Insurance Options

LIFE INSURANCE - not creditor insurance

Life insurance provides a way to replace future income streams and planned savings by paying a premium today to receive a lump sum death benefit just in case a life is halted prior to plans being fulfilled. It sounds cold but it is really one of the most heartfelt decisions a person can make. The proper amount of insurance ensures their family and loved ones are looked after financially if they are no longer here to provide the support. There are different types and ways to buy life insurance.

The most common, and I would argue the least effective, is to add it to a loan or mortgage through a financial institution like your bank. This is referred to as CREDITOR INSURANCE and should not be thought of as life insurance. When you really consider who you are protecting with this type of insurance think of who pays the premiums (you) and who gets the money (the bank). Yes it is true that the loan might be paid off but can your family buy groceries next week?

A couple of other key points to consider:

  • Bank employees are not suppose to discuss life insurance and its merits with you. They are only allowed to present their offer of creditor insurance as they are not licenced or trained in the selling of life insurance.
  • You are paying premiums on a diminishing coverage. As your mortgage or loan amount goes down the premium stays the same. Same payment, less coverage.
  • Your coverage is tied to your loan so moving lenders or increasing your borrowing may not have you covered or life conditions may make you uninsurable in the future.
  • Medical underwriting is actually done post claim. This means that the insurance company reviews your application at the time of death and if anything might be out of order, there is a good chance no claim will be paid.
  • Medical underwriting on actual life insurance is done up front. This greatly improves the odds of claims being paid.
  • Cost. You might actually think it is cheaper to buy it through creditor insurance. As an independent insurance advisor I use software that gives me the costing of most of Canada's life insurance providers. In most cases we can place life insurance that pays the proceeds directly to the beneficiary, maintains the level of coverage for now and in the future and provides a level premium cost over a period you decide. And, it will likely be CHEAPER.

There are three basic types of life insurance products.

TERM LIFE INSURANCE - Better referred to as death insurance

This insurance can be bought in different terms like 10 year, 20 year or until death. There is no investment attached to this product and this keeps the premiums very competitive. It is the most common and cheapest type of life insurance sold. It's primary design is to provide coverage for a specific period of time and works very well for mortgage coverage.

UNIVERSAL LIFE INSURANCE - The combo plan

UL, as it is referred to, combines life insurance with an investment plan allowing for protection today that grows into a tax-deferred investment later in life. It is often used by those seeking an alternative or augmentation to RRSP's and TFSA's as it can provide the building of tax deferred savings. There are strategies in place that can allow for the borrowing of the savings component of the plan to provide tax free income in retirement. Or, you can use the savings component to offset the cost of the insurance later on in life to provide permanent insurance. Because of the two components to the plan it is more expensive than pure term insurance.

WHOLE LIFE - by design to be permanent

As in the name, it is a product designed for your whole life. The higher premiums in the early years guarantee the insurance will be in force for life and the cost of your premiums will not go up. Although the most expensive premiums up front it may be the best solution to your situation. A popular idea is to buy whole life policies on young people (based on their age the cost of insurance is low) and have it paid up in twenty years. This gives them a permanent amount of insurance that does not cost them anything later in life. There is usually a cash surrender value that they can also access.

CRITICALL ILLNESS INSURANCE - true life insurance

This newest insurance product allows you to purchase a specific amount of insurance that is paid out upon the diagnosis and survival of many of today's dreaded diseases. This can provide needed funds for medical treatment or recovery time from diseases like heart attack, cancer, stroke, alzheimer to name a few. It is truly life insurance because it gives you the money while you are still alive.

It is different than disability insurance in that it provides a lump sum benefit.

Like life insurance, critical illness coverage can be bought for term certain periods like 10 year, 20 year to age 65 to name a few. You can also add riders like return of premium if you do not make a claim.

Not all critical illness insurance policies are built the same. Each insurance company covers certain conditions and offers certain options. Seeking out the guidance of an independent insurance advisor will provide you access to the coverage that meets your needs at a price that meets your budget.

DISABILITY INSURANCE - protect your income

With all the types of insurance out there, this is probably the most important. If you live pay cheque to pay cheque, what would you do without a pay cheque? DI insurance is designed to give you that income if you cannot work due to injury or illness. It can only be purchased based on having a taxable income and is based on receiving only a portion of that income.

The most cost effective way to purchase disability insurance is as part of a group plan. By having many members pay the premiums and hopefully only a few needing to make a claim, it keeps the cost of the insurance down. Talk to your employer about introducing a plan at work. If you pay the premiums, the income is tax free.

Individually, if you are paying EI premiums you have some coverage through EI. Like all DI policies there is a waiting period and in the case of EI the income will only be a portion of your income. Many employed people seek out a policy that can provide the additional coverage they require. For self-employed people or business owners that are not contributing to EI, you really should give it serious thought either individually or as part of a group plan.

Financial institutions are starting to offer disability insurance tied to their lending products. It is important to understand what and for how long you are covered for. Also make sure you are not continuing to make premium payments if you are no longer eligible for the coverage.

An independent insurance agent can help you identify what you have. Make sure you are not under or over insured and if needed take your individual situation or your group situation to market to get you a quote.

LONG TERM CARE INSURANCE - because hopefully we all get older

Long term care insurance is an insurance product that can provide needed funding to cover the high costs for in home care or nursing home care. It is not offered by all insurance companies but with the rising cost of care facilities it warrants review. This insurance can be bought by you for you or by you for a loved one. It is purchased with the concept of setting up to pay a monthly income amount.