Category: Insurance

Welcome to the second and final post in our series on insurance. Last month we covered life insurance and now we will explore disability insurance and critical illness insurance. All three types of insurance should be considered when putting together a plan to protect your finances.

Disability Insurance

Disability insurance pays a monthly amount if you are unable to work due to illness or accident. It is meant to replace employment income while you are unable to work. It pays between 60 – 85% of your gross income, depending on the policy.

DO I need Disability Insurance?

• If you have debts or loved ones who depend on your ability to earn an income, then you need to consider disability insurance. 
• Many people will have disability insurance coverage as part of their employment benefits. Be sure to review any policy provided through your employment.
• An emergency fund which can be used to cover short-term disability would struggle to cover a long-term disability. Insurance should be considered for protection from long-term disability.

Disability Insurance Options

There are many different options within disability insurance, below are a few important considerations.

• Any occupation coverage – Pays out benefits when you are not able to work in any occupation that you’re reasonably qualified for based on your experience and education.
  • This means that even if you suffered an injury where you couldn’t work your current job you would not necessarily receive a payout. Instead, the insurance company would look to see if there are other jobs you could perform with your injury. If there are such jobs, they may deny payment. 
  • An insurer cannot say that an architect who is injured could instead work at a fast-food restaurant and therefore is not covered. They must compare to jobs that fall within your education, training, and experience.
  • Any occupation coverage tends to be cheaper as there is a higher chance of a claim not being paid.
• Own occupation coverage – Pays out benefits when you are unable to work in your own occupation. If you cannot perform a substantial part of your own occupation, then you will receive your disability insurance payments. This type of coverage is especially important for professionals and high-paid positions such as lawyers, doctors and accountants who could not replicate their earnings in other careers. 
  • Own occupation is more expensive than any occupation coverage due to the higher chance the insurance company will have to pay if you become disabled. This type of coverage is not offered to all types of jobs.
• Cost of living rider – Increases your payout annually by adjusting it for inflation. An important consideration as a payout that seems adequate now, will not be adequate in 25 years.
• Future purchase option – Gives the option to increase insurance coverage annually as income increases in exchange for paying a higher premium. Additional medical underwriting is not required when increasing your coverage. Should be considered by professionals or those with large, expected increases in annual income. 

Critical Illness Insurance

Critical Illness Insurance pays out a lump sum if you contract a covered illness (such as cancer, stroke and heart disease) and survive the waiting period. This type of insurance is meant to cover added costs due to the illness or to replace lost income if you or your partner need to take time off of work. 

Do I need Critical Illness Insurance?

• With the advances in the medical industry there is a growing chance that those who contract these serious illnesses will survive. This is certainly a positive, but it can lead to added costs that critical illness insurance can help cover. 
• However, in Canada the majority of health-care related expenses would not come out of your pocket. If you had to miss time at work this would be covered by your disability insurance. This means critical illness insurance should be considered after you make sure you have adequate life and disability insurance in place.
  • It is a good idea to consider critical illness insurance for someone who is not covered by disability insurance such as a stay-at-home parent who doesn’t have any income to replace. 
• Keep in mind only certain illnesses are covered and each company has slightly different covered illnesses and have different definitions of those illnesses. This is important to review with your specific policy.

If you have questions about disability insurance, critical illness insurance or any other financial planning topic please reach out to our office. We would be happy to assist you.

Insurance is an essential part of a healthy financial plan. It helps to financially protect you and your loved ones. There are three basic types of insurance that we will explore in this two-part series. Next month we will review disability and critical illness insurance, this month we’ll explore life insurance.

Life insurance pays out a sum of money on the death of the insured if the policy is still in force. Keep in mind that specific events may not be covered so review your policy before completing the purchase.

Do I need Life insurance?

Most people will need life insurance at some point in their life. The two main situations that require life insurance are:

1. Having dependants (spouse, children) who rely on you to cover their needs.
   • You want your loved ones to be taken care of financially if you were to unexpectedly die. Unless you have sufficient assets to provide for them you should have life insurance in place.
   • This is not limited to only those earning an income. A stay-at-home parent also provides economic value to the family. If they were to pass you may need to pay for someone to take care of the children, or the surviving partner may have to work less.
2. Having debts that you do not want to leave outstanding on your death.
   • For example, if you purchased a home with your spouse, it is often extended based on your combined income. On your passing the bank may no longer be willing to extend the loan. Life insurance can be used to provide money to pay this debt.

Some other potential situations:

3. Cover future taxable events where there is limited liquidity.
   • For example, you own a family cottage and want it passed on to the next generation but there will be a large income tax bill on the transfer. Life insurance can provide the necessary cash, so the cottage does not need to be sold to cover the tax bill. 
4. If you are a business owner, life insurance may be necessary to facilitate a succession plan or protect other business partners.

TERM or Permanent?

These are the two basic types of life insurance. They each have sub-categories that are beyond the scope of this post but can be explored further with an expert at it applies to your situation.

• Term insurance covers you for a period, usually sold in 10-, 20- or 30-year increments. If you die during the covered period, then the life insurance would pay out. If you die after the term policy expires no death benefit will be paid out.
• Permanent insurance covers you for the rest of your life (if the premiums are paid). 

Term insurance tends to be much cheaper as you are only covered for the specified period. In most cases this is the insurance you should be buying. Your insurance needs change throughout your life and paying large premiums for coverage you will not need in the future doesn’t make sense. 

For example, you have two children who are 14 and 16 years old and you need insurance coverage to provide for them until they can provide for themselves. In 10 years, they will likely be done with school and in the workforce. You will need less (or no) insurance coverage to support them at this point.

Permanent insurance should be used for permanent needs, such as the taxes on the family cottage that you want to pass on to the next generation. 

There are specific instances where it may be appropriate to use permanent insurance as an investment product, but this is limited. Most people should instead buy term insurance and invest the monthly premium savings. Eventually you can accumulate enough assets that life insurance is no longer necessary to protect your loved ones.

Renewable and Convertible

When buying term insurance, it is generally recommended that you buy a renewable and convertible policy. These features protect you in the event you develop serious medical conditions that make you uninsurable in the future.

Renewable means that at the end of the term you can renew your coverage (at the rate outlined in your policy) without having to go through another medical examination. This protects you if you develop a health condition during the original term that would cause you to be uninsurable.

A convertible policy allows you to convert the policy to permanent coverage. This would be done without the need for you to undergo a medical examination, so the premiums are set quite high.

If you are still in good health at the end of your term and need coverage for additional years (or permanently), you can apply for a new policy usually at a lower price than the renewal or convertible premium.

How much insurance do I need?

This is a question that is best answered by working with an insurance professional. Generally, the items to consider are:

1. Loan balances to be paid off.
2. Income to be replaced – This calculation considers:
   • Annual income replacement
   • Number of years
   • Rate of return on investment of life insurance proceeds
3. Other expenses such as:
   • Funeral expenses
   • Post-secondary education for children
   • Daycare for children
4. Available assets to cover these needs.
5. Existing life insurance coverage (ex. employee benefits)

There will be additional considerations specific to your situation.

Remember, you are better off to purchase the amount of coverage you can afford instead of having no insurance coverage. Revisit your life insurance coverage again if your ability to pay premiums improves.

Other considerations

• If you are applying for a new insurance policy do not cancel your current policy until your new one is in place. You do not want to be without coverage during the transition period.
• Naming beneficiaries directly on your life insurance policy is one of the benefits of life insurance. This allows the proceeds from life insurance to flow outside of your will, maintaining privacy and saving on probate fees, among other benefits.
• Be aware that beneficiary designations are not as flexible as a will. In some cases, it may still be best to have the life insurance proceeds flow through your will.
• Be honest! Do not lie on your application. If the insurance company finds out that you intentionally lied on your application, it could nullify your life insurance.

Conclusion

Life insurance is an essential part of your financial plan and part of your responsibility in looking after your loved ones. Make sure you speak with an expert when you are purchasing life insurance so that you get the right coverage, clauses and beneficiaries that fit your situation.