April 2009

Personal Insurance: The "other investment"

By Don Eberley

“Herb is selling life insurance,
and he's headed this way!”

- Les Nessman

Insurance is “the other investment” that few people like to talk about. It conjures up images of long winded sales pitches, and embarrassing medical questions that most of us would rather not answer.

Love it or hate it, however, insurance is important to your financial plan. It handles the financial scenarios that we all hope will never happen, but sometimes do.

Life insurance

If you are working and raising a family, you need life insurance to sustain your dependents in case you die unexpectedly. Face it; your boss isn't going to keep sending pay cheques after you're gone, and your RRSP probably isn't big enough to replace the lost income for very long.

Start by considering the cost of a funeral, taxes, legal bills, and an emergency fund to alleviate the immediate pressure. Then think about how many years of income you would like to provide, debts you would like to pay off, or other money you would like to provide for education or retirement.

Next, apply for convertible term insurance. It is relatively affordable, and when you no longer need it you can cancel the policy or convert it to Universal Life. Universal Life insurance is really the optimal estate planning investment, because money invested in its cash account can be sheltered against all taxes when you die. But it is also less affordable to growing families, which is why I suggest starting with convertible term and going from there.

Disability insurance

Disability insurance provides temporary monthly income for as long as a doctor certifies that you are unable to work due to accident or illness. Some folks are covered under a group plan at work, while others must purchase their own. Most DI claims are based on relatively minor conditions (such as back problems or emotional stress) which last beyond the typical policy's 30 to 90-day exclusion period. Watch out for policies which cut off your benefits as soon as you're ready to work at the Burger King Drive-Thru window. The best policies allow you to return to your own job at your own pace. Caveat emptor.

Critical Illness insurance

Critical Illness insurance is like life insurance for the living. Instead of dying to collect the money, however, you must be diagnosed with a covered illness. Cancer, heart and stroke are the big ones, followed by Multiple Sclerosis and certain other conditions. Pay attention to how well these major illnesses are covered, rather than how many other exotic illnesses appear on the list. Nine times out of ten it is better to be covered for a borderline case of cancer than Mongolian Toe Fever.

Soon after the diagnosis of a covered illness, a Critical Illness policy pays you its full value - let's say $200,000 – for spending however you like: Private clinics, experimental treatments, wheelchair accessibility, early retirement, a world cruise.... it is completely up to you. CI insurance can be an affordable pay-as-you-go term policy, or a permanent plan that is eventually fully paid for life. You also have various options for getting your money back if you remain healthy.

The un-sales pitch

A professional financial advisor does not pressure you to buy insurance, or ask for a list of your friends who would love to be pestered next. He or she helps you calculate how insurance fits into your overall financial security plan, explaining the pros and cons so you can make your own educated decision.

I started offering insurance to my Ontario clients back in my stock broker days, wanting to build financial security plans for average families that were as bullet-proof as practical. I still do this today. I work with a number of different insurance companies, as well as a local brokerage which employs a team of specialists for complex cases. There is no cost or obligation associated with seeking advice, detailed quotes, or even conditional underwriting approval. I find that this is how “the other investment” works best.