When reading about life insurance online, it’s common to only deal with the final purchase decision, how much and what type. Those factors need to be treated unemotionally and factually. In the past three articles however we’ve examined what happens before you make the decision to purchase life insurance. We’ve contrasted two groups of very knowledgeable insurance purchasers and seen how their underlying bias and assumptions dictate their final insurance purchase.

The financial bloggers assumed that they needed income replacement during their income earning years while they have debt. Their further assumption is that their need or desire for insurance goes to 0 at some point in the future. That resulted in the purchase of term life insurance with the expectation of cancelling the insurance later in life.

The life insurance brokers all had some level of income replacement, but they all also had a sizeable permanent policy. Their underlying assumption is that they want some level of insurance coverage in the future. That assumption appears to be based on both their past personal experiences as well as what they’ve experienced in their business. The result of those two things is a high perceived value of life insurance, and an expectation that they don’t want their coverage to go to 0 at some point in the future.

Which one is right? Of course they both are absolutely correct. Which is why most of my clients do not have the same level of coverage that I have (most of my clients have term life insurance, like the financial bloggers). Nor do I think my clients should have the same coverage that I have. As long as you’ve examined why you want the insurance and then find the best and least expensive coverage for that need, then you’ve done the job right. In the end it doesn’t matter what everyone else has, only that you have the correct coverage for your circumstances.

Today we’re going to interview 3 actual Canadian life insurance brokers to see what type of insurance they have. All three brokers have many years of experience in the business, all three have dealt with thousands of clients through the years, all three are professionals looking after the best interests of their clients. Two of the life insurance brokers have also discussed other types of insurance coverage.

But before we talk about specifics, I’d like to take a page from my grade 13 English class and engage in some foreshadowing. Our first broker interviewed responded with this as his very first line:

I believe in what I sell.

I believe you’ll see that statement reflected in his insurance coverage, as well as the other brokers interviewed here. Looking at what coverage your insurance broker has can provide an interesting glimpse into their approach towards life insurance.

Insurance Direct Canada

First up, I interviewed Russ, owner of Insurance Direct Canada. Russ is old enough to have grandchildren and maintains a very active national life insurance brokerage. While I’ve paraphrased other’s responses, Russ’s response is superb as it stands – I’ve simply quoted exactly what he sent me. Here’s what he had to say:

I believe in what I sell.

I have $200,000 funded UL to top up my wife’s pension or provide for grandchildren when I pass if she does not require it which is most likely.

$75,000 critical illness for me and my wife. It went through a policy renewal a couple of years ago – I would recommend a 20 year term or longer now to clients as it is expensive. This is to enable me to take time off work or hire someone to fill in for me if either one of us gets a critical illness as I would want to concentrate on getting better or help my wife get better and also to cover the hidden costs like travel and parking and medicine that is not covered by our plans.

$1.0 million to fund a “buy” agreement in the event of my death. Additional corporate owned insurance to cover any debts and pay the balance out through the CDA to my wife.

Long Term Care Insurance – $100 per day for each of us for home care or institutional care. We had my wife’s parents come to live with us for 8 years and while we would not have had it any other way, it was a strain particularly for the last two years of failing health. We want to have the insurance so that the question of living with our kids when in poor health will not be an issue. We will be able to go to the care home of our choice and it will be a matter of claiming on our insurance policy not a snub by our kids. Frankly, I think we can find a care home that would be better than living with kids and the “at home” care benefit should enable us to live at home longer than usual with daily help.

I also have an excellent group insurance plan that goes to age 80 with no pre-existing conditions for the travel component – all I need is a letter from my doctor saying I am approved to travel and the time is up to 90 days. It is also a large pool so no surprises if we have a bad year for claims and the prescription coverage is unlimited if we have a need for that. It was designed by an older person for what he felt he would need but it is for groups of two or more.

Term Canada

Chris from Term Canada is also an independent life insurance broker. He’s married, no kids, and in many respects similiar to Mark from our post yesterday on financial bloggers.

Chris maintains $500,000 of 20 year term life insurance to cover his mortgage plus some. In addition he has a $100,000 permanent life insurance policy that he’s had for a number of years. He purchased that policy simply because he expected he would want it in the future, and wanted to lock in rates when he was younger.

And while we didn’t specifically ask for this, both insurance brokers we interviewed went on to discuss other insurance policies that they own. Chris has a disability insurance policy that he purchased when his business first started to take off. And lastly, Chris has $150,000 of critical illness he purchased years ago back before the insurance companies realized they had underpriced these policies. His critical illness policy has premiums level to age 75 instead of the more common 10 year level rates.

 Life Insurance Canada.com

Glenn of Life Insurance Canada.com – that’s me. I’m an independent life insurance broker. I focus my practice on education rather than specific products. Most of my clients have term insurance, in direct contrast to the insurance that I carry. I’m married, we have two children in their mid to late teens, both are still in school.

Coverage:

• $1,000,000 20 year term insurance.
• $250,000 minimum funded universal life insurance – basically a term to 100 policy.
• $200,000 joint last to die policy with my spouse.
• Spouse has roughly $600,000 term life insurance coverage.
• $250,000 minimum funded universal life insurance on each child.
• Disability policy.

The $1,000,000 of coverage is simply income protection, to cover income replacement for my family should I pass. The joint last to die policy I purchased in order to create an estate for my children. The basic decision was that no matter how our finances ended up, when both my wife and I passed away we would have an estate of $100,000 for each of our children.

The minimum funded universal life policy was purchased in order to leave my wife an amount of money upon my death. Again, the consideration was that no matter how business or investments go over the long long term, I’ve guaranteed $250,000 to her upon my death.

My wife’s coverage is again income replacement. We expect to shortly replace $100,000 of her term life insurance coverage with a permanent life insurance policy.

We purchased the admittedly fairly large policy on our children for two reasons. First, I wanted to ensure that no matter what happens to them medically, that they always have some type of coverage, and hopefully enough to cover a small mortgage. Secondly, with permanent insurance premiums on the rise I locked in the policy for their lifetime at premiums I don’t believe we’ll ever see again. Once they’re older and have their own families I expect to transfer ownership of the policy to them. At that point I expect they’ll find the coverage a screaming deal.

And lastly, I have a disability insurance policy to cover my income. The policy is an older policy from the 90′s and is deficient in that it doesn’t cover my current level of income. Unfortunately because my business is all non-face to face and we work from a separate home office, the insurance companies have decided that I am now uninsurable for disability insurance. This isn’t for medical reasons, it’s simply because if I’m working from my office and not visiting clients, the insurance company can’t tell if I’m actually working or not. And that’s understandable because according to my wife, some days she can’t tell if I’m working or not either.

I’d like to thank Russ and Chris for being so willing to share their personal insurance coverage details so openly.

With the idea of comparing and contrasting different approaches to life insurance purchases, this week we’ve interviewed three of Canada’s top financial bloggers.

These folks are financially astute. They blog on Canadian financial matters, are well read and unbaised. None of them earn an income from the financial industry. They’re just regular folks who pay very close attention to their financial affairs.

MyOwnAdvisor.ca

First up, is Mark from MyOwnAdvisor.ca. Mark is a married 30′s something, no children.

Coverage:

• 1.5 times annual salary at work.
• $500,000 10 year term policy.

Mark purchased the 10 year term policy expecting that his mortgage and debts will be paid off within the 10 year timeframe. In terms of the amount, he factored in their debts, including mortgage, and added in income loss for one year. He also factored in inflation, assuming that $500,000 will be worth almost $100,000 less 10 years from now. His final step was to round up to $500,000, after determining that the cost increase in going from $250,000 to $500,000 was minimal.

TimelessFinance.com

Next up, is Joe from TimelessFinance.com. Joe has a spouse and a young daughter (for cute baby pictures of Joe’s daughter, follow the link through to his blog).

Coverage:

• $280,000 coverage at work
• $250,000 20 year term
• Spouse, $500,000 20 year term

Joe purchased the work coverage due to the low premiums (life insurance premiums through work are generally inexpensive for younger folks, but gets increasingly expensive and uncompetitive as we get older). They purchased 20 year term with the assumption that the mortgage would be gone in that timeframe. For the amounts, Joe and his spouse used 10 times their after tax income for his amount. For his spouse, they used 10 times her income plus added in another 10 years of childcare expenses to arrive at the $500,000. No insurance on their children.

 CanajunFinances.com

Finally we have BigCanajunMan from CanajunFinances.com. This blogger and former Nortel employee is married with children and lives in Ottawa.

Coverage:

• $200,000 term life insurance.
• 2 times annual income with employer.
• Some survivor benefits on his pension.
• 2 times income on spouse with employer.
• $200,000 term policy on spouse.

BigCanajunMan determined his $200,000 of term insurance, both the amount and the type, as a means to offset his mortgage debt. His work coverage is simply the maximum that’s available to him through his current employer (he’s had higher amounts at other employers in the past). For his spouse, the amount is intended to simply cover increased child care costs to allow this Big Canajun man to keep working at his Big Canajun job .

Interesting, and perhaps not surprising, that all three families have a blend of work coverage and term insurance policies intended to cover their income.

I’d like to thank Mark, Joe and BigCanajunMan for sharing their personal information so freely.

All life insurance sales start out as an emotional decision. The life insurance industry is well aware of this fact and uses emotions in much of its marketing material. Conversely, some people will tell you that emotion should play absolutely no part in your decision.

I believe that somewhere in the middle is the correct answer. We need to know why we’re buying insurance. We need to understand and examine our assumptions that are based on bias, beliefs and emotions. From those assumptions, we can switch over to the cold hard facts and find the best coverage, the best type, and the best price for life insurance.

To show this contrast in approaches and assumptions, I’ve interviewed two different groups of people to ask them how much and what types of life insurance they own. The first group are some of Canada’s leading financial bloggers. These people write about finances as a hobby. They’re actively involved in the industry from an outsider’s perspective. They’re unbiased, as they don’t work in the industry, they just research and analyze it. I expect these folks will give us the cold hard truth about their life insurance purchases.

The second group of people I’ve interviewed are at the complete opposite end of the spectrum – life insurance brokers. These people are actively involved in marketing life insurance to the public all day long. They’ve seen thousands of individual’s purchase insurance for a wide variety of reasons. They’ve seen death claims paid, and the impact that has on the beneficiaries. I expect this group will be more towards the opposite end of the spectrum, having seen numerous instances of life insurance practically applied.

Let me contrast two scenarios to illustrate how your need for insurance is based on your underlying assumptions. Let’s say that you have a family cottage that will be inherited by your children. The cottage is worth say $500,000 so the children will have a tax bill of $100,000 when they inherit it. That’s $100,000 that the children don’t have handy. Person A simply passes the cottage down through their estate, resulting in the kids having to sell the cottage. They sell the cottage, pay the government $100,000 and pocket the remaining $400,000. Person B is adamant that the cottage they’ve enjoyed across generations remain in the family. They purchase a $100,000 permanent life insurance policy. When they pass away, the children take the $100,000 insurance proceeds, pay the taxes owing, and continue to enjoy the cottage with their children.

Which person was right? Person A doesn’t need life insurance and their children got $400,000 and no cottage. Person B needs $100,000 of life insurance, their children got no cash in the end, but got a cottage. Clearly, they’re both right. It simply depends on their underlying personal assumptions and preferences. However if you’re person B, we now know that you need $100,000 of permanent life insurance. Now we can go looking for the least expensive route to fill that need.

Tomorrow in part II of IV, we’ll interview some of Canada’s top financial bloggers to see their life insurance purchases.

Manulife has been promoting a unique combination plan called Synergy. It combines coverage on life insurance, disability insurance, and critical illness insurance all under one coverage. If you’re not covered under under a group work insurance policy, this may be a suitable product for you. Buying your coverage bundled like this is likely a less expensive option than purchasing it seperately, however be aware that there are some limitations within the policy.

The basic premise behind the policy is that all claims come from a pooled or common insured amount. Basically each claim reduces the amount insured amount, until the insured amount goes to 0. Critical illness has a maximum of 25% of the insured amount, and disability pays a monthly benefit of 0.5% of your insured amount.

Let’s say you purchase $250,000 of coverage. If you should die, your beneficiaries will receive $250,000. However, if you become disabled, your benefits will be 0.5% of the $250,000, or $1250 per month. Each $1250 payment reduces the available pooled coverage. So if you were disabled for 10 months, Manulife would have paid out $12,500 (10 monthly payments of $1250). So now your coverage amount drops to $237,500, which would be the payout should you now die. Disability payments under this structure will last only for about 16 1/2 years, which may not be long enough for anyone younger than their late 40′s.

The coverage also stops at age 65, and there are some limitations on conversion, so be careful you’re up to speed on what happens if you become uninsurable.

It’s an interesting premise, and one that does have some inherent cost savings. Because the coverage amount is limited to $500,000, and that amount may not be enough for your life insurance, you may consider adding a term life insurance rider to the policy, thus increasing your total life insurance coverage.

In summary, if you don’t have inexpensive coverage at work, this can be a cost effective way to get all three types of insurance coverage – life, disability, and critical illness. Just make sure that you’ve addressed whether the disability insurance payments are going to last long enough if you’re disabled, and that you have enough life insurance coverage.

Final note: Manulife publicizes that the odds are 50% that you will have at least one of those three before age 65 (and that for a couple, it’s over 75% that at least one of you will have one) but they don’t tell us what the likelihood is of having two or three of them. I assume it’s a relatively insignificant number of people. Which is actually a positive for the product – I assume it’s likely that you’ll need the coverage for only one of those three concerns, so a low risk that you’ll be reducing your coverage for a second concern.

When people consider the purchase of life insurance, the consideration normally centers around term vs whole life insurance. The basic idea is that if you need life insurance for a period of time, say 20 years, then term life insurance is perfect. If you need life insurance forever, you should consider some variant of permanent life insurance such as whole life or term to 100.

There’s only one problem with that – it assumes all or nothing. Either you need all your life insurance forever, or you don’t need any after a certain point. In reality, you may need a lot of life insurance when you’re younger, and a much smaller amount of life insurance when you’re older. In fact I believe that most people have an insurance need like that. Rather than having an insurance need that goes right to 0 at retirement, that in fact a small amount of continued insurance after retirement would be better.

So what would the perfect policy to fit those needs look like? It’s actually fairly simple once you’ve seen it done. Rather than having just term or just permanent life insurance, we can actually mix two types of coverage in one policy.

For example you could purchase $100,000 of permanent life insurance and top it up with a layer of $400,000 of term life insurance. This would give you a total of $500,000 of coverage when you’re younger. When you get older and we need less life insurance we can drop the $400,000 of term life insurance, getting rid of both the premiums and the coverage. That leaves us with the $100,000 of permanent life insurance coverage with premiums level for life. The good news is those lifetime premiums will be based on our younger age when we bought the policy and not our older age when we drop the term coverage.

For example if you purchased $500,000 of term life insurance at age 45 and then wanted $100,000 at age 65, you would normally cancel your term life insurance and purchase a permanent life insurance policy at age 65 – at age 65 rates of course. If instead you’d purchased the two layers as described above, when you cancel the term insurance at age 65, your remaining $100,000 of insurance premiums are based on someone who’s 45 years old, not 65. And which premiums would you rather have at age 65 – rates for a 45 year old or a 65 year old?

This mix of coverages provides a decreasing amount of coverage over your lifetime at the lowest possible long-term cost. That’s why I call it the ‘perfect policy’.

30 year term life insurance is a great product for young families. It provides coverage until close to retirement, and fits well with mortgage and family timeframes. It’s a great all around term life insurance policy for people into their early 30′s.

However if you’re considering 30 year term, there are two other things you should be aware of.

First, 30 year term is competitively priced only until you’re about age 32. After that age, 30 year term can be twice the price of a 20 year term policy. While a 30 year term policy may be ideal, many young families will cut their premiums in half by going with a 20 year term policy and simply push off purchasing another insurance policy at the end of 20 years.

Secondly, there is currently an idiosyncracy in the market. Manulife has a level to age 65 term life insurance policy. For consumers considering a 30 year term, this policy may actually be less expensive and last longer than a 30 year term policy. For example, on a male and female both age 32, the least expensive 30 year term policy is $94.50/month. The least expensive that I would recommend however is $103.50. Compare that to Manulife’s term to age 65, premiums would be $101.27/month. Not only is Manulife’s policy cost competitive, but the term is for 33 years instead of 30 – you get an extra 3 years at that price!

Pricing on term policies change over time so this may be something that’s temporary, but certainly ask for a quote on this product when shopping for 30 year term.

Buying insurance is often done emotionally, overruling financial common sense. There’s three easy tests you can use though to ensure that you’re making the right decision. These three tests are simple, you should purchase insurance to cover Catastrophic Financial Losses.

1. Catastrophic: You should normally only purchase insurance if your loss if catastrophic. If your loss is not catastrophic then you should consider saving the premiums and self-insuring. Totalling a $30,000 car would be considered catastrophic, or a fire burning a $250,000 home. Those amounts are not easily replaced by most of us out of our immediate funds. But many warranties are not catastrophic. This is why many financial advocates advise us to stay away from insuring electronic devices. If you’re $500 smartphone gets lost, that should not be catastrophic – so save your money and if it happens, buy yourself a new smartphone.
2. Financial: You must suffer a specific amount of a loss and it should be clearly defined. You should be able to say “If this event happens, I have lost $YYYYY” and then purchase insurance for the amount of $YYYYY. If you can’t define the loss in financial terms, then the loss is likely emotional. Purchasing insurance for emotional reasons is fine as long as you are aware that this is what you’re doing. Don’t purchase insurance for emotional reasons thinking it’s a sound financial decision. Purchasing insurance on children is a good example. While I maintain a policy on my children, I do so for a variety of reasons, not all of which are ‘because it makes strong financial sense’. It may be for other non-financial reasons like teaching them the importance of planning and guaranteeing future insurability.
3. Loss: This seems intuitive, but be careful. With both insurance and lotteries, large numbers of people contribute to a pool where based on a random event one person receives the pool of money. With insurance, the recipient lost that amount of money and the loss is being replaced by the pool. With lotteries, the person did not lose anything, they’ve created wealth. The mechanics are the same, the intent is entirely different. Critical illness insurance is a good example of this, failing both the financial and loss. Many critical illness policies are sold based on emotions rather than finances. And to make that clear, the challenge with critical illness is to show where a specific amount of money was ‘lost’, rather than having some benefit created. (i.e. taking a trip to the mayo clinic isn’t a loss, it’s a created wealth benefit, so it fails our test for proper insurance.)

If you put your insurance coverage against these three tests you’ll be a long way to asking the right questions to make sure you have enough of the right type of insurance, and not too much of the wrong type.

It’s a new calendar year, so for those of us with children, we once again have the full yearly contribution limit available for our children’s RESP’s.  So if you’re not making routine monthly contributions, now’s as good a time as any to drop the $5000 into the little one’s RESP’s.  That’ll give the contribution a full year to grow and gets you your $1000 contribution from the government faster as well.

RESP’s are outside of the field I provide advice on, so I actually contacted Mike Holman of Money Smarts Blog to confirm that the contribution limits were by calendar year and that I could make the full contribution in January.  Mike’s the author of The RESP book.  This is a book that every parent should read.  It explains RESP’s in clear easy to understand language and steps you through what you need to know to set one up.  And if you haven’t yet started an RESP, now is the time – it’s an easy $1000 per year towards schooling costs that the government will give you every single year!

We just reviewed the RESP’s we have for our children and just because we make regular contributions to it we expect to have enough to entirely pay for our youngest children’s university education (we started a bit late for our eldest to fund their entire education).  We know that when they head off to university that we won’t have to cover much of anything in the way of costs – it’s already accumulated and in the RESP.

Comparisons between term life insurance and mortgage life insurance are common.  But few if any will show you the real worst case scenarios that show mortgage life insurance to be a huge mistake.

Here’s the common reasons to buy term life insurance that you’ll read about on the internet:

• Mortgage insurance is decreasing insurance.  Your premiums remain level but the amount of insurance declines with your mortgage.
• The insurance company pays the bank, not your beneficiary.
• Mortgage life insurance uses post-claim underwriting and may lead to your claim being denied.

And these are all true (except the last one, which requires clarification, see below).  And term insurance compares well against these drawbacks.  However there are a few other ‘gotchas’ with mortgage life insurance that aren’t discussed.  These deficiencies can cause huge problems, not the least of which is leaving you without insurance coverage when you want it the most.  Here’s some of the reasons common in many mortgage insurance products:

• You can be denied insurance every time your mortgage renews.  Because your insurance is tied to your mortgage, every time you go in to renew your mortgage, or switch banks, your old insurance is cancelled and you have to requalify for new mortgage life insurance.  If you’ve become unhealthy and uninsurable, you’ll find yourself with no insurance coverage.
• Mortgage insurance does not have a conversion option.  Most term policies allow you to convert from term insurance to permanent life insurance, without taking a medical exam (and still getting healthy rates).  If you become uninsurable/unhealthy with mortgage insurance, you’re goose is probably cooked when your mortgage renews.  With a term policy, if you become uninsurable you simply use the conversion option to lock in your life insurance rates for the rest of your life, at healthy rates and no medical exam.
• Premiums go up every time you renew your mortgage, likely every 5  years.   (this is speaking generally).  If you have a 5 year term on your mortgage you should expect your premiums to go up in 5 years.  And the premiums at renewal may not be guaranteed – they could be anything.  Compare those premiums for a 5 year period with a 10 year term or 20 year term life insurance premiums and expect to be pleasantly surprised.
• You can’t get preferred rates with mortgage life insurance.  I’ve never spoken to a consumer that received preferred health rates with a mortgage insurance product.  I’m left to assume that they’re not offered.  Term life insurance offers you the opportunity to receive preferred health class premiums (you’re unlikely to receive them, but at least the probability isn’t 0).
• Mortgage insurance may leave your family without enough money.  People buy mortgage life insurance as a proxy for insuring their lifestyle.  They want their family to continue to live as they are now, should a wage earner die.  But does paying off your mortgage accomplish that goal?  If you run the numbers, the answer is ‘probably not’.  That’s because you’re insuring the wrong thing.  Rather than insuring your mortgage you should be insuring your paycheque.  Your family loses your paycheque at your death and it’s your paycheque that’s maintaining your lifestyle, not your mortgage.  By focusing on the mortgage alone, you may leave yourself and your family without enough money to maintain their lifestyle if you should pass.
• Post claim underwriting can lead to your claim being denied.  Many articles will suggest that mortgage life insurance has post claim underwriting,where they’ll review your medical history after you die, and then perhaps deny your claim.  By contrast, they suggest that with term life insurance the underwriting is done up front.  This is not necessarily the case – term life insurance policies are frequently carefully reviewed after the insured dies and may lead to a denial of the claim, just like mortgage insurance.  The difference is in the application.  Most people do not read the health declaration they signed with their mortgage life insurance.  They may have understood that they were signing ‘I want the insurance’ and not a specific health declaration (did your mortgage vendor just say “do you want mortgage insurance?  If so, sign here’).  And even if they did read it, they may not have understood the questions, or been able to offer additional information.  By contrast with term life insurance you should be coached by your broker to fully disclose your entire medical history during the application process, no matter how unrelated or miniscule the details are.  This doesn’t mean you won’t get reviewed either way, it does mean you should have minimized the risk of the insurance company finding a detail they can use to deny your claim – simply because you fully disclosed more information and paid attention to details during the application process.

In the end, it’s not just the features of how the insurance works, it’s what can happen in worst case scenarios.  Mortgage life insurance can leave you uninsured with no backup options and caters to the lowest common denominator.  Term life insurance provides longer term coverage and normally has some backup options should you become uninsurable.  And not only does term life insurance normally provide premiums that are level for longer durations (10 or 20 years instead of maybe 5), it does so at rates that are competitive – frequently cheaper – than mortgage life insurance.  You can shop this yourself using the form on the right side of this page.

If you’d like a friendly review of your mortgage life insurance including a comparison of market prices for term life insurance, feel welcome to call toll free (866) 662-5433.