. Now you’re friends and family have to provide the care and have to take time off work. It would be nice to be able to give them some sort of compensation so they don’t suffer a financial strain while caring for you. Long Term Care Insurance provides you with a monthly benefit to allow family to care for you or to put you in a quality home. Not everyone volunteers to be a care giver or is capable of being one so if this would make your quality of life a little better and theirs, why wouldn’t you insure yourself??

    There is more to just building wealth, you have to protect it too. Both Critical Illness and Independent Living Benefits are fairly cheap, can save you a lot of money in the long run and gives you peace of mind. If you think you will loose all your money if you don’t submit a claim, there is a Return of Premium option on some policies. So its a Win Win for everyone!!

  29. Some good points Mark, here is some more.

    Morality vs. Morbidity

    Mortality risk is the risk of dying, at any given time, when compared to other individuals of the same age or sex. Morbidity risk is the risk of a particular individual contracting a disease or other disabling condition at any given time, when compared to other individuals of the same age or sex.

    Incidence of Disability and Death at Various Ages – source: Education Committee of Academy of Life Underwriting (2007)

    Age Disabled greater than 90 days Disability vs. Death

    32 8 per 1,000 8 to 1
    37 9 per 1,000 8 to 1
    42 11 per 1,000 6 to 1
    47 13 per 1,000 5 to 1
    52 17 per 1,000 4 to 1
    57 21 per 1,000 3 to 1

    When a person applies for a mortgage, the bank will generally offer life insurance but rarely talk about disability or critical illness insurance. Since there is a higher risk of disability than death, disability insurance is of great importance also in order to protect against an interruption in mortgage payments.

    The note here is 90 days plus…a long time, which could wipe out years of savings!

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