Life Insurance? Give me some toppings!!

Back to our discussion on life insurance.  

We covered the basics in Wanna bet... on my life! and then the vanilla of the life insurance world, Term insurance, in Life Insurance? A little vanilla please!  

Now the toppings!!.

Permanent Life insurance, like the title implies, doesn't just cover a specific period of time but is there “permanently” or for your entire life.   Similar to term insurance, the insurance company calculates the average premium you need to pay across the entire term, in this case your estimated lifespan.   

Compared to term life insurance, the premiums will most likely be more expensive in the early years of the policy and less expensive later.  This is because if I bought a term policy in the early years, I would most likely be healthier and less likely to die so the cost is less.  Similarly, a term policy in later years would be more expensive since I would likely be less healthy and more likely to die. Permanent life smooths out your costs similar to when you choose an equal billing option for a utility bill to keep the payments the same.

This type of insurance usually has a built-in savings account funded by part of your premiums known as the Cash Value.   You can get this cash back if you cancel your policy or sometimes you can borrow from it directly or use it as collateral on a loan.

Permanent Life Insurance comes in two common variations – whole life and universal life.

Whole life insurance is the “chocolate topping” compared to Term life keeping your premiums the same for the life of the policy and amount paid out is guaranteed.   

Universal life insurance adds the “cherry” with the ability to change the premium amount plus having an investment account.  You are able to choose how the premiums are invested, normally from a select group of investments.  The amount paid out and cash value is dependent on how well the investments do.

So when would you choose one type versus the other?  Whole life is good if you want to have certainty on what you are paying and how much your beneficiaries are going to get.   Universal life gives you growth potential and another place for investments to grow tax-free similar to an RRSP but without any maximums plus you can leave the investments in the policy for your beneficiaries or use them for income during retirement.

Now that we are talking about Permanent Life, I want to revisit the question about insurance for children.  I had several readers respond to this when it was discussed related to Term insurance.  Thank you.   I’m not a big supporter of term life insurance for children though no doubt, parents experiencing this type of loss would benefit from having the financial means to take the time to deal with the emotional pain and suffering.  Insurance is always a very personal decision. 

When it comes to Permanent Life insurance there are stronger arguments to consider it.  An individual policy for a child could be used as savings so when they become an adult, they could cancel the policy for the cash value or continue paying the premiums to keep the coverage.  A child rider (add-on) could be added to the parent’s policy and later converted into the child’s own policy when they are an adult without going through the medical tests and questionnaires to see if they are eligible for coverage.  If your child is unlucky with illness, or just makes bad health choices later in life having these options would be really valuable.

Bettina Schnarr of  HollisWealth has "come to see the value, not only in the coverage it (the rider) provides on the child today, but mainly because it can be converted (at least 5 times the initial amount), usually by the child's 25th birthday, to permanent life insurance, without proof of insurability.  These days, it's becoming harder and harder to qualify for life insurance without being rated and insurance companies also look for any hereditary conditions in the immediate family.  …they are now asking about grandparents, not only parents and siblings as before… a whole life policy for $30,000 for a 10 year old male would be at least $200/year.  However, a $30,000 child rider is around $150 and is guaranteed convertible at 5 times that amount.  The real bonus is that these child riders cover all of your kids for the same price!  So it is a lot cheaper per child the more children you have".  [Disclosure: I don’t have any investments with Bettina]. 

So aside from covering parents, if they ever suffer this type of loss, this is an investment in your child’s future.  Go with the individual policy if you want to give them the options to continue with the insurance or cash out when they are an adult or go with the rider if you worry about their health and ability to get insurance later and/or you have lots of children.

So we’ve talked about Term and Permanent Life Insurance but how do we put it all together?   The best way to think about it is in layers with one long layer covering the long term or “Permanent” needs and another shorter layer for the more temporary or “Term” needs.  Normally, you would go through a financial needs analysis with an insurance agent to determine what you need covered.

Let’s use my own situation as a very simple example.  My wife and I both are currently working with our children both in high school.  Soon they will be going to university and sometime after that we’ll be retiring.  Examples of temporary needs for us would be our mortgage, paying for our children’s education and replacing the income of a parent who dies prior to retirement.  Permanent needs would be funeral expenses, taxes and any decreases in income.  We have covered this with a combination of individual Term life policies from our employers plus purchase of additional term policies and a joint Permanent Life policy.

This concludes my series on life insurance.  If you want to do some further insurance reading, take a look at the links below.

For my next posting, I’m thinking about advice on buying a house.  If any of you have an advice to share or ideas for other topics, please drop me an email or twitter message.

• Life Insurance – Financial Consumer Agency of Canada (FCAC)

• A guide to Life Insurance – Canadian Life and Health Insurance Association (CLHIA)

James Whelan

moneymatters4life@gmail.com

Follow @monymattrs4life

Life Insurance? A little vanilla please!

After my last posting, you should understand the basics of life insurance.  When you start talking about the different types and options though, it’s like walking into an ice store… so many flavours and toppings.  It’s hard to make a decision.  Let’s start with plain vanilla and talk about the other flavours and toppings later.

In the life insurance world, Term Life Insurance is vanilla.


With all types of insurance, you make a contract with the insurance company for a certain amount of coverage or the amount your beneficiaries would receive if you die.  Also called the Death Benefit.  With Term Life Insurance, you make the contract for a specific period of time or term and if you cancel the contract at any time, you don’t get any money back or there is no “Cash Value”.  The amount you pay or premiums is dependent on a number of factors such as age, sex, and health.

The shortest period of time would be a 1 year term but if you purchased it this way year after year, the premiums would go up every year.  To make it easier for consumers, insurance companies offer 5, 10, 20 or 30 year terms where they have calculated the average premium across the entire term so you pay the same amount every month for the full term.

So where do you get this type of insurance?

The first place you should look is your employer.  If you have a benefit plan, your employer will most likely offer coverage equal to two times your annual salary.  This is the average offered according to the Benefits Benchmarking 2012 study from the Conference Board of Canada with a minimum of one times.  Some employers also offer dependent (spouse, partner, dependent child) insurance where coverage is paid if you dependent dies.   Both of these, if offered, will be at no cost.

Optional life insurance, where the employee pays for the additional coverage for themselves, their spouse, partner or dependent children is also frequently offered.  The amount is typically a flat amount or could be a salary multiple as well.  If your free coverage isn’t enough, this optional coverage is normally much cheaper than if you bought insurance on your own.  It’s cheaper because it’s bought in bulk from an insurer so rates are averaged across all or a certain age group of your co-workers.  If you buy higher amounts, the insurer will ask you for some simple medical tests such blood pressure to determine if they will accept you for coverage.

Besides your employer, you can purchase life insurance directly from insurance companies or life insurance brokers representing multiple companies.

A few comments on some specialized Term Life Insurance products:

• Mortgage Life Insurance can be purchased to cover your mortgage if you or your spouse or partner dies.  Not a great deal for most people.  First, the amount covered shrinks as your mortgage gets smaller so you end up with less coverage as time goes on and it’s limited to just this one expense.  Second, if you move, the policy is cancelled.   Better to get regular term life insurance to cover all your finances including your mortgage.

• No Medical Exam Life Insurance.  You’ve probably seen or heard the commercials where you can apply and don’t need a medical.  There are reasons for people to get this type of insurance like having health problems, wanting coverage quickly or not liking medical tests but the tradeoff is higher premiums.  The reason is simple.  The life insurance company is willing to not get as much medical information about you but will charge you more to cover themselves for the unknowns.  Make sure to read the fine print and see if it’s worth it for you.  Take a look at this company’s site for some variations for this type of policy or the article Life insurance: On the edge from MoneySense for a dated but still good discussion on the topic.

• Insurance for children. The article Does your child need life insurance? from the Globe and Mail discusses the pros and cons of this quite well.  I’m not a big fan.  The death of a child is a horrible thing for any parent but not a big financial burden to need insurance.  There are lots of other things to use your money for on your child’s behalf like RESPs before even considering insurance as a way to create wealth for them or as a “just in case” against future health issues.

Well, the second bite-size piece is done. Only a few more to go.  In the next postings, we’ll be talk about types other than vanilla and then on to when you should consider having insurance, how much, the different features, factors affecting its cost and contrast the pros and cons across the types.

If you want to do some further insurance reading before my next posting, here are a some links for you.

• Life Insurance – Financial Consumer Agency of Canada (FCAC)

• A guide to Life Insurance – Canadian Life and Health Insurance Association (CLHIA)

James Whelan

moneymatters4life@gmail.com

Follow @monymattrs4life

Wanna bet…on my life?

Do you know how long you’re going to live?   If we did, it would be so much easier to get all our financial affairs in order and make arrangements to limit the impact on everyone around us.  

But we don’t, so what’s the alternative?

We could have a bet with ourselves on how long we’re going to live and use that to plan our preparations.   

The World HealthOrganization calculates the average life expectancy in Canada, in 2013, for females is 84 years and males is 80 years.  So I could bet I’m going to live until age 80 so I’ve got a while to get things all straightened out but wait that’s only part of the story.  Since this is the average, roughly half are going to die before this age and half this age.  So now I’ll be flipping a coin on which side of the average I’m on but still don’t know how far away from that number I’ll be.  This bet is just getting worse and worse.

Aside: For readers in other countries, the World Health Organization has numbers for you as well!

So the self-bet is a non-starter.  I wish there was a way to make sure my loved ones are spared the financial burden (e.g. debt, decrease in standard of living and maybe even funeral expenses) my death would have on them.   Of course there is and this is the reason for the existence of Life Insurance.

The basics of life insurance are quite simple:  I (the Insured or policyholder) agree to make regular payments to an insurance company (the Insurer) in exchange for paying a lump sum amount to my named dependents (called beneficiaries) when I die.  The insurance company creates a pool of money with all these payments from a large group of people.  They determine the amount of the payments and how to manage the investment of the pool to ensure they have enough money to pay everyone when they die and of course make some money because they are a business.  The insurer determines if they will enter into an agreement or contract (called a policy) with me using a process called Underwriting.  I buy the policy from a specialist (called an Advisor, Agent or Broker) licensed to sell insurance in your province or territory.  So far so good?

Where it gets complicated is when you start considering the factors impacting the payment amount, the features of the insurance agreement (or policy), when it covers multiple people and if it is straight insurance or if there is an investment component as well.

In the next few postings, we’ll be discussing the different types of insurance, when you should consider having some, how much, the different features and factors affecting its cost.  This is a long topic so I’m going to break it up into bite-size pieces so it’s easier to digest and this is the first bite.

 A couple of last words.  My future posting ideas survey is still running if you want to vote.  The top three are still: (1) Alternative payment systems (PayPal, Apple Pay, Google Wallet) (2) RESP basics and (3) Life Insurance basics.  

If you want to do some further insurance reading before my next posting, here are a some links for you.

• LifeInsurance – Financial Consumer Agencyof Canada (FCAC)

• Aguide to Life Insurance – Canadian Life andHealth Insurance Association (CLHIA)

James Whelan

moneymatters4life@gmail.com

Follow @monymattrs4life

New Year Resolution: Stop Over-Thinking Your Money!

Happy New Year everyone.  

I have to admit I’m not a big one for large New Year’s resolutions since without the proper plan to achieve them, quite often, they are doomed to failure.   A plan to me would be made up of major goals and getting to them via evolutionary changes (e.g. small changes/targets).   This is a technique I use daily in my non-blogger job where I communicate a long term vision for a specific project to people and then get them focused on the short term.  A big part of this is determining what is important and continually adjusting priorities as circumstances change.

I just finished reading a personal finance book that fits perfectly into this type of thinking and has a lot of great information you can use for a personal finance plan for the coming year. 

The book is called “Stop Over-Thinking Your Money! The five simple rules of financial success” by Preet Banerjee.  You may remember I mentioned Preet in a previous posting “Buying cars on credit… what does it cost you?” after I saw him speak at the Financial Literacy Educators Summit put on by the Investor Education Fund.  He did a great presentation on that occasion and now has used some these skills in this book to explain some key financial planning principles in a very straight forward way.  Don’t let the title mislead you.  There is thinking involved.  The main aim of the book is get people to take immediate steps to improve their financial health and avoid getting overwhelmed by all the financial and investing information out there.  You may have heard some people refer this as avoiding “analysis paralysis”.  Preet equates our level of planning to school grades and assesses most of us as near a C- and suggests if you follow the rules in this book, you can get to an easy A.   After reading the book, I have to agree.

The book is roughly divided in half with the first talking about five key rules and the second half giving some more advanced information.  Let’s look at the five rules first:

Rule1: Disaster-proof your life.  Good information here about life/disability insurance, wills, power of attorneys and emergency funds.  I’m sure I’m like a lot of people in thinking talking about this is a bit of a snooze and not nearly as sexy as discussing investing.  Before you jump over this chapter though try answering the following questions.  If you can’t give specific enough answers to prevent “keeping yourself up at night” thinking about it, choke it down and read it through.  You won’t be sorry.

• If I was not able to work for the next 3-6 months, how would my family and I pay for our living expenses?

• If I died tomorrow, how would my family survive financially?

• If I’m too sick to make decisions or I die, who can legally make decisions on my behalf and will my money/assets be handled like I want?

Rule2: Spend less than you earn.  Great information on savings and budgeting and one of the pillars of all personal finance.  One of the key themes I like (rephrasing in my own words) is: If you have no savings, why are you wasting your time worrying about how your investments are doing?  I’ve met quite a few people who like to discuss how certain investments are doing but never mention their savings.  

Rule3: Aggressively pay down high-interest debt.  Some good strategies on lowering and eliminating credit card debt.  This is a major problem for many people and could be a priority in many people’s plan for this year.

Rule4: Read the fine print.  Some good advice here on knowing the details on what you are signing.  I’ll admit reading the fine print is always a painful one for me.  Sort of like taking Buckley’s cough syrup.  You know it’s good for you but want to avoid it.

Rule5: Delay consumption.   Many people suffer from “consumption-itis” and this rule talks about some of the underlying causes and strategies for improving your situation.  This is an ongoing teaching point with my children on waiting until you have the money to pay for something and differences between needs vs. wants.   

  The second half of the book has more advanced information on Investing, Financial Advisors and Insurance.  There are two parts I particularly liked here:

 

• Financial Advisors.  Many people would benefit from a financial advisor but end up with one not fitting their needs.  My first financial advisor seemed more interested in making money from me and not advising.  I was much more careful, years ago, when I found my second one and did use many of the techniques mentioned in this section.  I ended up interviewing him for an hour and a half using the similar questions mentioned in this chapter.  If you’re asking yourself why I would talk to him for so long and/or want to avoid other pitfalls, the section is for you.

• Insurance.  This section in particularly good at explaining the principles and types of insurance.  Makes it easy to understand for those without much background and a good refresher for others.

After reading these rules, you could end up with a large “to-do” list.  The big question is where to start?  I’d recommend making the list, putting priorities next to each and start from there.  There is lots of good information on helping you decide on priorities in the book.  Still overwhelmed because you have too many high priorities?  Break them up into smaller pieces and go through the same exercise as again.

After reading this book, here is what I have on my plan for the coming year:

 

• Review my life and disability insurance coverage.  I know I have some of both but it’s been years still my wife and I have looked at it and life is always changing so maybe this doesn’t fit any more. 

• Review my regular savings plan.   I do have regular automatic monthly saving with periodic top-ups during the year but again haven’t really looked hard at the amounts for a couple of years.  I suspect I’m not saving enough.

During a future posting, I'll discuss my review of my insurance coverage.  If have any questions or comments on any of the above or have ideas for a future topic, please feel free to post a comment (anonymously if you’d like).     

James Whelan, moneymatters4life.blogspot