Comments on: Deciphering the Insurance Puzzle – II (Universal Life, Disability, Critical Illness)

By: Brian Poncelet, CFP

Brian Poncelet, CFP — Fri, 08 Apr 2011 00:34:58 +0000

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!

By: Mark

Mark — Thu, 07 Apr 2011 23:35:37 +0000

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!!

By: Brian Poncelet,CFP

Brian Poncelet,CFP — Sun, 25 Jul 2010 15:42:50 +0000

@ 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

By: Future Money-Bags

Future Money-Bags — Sun, 25 Jul 2010 11:41:52 +0000

@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).

By: Brian Poncelet,CFP

Brian Poncelet,CFP — Sat, 24 Jul 2010 09:40:15 +0000

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.

By: Geoff

Geoff — Fri, 23 Jul 2010 18:29:20 +0000

@ 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.

By: Mark

Mark — Fri, 23 Jul 2010 18:23:58 +0000

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.

By: larry macdonald

larry macdonald — Fri, 23 Jul 2010 17:31:10 +0000

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.

By: Tim Landry

Tim Landry — Fri, 23 Jul 2010 17:11:19 +0000

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.

By: larry macdonald

larry macdonald — Fri, 23 Jul 2010 14:30:07 +0000

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.

By: Car Guardian

Car Guardian — Fri, 23 Jul 2010 11:38:54 +0000

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.

By: FrugalTrader

FrugalTrader — Wed, 21 Jul 2010 16:42:35 +0000

Geoff, good point, something that I overlooked!

By: Geoff

Geoff — Wed, 21 Jul 2010 14:27:59 +0000

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.

By: Tim Landry

Tim Landry — Wed, 21 Jul 2010 13:18:57 +0000

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?

By: Future Money-Bags

Future Money-Bags — Wed, 21 Jul 2010 09:28:05 +0000

@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. :)

By: sco

sco — Wed, 21 Jul 2010 01:27:09 +0000

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

By: Future Money-Bags

Future Money-Bags — Wed, 21 Jul 2010 00:11:20 +0000

@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.

By: Tim Landry

Tim Landry — Tue, 20 Jul 2010 20:16:49 +0000

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”

By: Jenna

Jenna — Tue, 20 Jul 2010 20:10:38 +0000

Health insurance no matter what.

By: Multiple Egg Baskets

Multiple Egg Baskets — Tue, 20 Jul 2010 20:08:27 +0000

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!