Deciphering the Insurance Puzzle – II (Universal Life, Disability, Critical Illness)

In the last article, I briefly went over CMHC, mortgage life and term life insurance, lets continue with other insurance options that are out there.

Universal/Whole Life Insurance

This insurance option, I’ll admit, I’m not a fan of.  Although I don’t have direct experience with Universal or Whole Life insurance, I know that they are expensive.   With both, the monthly premiums are significantly higher as the policy holder is paying for a term life portion plus an investment portion.   While the investment portion can grow tax sheltered, the investment options are typically limited to money market or segregated funds with higher than average MERs.  The policy for this type of insurance usually lasts for the life of the policy holder.

As I mentioned in the last article, you’re better off buying term insurance and investing the price difference.  Here is a fairly opinionated article on the pitfalls of Universal Life Insurance.

Disability Insurance

While this one can be a bit expensive, it’s a must have in my opinion.  In the case of an injury or illness that prevents the worker from doing his/her regular work duties, this insurance will pay monthly benefits to replace lost income.  There are a few details of this insurance of which you can learn about them in our disability insurance article.

Essential insurances basically cover lost income.  With term life, it covers income or debt balances in the case of death, but with disability, it protects the income stream if the worker is unable to function in the work place.  A quick tip, some work places offer disability insurance, but note that if you leave the employer, the insurance typically does not follow.  If you want reliable coverage, it may be best to go with a third party insurer.

Critical Illness Insurance

This insurance pays out a lump sum in case on the listed critical illnesses occur.  Some of the more common critical illnesses include:

heart attack, stroke, cancer coronary artery bypass surgery, multiple sclerosis, kidney failure, paralysis, blindness, deafness, rheumatoid arthritis, benign brain tumour, loss of limbs, major organ transplant (or on waiting list), Alzheimer’s disease, Parkinson’s disease, motor neuron disease (a.k.a. ALS or Lou Gehrig’s disease), coma, loss of speech, severe burns, occupational HIV infection, late onset insulin dependent diabetes, aortic surgery, heart valve replacement, loss of independence.

Critical illness insurance may be required for situations where the critical illness requires a large sum of money during the healing process.  For example if the policy holder is paralyzed and requires modifications to their home and vehicle. Or a Cancer patient that requires expensive medication not covered by medical insurance.  I personally do not have critical illness insurance, nor do I plan to as we typically have cash savings on hand.  You read more details on critical illness insurance here.

Credit Card Balance Insurance

I do not like this one at all.  This is the one where the credit card rep always tries to push on you when applying for a new credit card.  The reason?  It’s extremely profitable for the company!  Credit card balance protection will cover the minimum payment of your balance should the card holder become ill, injured or faced with involuntary loss of employment.

For one, it’s expensive as they usually charge a fee per $100 in spending.  In MBNA’s case, they charge $0.99 + tax per $100 in spending.  If my average credit card bill is $2k/month, that’s $20 in premiums every month to cover slight chance of requiring insurance to pay the 3% minimum payment of $60.  Sounds like a great deal for the credit card company – no thank you!

Extended Warranty

I thought I would throw this in there as the local electronics shop will always try to push this warranty/insurance with almost every purchase.  Basically, if you pay the extra fee and the product breaks within the insured period, they will pick up the electronics and fix/replace it for you free of charge.  I tend to avoid this insurance as the premiums are quite high and I usually use a credit card to extend the warranty without any extra fees!  Curious?  The MBNA Smart Cash, one of my favorite free credit cards, will extend the warranty for up to 1 year extra.  While the Capital One Aspire Gold, also free, will extend the warranty up to two years extra.

Conclusions

The original reader email questioned about typical insurances offered and how to distinguish which are required.  Insurance, in my opinion, is all about protecting your dependents.  Besides the essentials of home/fire and auto  insurance, out of the list, in my opinion, there are two insurances that are a MUST for every household with dependents –  term life and disability insurance.  One to protect family cash flow in the event of death, and the other to protect cash flow in the event of injury.

What do you think?  What insurances do you consider essential?

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Brian Poncelet, CFP
10 years ago

Some good points Mark, here is some more.

Morality vs. Morbidity

Mortality risk is the risk of dying, at any given time, when compared to other individuals of the same age or sex. Morbidity risk is the risk of a particular individual contracting a disease or other disabling condition at any given time, when compared to other individuals of the same age or sex.

Incidence of Disability and Death at Various Ages – source: Education Committee of Academy of Life Underwriting (2007)

Age Disabled greater than 90 days Disability vs. Death

32 8 per 1,000 8 to 1
37 9 per 1,000 8 to 1
42 11 per 1,000 6 to 1
47 13 per 1,000 5 to 1
52 17 per 1,000 4 to 1
57 21 per 1,000 3 to 1

When a person applies for a mortgage, the bank will generally offer life insurance but rarely talk about disability or critical illness insurance. Since there is a higher risk of disability than death, disability insurance is of great importance also in order to protect against an interruption in mortgage payments.

The note here is 90 days plus…a long time, which could wipe out years of savings!

Mark
10 years ago

If anyone has had a family member suffer from Cancer, MS, Stroke or any disease that needs a care giver knows that a little extra cash would help a lot. There are drugs and other sources of treatment that may not be covered by private health plans or company health plans. Where do you get the money for such things? My investments? So if I don’t die from my disease and it takes me years of treatment and recovery how long do you think my investments are going to last? If I am not fortunate enough to have Investments, I am on my last bag of oats. If I do have RRSP’s and I take them out for treatment, I am taxed, could have redemption fees and withholding tax. So what the cost of treatment didn’t take, the government did.

I’ve been too a lot of benefit dances for people suffering from cancer that didn’t have investments or some other source of income. Twenty or fifty dollars in a card doesn’t go far when you have to pay for treatment and other costs. Yes you could have Disability (DI) but that is about 70% of your wages. Woopie! Unemployment Insurance lasts about 15 weeks and is 55%? Looks like the Financial Stress is going to kill you.

I would much rather a $50,000 tax free cheque from my Financial Advisor at my benefit dance so I can get the treatment I need and have no financial stress. For a policy that is relatively cheap, could save you and your family a whole lot of headaches. If you live for 2 – 5 years, who is going to bath, dress and do other activities of daily living that you can’t do for yourself?

I am sure your family could put you in a home or the hospital. Nursing Homes are expensive and you may not be lucky enough to get a bed in the hospital. Now you’re friends and family have to provide the care and have to take time off work. It would be nice to be able to give them some sort of compensation so they don’t suffer a financial strain while caring for you. Long Term Care Insurance provides you with a monthly benefit to allow family to care for you or to put you in a quality home. Not everyone volunteers to be a care giver or is capable of being one so if this would make your quality of life a little better and theirs, why wouldn’t you insure yourself??

There is more to just building wealth, you have to protect it too. Both Critical Illness and Independent Living Benefits are fairly cheap, can save you a lot of money in the long run and gives you peace of mind. If you think you will loose all your money if you don’t submit a claim, there is a Return of Premium option on some policies. So its a Win Win for everyone!!

Brian Poncelet,CFP
11 years ago

@ Future Money Bags,

I think you may not understand how taxes is the number one problem. Saving money helps but saving taxes you are unknowingly or unnecessarily saves money.

Do you do your own taxes or review your taxes? Both personal, and for your business?

You may want to reread my comments again. If you need some help to understand what I talking about, feel free to drop me a line.

cheers,

Brian

Future Money-Bags
11 years ago

@Mark
Yes, some people do just that. Spend early years (20’s, 30’s, 40’s) saving money and using term insurance. Why do the majority of people, that DO HAVE insurance, have Permanent or whole life or universal? Because that is what Insurance Agents, SELL them.

If someone comes along, and offers you 2-3x the coverage, for less premiums, for 10/20/30/etc years, many people will take it. But this does not benefit them UNLESS they save (invest) the difference. If you refinance a tonne of debt, and have lower payments, but spend the difference; Than you are in a worse position.

But if you consolidate your debt, and pay less each month to pay it off, and use the extra and apply it back to your payments, you will be out of debt much faster.

Back to the Term Insurance:
Term insurance is meant to insure you for the years that you need it. You say that not many people will have saved enough money for retirement to not need Insurance? Well that is because the majority of people think the same way. The same thing with raising CPP contributions…it is a FORCED savings plan to make people save for retirement, because we all know canadians generally do not/can’t do this for themselves.

We need to start helping people learn how to save and invest for their future and get out of debt. To accumulate more earnings and passive money and have money put aside for retirement. People need to start getting out of their confort zone to start planning their lives and making goals they can keep. Travel the path less travelled and do not follow the pack; You may just run off the cliff with the rest.

@Brian
I have people to support, I own my own business, and I have a job in which I pay way more tax than I should. I also save more money than the majority of people ‘choose’ to, due to lots of budgetting and focusing on what is important.

To end, This blog is about helping people spend less on life. Make more money, Not work so hard, succeed at what others failed at, learn from others mistakes, get the most ‘bang for your buck’, and to help people spend what is needed to be spent (Not what companies want you to spend).

Brian Poncelet,CFP
11 years ago

FT,

The key with insurance is you are off loading risk to an insurance company.

What some people don’t understand is taxes. If you review my “Using Universal Life Insurance with Corporations” in this blog.

You may recall assuming a guaranteed 7% rate of return (assuming you can get that from stocks, mutual funds etc. vs. 3% (with life insurance) because of taxes you are ahead with life insurance.

Larry McDonald’s comments of self insuring, sounds great on paper but for anyone who has a family owns or their own business and pays taxes, this does not wash.

I have on my site http://www.rightinsurance.ca (under free financial tools) Person A vs. Person B

Person A (with more money non-registered) vs. Person B (who has less money but permanent life insurance)

Person B pays 20% less taxes and has more money to spend every year in retirement with less risk!

If you want, I can expand on this in a more detailed article in the future.

Geoff
11 years ago

@ car guardian – credit card extended warranty coverage has a list of about 25 items not covered – from cars to golf balls. Also they have limits on total coverage and total individual item cost replacement.

Mark
11 years ago

It amazes me that the majority of responses assume that everyone will save and invest enough that “insurance” will at some point no longer be needed.

Without going into actuarial data you could claim that 80% of the working public save nothing of significance to retirement. You are preaching to the converted while actually worsening the plight of those these products could help the most.

At the end of the day those that are not financially “independent” are a tax burden to the 20%. Now what is your cost? Actually, this number is to complex for most so they ignore the real issue…don’t they?

(real issue: productivity, entitlement and where tax money comes from)

Be careful what you wish for.

larry macdonald
11 years ago

Tim:
Good points. So that’s why it should be done before marriage. And if one continues to live modestly, “like a student,” 5 years would a reasonable set-up time for a starting sum. If someone in the pink of health (late twenties and early 30s) still feels apprehensive during the saving period, they can purchase term policies for the savings period. Once accumulated, by the way, the savings also bestow a sense a freedom in one’s career — i.e. that they have a choice in what jobs they accept.

Tim Landry
11 years ago

To Larry – just pray REALLY hard that nothing happens to you before you have accumulated sufficient savings to look after yourself – and anyone who depends on you.

larry macdonald
11 years ago

There is also good old fashioned “self insurance” — i.e. spending the early years of your career saving like mad to accumulate a large pool of savings that can be deployed in the event of a setback or misfortune (or later used in retirement). For those of frugal disposition and a deep aversion to paying insurance premiums.