Proper Protection

Misconception #1: 

I don't need personal insurance because I'm covered through work.

• Work coverage is a great bonus, but usually either not enough or not something you can depend on long-term. 
• Most workplace policies are basic, with low coverage limits (i.e. 1x your salary).
• If you leave your job, get laid off, or become self-employed, the coverage usually does not follow you.
• Group plans often don’t include critical illness insurance.
• Personal coverage fills the gaps and stays with you regardless of your employer.
   

Misconception #2: 

Insurance is too expensive.

• If you can't afford to, you can't afford not to. Not having insurance when you need it is far more expensive as it leads to draining savings, going further into debt or leaving your loved ones vulnerable. 
• You can start with budget-friendly coverage and adjust it over time. When properly structured, and especially when young and healthy, term life and critical illness insurance coverage can be very affordable.
  

Misconception #3:

I don't have any dependents, so I don't need insurance.  

• Dependents are not just your spouse or children. If anyone relies on your income, including aging parents or a business partner, there may be an outstanding insurable need. 
• It is typically easier and more cost effective to get coverage while you are younger and healthier; even if it is before you have debts and dependents. 
• Insurance isn't just for people with dependents: critical illness insurance and disability insurance protect your income & permanent life insurance builds cash value that you can access in your lifetime.
  

Misconception #4: 

I don't want to "jinx" it by talking about it.  

• Talking about protection isn't about attracting bad luck, it's about planning ahead to avoid worse outcomes.
• We insure our home, car & phone and these are all things with less importance than our life and our health. Ignoring this reality doesn’t stop life from happening. It just means you’re less prepared when it does.

Misconception #5: 

I have a pre-existing condition, so I can't get coverage.  
 

• Talk to an advisor rather than being quick to self-decline. 
• Some insurers offer policies that accept higher-risk individuals, even without medical exams. You might still qualify for partial, modified or guaranteed issue coverage & protecting what you can now is still better than having nothing later.

Misconception #6: 

I already have mortgage insurance through the bank, so I don't need to look at personal insurance.  

• Bank mortgage insurance primarily protects the lender rather than you and your family.
• In spite of your premiums staying the same throughout the length of your mortgage, the death benefit amount decreases as your mortgage is paid down. 
• If you pass away with a mortgage balance owing, the death benefit is paid to the bank to cover the remaining debt rather than to your family for them to decide what the money is needed for in your absence. 
• Lastly, you often can’t control or change the policy terms, and underwriting is done at the time of claim rather than the time of application, which leads to a much higher percentage of denied claims.
• To summarize, a personal term life policy can be cheaper, more flexible, and ensures the payout goes where you want it to.

Nearly half of the population will be diagnosed with some form of critical illness in their lifetime, with the average age of receiving a claim payout across various insurance companies ranging from age 41-60. 

We hear the statistics, but have we ever taken the time to think about how that would play out within our life? 

1. It's likely to happen to someone you deeply care about, if not yourself; and

2. It's likely to happen at a younger age than we're taught to think. 

On the investment page, we talk about building and experiencing uninterrupted, long-term, compound growth. 

This is much harder to do if you or someone in your family gets sick, you need to take time off of work, and now you are liquidating what was supposed to be your retirement money for bills and treatment. 

But it doesn't have to be that way. 

Insert critical illness insurance. 

It is a type of protection that provides a tax-free lump sum payment, with no restrictions on how the money can be used, if you’re diagnosed with a serious illness listed in your policy (such as cancer, heart attack, or stroke). 

The benefit is typically used to cover: 

• Taking time off work
• Travel for treatment or specialist care
• Out-of-pocket medical costs not covered by provincial plans
• Home renovations, private care, or alternative therapies; and
• Supporting your family while you recover

Those who would benefit the most from this coverage are: 

• Self-employed individuals with no group benefits
• Anyone who would struggle financially during a serious health event
• People who want to protect retirement savings or avoid draining their TFSA/RRSP
• Families who have not yet achieved their financial independence number and still rely on one or two main incomes. 

There are three things to consider when deciding which insurance plan makes sense. 

1. Your current "on paper" insurable need 

2. Future need

3. Affordability

Based on those three variables, a common sense discussion with an advisor can determine what to apply for. Prior to the discussion, filling out this questionnaire can give you an approximate feel for your situation. 

Calculating on Paper Need

The industry standard acronym is DIME.

• Debts: what percentage of my debt (credit cards, student loans, lines of credit, etc.) do I want to be paid off vs. left for my next of kin to deal with? 
• Income: how many years would I like for my family's lifestyle to remain the same if I were no longer contributing an income to the household? 
• Mortgage: how much of my remaining balance would I like to be paid off? 
• End of Life: how much should I allocate towards covering funeral costs and final estate expenses? 

For example:

John & Jane Doe make $50,000/year each, have a 10-year-old child, a $500,000 mortgage, and $50,000 in other debts. They both agree that if one of them passes, they would still like the same amount of household income coming in until the child is at least age 18.  

Current on paper insurable need: 

• Debt: $50,000
• Income: $400,000
• Mortgage: $500,000
• End of Life: $20-50,000

Their insurable need for the next eight years would be about $1,000,000. In 10 years, their child is off the payroll and the mortgage is paid down to, say, $250,000. 

On paper insurable need in a decade: 

• Debt: $50,000
• Income: $0
• Mortgage: $250,000
• End of Life: $20-50,000

Their insurable need for the next 10 years beyond that (until the mortgage is paid off) would be about $350,000. 

10 years after that, if there is no debt, mortgage or other people depending on their income, then their insurable need may only be around $50,000.

This is where the next section, understanding the different types of life insurance, can come in handy. 

This is also a great example of where life insurance is simple, but not always easy. 

• Easy would be just getting a quote and then paying the premium. 
• Simple is talking out the situation, reviewing all options, and then fulfilling the desired need. 

The problem with just getting a quote is it lacks perspective on the options. 

Do they get a $1,000,000 of term coverage for the next 20 years so they are okay until the mortgage is paid off? But in 10 years from now, they are paying for $600,000 of coverage they don't need and in 20 years from now, the policy has expired altogether, and they still have a $50,000 permanent need? 

In sitting with our team, you will get a customized review of all of your options, taking into consideration your current objectives and looking over the hill at your future needs. 

Final Note: 

When it comes to the income calculation for a homemaker, it is important to have an open discussion with your advisor about how much it would cost to fulfill the homemakers role to keep life as close to "normal" as possible. The calculation may not be as clean as John & Jane Doe's income replacement calculation, but it is still doable and important. 

The most elementary explanation would be. 

• Term life insurance = renting 
• Permanent life insurance = owning

Renting

When renting a house, there is no option to get to a point where you are eventually mortgage free; it is a perpetual rent payment to stay in the home. 

With term life insurance, so long as you want the coverage, you will need to pay for it. And the cost increases substantially every time it renews. 

Owning

When owning a home, there is typically a higher upfront cost (down payment, property tax, utilities, repairs), but you can get to a point where it is paid off and you no longer have the monthly expense. The home is also an asset that can be sold or borrowed against to acquire wealth. 

With permanent life insurance, the policy can be structured in a way where it is fully "paid up" after a period of time, so there is no longer a monthly cost. It is also an asset that can be sold or borrowed against to acquire wealth. 

Let's recall the earlier example, where John & Jane Doe's life insurance need was:

• About $1,000,000 each for the first eight years,
• About $350,000 each for the next 10 years; and
• About $50,000 for year 18 through end of life. 

There are a few options to discuss with them and the one that makes the most sense would be dependent on their primary motivation for purchasing the policy. 

1. If it was strictly about cost-effectiveness, it may be worth looking at a joint first-to-die term-20 policy for $1,000,000. Joint-first-to-die meaning as soon as one of them passes, the other person gets the benefit. 

If we wanted to get granular, they could do something called term layering, where they purchase a $350,000 term-20 policy, with a $650,000 term-10 rider. The coverage would decrease from $1,000,000 to $350,000 in year 11, and so would their monthly payment. 

2. If it was strictly about properly fulfilling their insurable need, they could get a layered policy, with a $50,000 whole life or universal life base, a $300,000 term-20 rider and a $650,000 term-10 rider. 

In this scenario, ideally the policy is funded well enough over the first 20 years that it can be put on a premium holiday after the term-20 rider falls off, and the accumulated cash value within the policy is enough to pay for the permanent premiums in retirement. 

This is an example of there being more than one way to do the same thing. 

Instead of doing a layered policy, if they wanted simplicity (not worrying about premium holiday, riders falling off, etc.), they could have two policies to have a clear separation between the intended payments and purpose for implementation: 

• Policy #1 = the $50,000 standalone permanent solution
• Policy #2 = the $950,000 layered term plan

3. If they wanted to use their insurance as an asset class (either in addition to or in lieu of an RRSP or a TFSA), the amount of term coverage to purchase would be dependent on how much permanent coverage was needed to properly tax-shelter the amount of money they wanted to contribute to the cash value. If, say $500,000 of permanent death benefit was required, then to fulfill the balance of their insurable need, they would only need a term-10 rider for $500,000 and no additional riders beyond year 10. 

4. Regardless of which option John & Jane move forward with for their life insurance, they should also both consider getting individual critical illness insurance policies. 

This case is a great example of why a financial needs analysis is so important when determining how to fulfill someone's insurable need. The decision largely depends on their current cash flow, other assets and overall goal for the policies. 

Most families we sit with have existing coverage in place, but it is nowhere close to suitable for their situation. Whether you want to blame it on commission and quota-focused advisors, a lack of education on how to ask appropriate discovery questions, or any other variable, the unfortunate truth is that the majority of people who need life and critical illness insurance are either underinsured or overpaying.