They’ve got you covered: insurance essentials

Life, mortgage, and critical illness

Insurance is a numbers game. Anyone who has ever purchased any kind of life or health insurance knows this firsthand. But here’s one number you won’t often hear about: $4.7 trillion (no mistake, that’s a “T”). That’s how much life insurance coverage is owned by the 22 million Canadians who have policies, according to the Canada Life and Health Insurance Association 2018 report. In 2017, that represented $21.4 billion in premiums. And the average coverage per household is $417,000. Health insurance added another $43 billion in premiums. No doubt about it – insurance is big business in Canada. Here’s a quick look at the types of insurance advisors are asked about most frequently.

Life insurance

Term life. There are many types of life insurance policies. “Term-life” policies, for example, offer pure protection – there is no investment component. You pay your premium and your life is insured for the stated amount for the specified length of time. Period. It’s a cost-effective way to buy insurance, especially for young families.

Permanent insurance. Also called “permanent life,” premiums on these types of policies fund both an insurance component and an investment component, which is often called cash value. The growth in cash value is tax-deferred and can be used as collateral for a loan or can be withdrawn to fund other financial goals.

Permanent life insurance is sold in many variations, but there are really only two main types: whole life and universal life. The premiums for these are considerably higher than for straight term life insurance. Both whole life and universal life policies provide protection, grow your investments, and defer tax. Upon death, your beneficiary will receive the amount of the insurance policy tax-free, as well as any accumulated savings components, which would be subject to tax.

Whole life insurance has level premiums and stays in force until you die. You have no choice over the investment component, which is the responsibility of the insurance company. With Universal life you can alter the premiums, size of death benefit, and amount and type of investment component (as specified by the policy) if your life or financial circumstances change. Universal life insurance allows you to use a portion of your accumulated savings to pay premiums. And you have some control over the investment component. But investment returns are not guaranteed unless there’s a specified internal guarantee of principal, which, of course, raises your premiums.

In general, while they have their uses in some situations, most advisors recommend staying away from permanent life insurance policies, whether whole life or one of the many flavors of universal life. For many people, the old saying to “buy term and invest the rest” is probably the most sensible solution if you’re considering a life insurance policy as an investment. It means simply that you buy term life insurance and then invest the difference in premiums, fees, commissions and charges that you would have paid for a whole life or universal life policy.

Mortgage insurance

This is insurance that pays off your mortgage if something prevents you from doing so. It’s mandatory for mortgages with down payments of between 5% and 19.99%, and it strictly protects the lender in case of default. But for those who don’t need it, it’s probably not a good deal.

First, if you aren’t required by the rules to have it, you probably don’t need it. If you already have life insurance, and it’s at least for the amount of your mortgage, you’re already covered. If you need more, you can increase the size of your term life insurance at very low cost, especially if you’re young and in good health.

Also, mortgage insurance pays only to the amount of the outstanding balance of the mortgage, whatever that balance is. So you’re actually paying more and more for less and less as time goes on, providing nothing for your family in the event of your death. And the mortgagee gets the funds in the event of your death. In addition, it isn’t portable. If you sell your home or transfer your mortgage business to another bank, your policy is cancelled and coverage stops. Premiums are not refundable.

If you aren’t required to have mortgage insurance, but still want coverage, buy term life insurance for pure protection for as long as you pay the premiums.

Critical illness insurance

This is basically health insurance that provides a cash payment should you become ill with a specified major disease, like cancer. The money may be used for any purpose, for example, to offset medical and drug costs, cover income shortfalls, and so on. But the premiums can be expensive, depending on the level of coverage you want. Covered illnesses and diseases are specifically spelled out in the policy, and not everything is covered at all times by every policy. In addition, there’s a waiting period before coverage starts after a claim is made.

Putting adequate disability and life insurance coverage in place is actually more important than critical illness coverage. That’s because if a critical illness is terminal, your life insurance coverage will pay out at death. Critical illness insurance may not, especially if death occurs within 30 days of diagnosis, as may happen with a heart attack or stroke. In addition, if your illness leaves you permanently disabled, the total of regular disability insurance payments is likely to exceed a lump-sum critical illness payment.

Still, critical illness insurance may be useful for short-term disability coverage, medical and drug costs not covered by provincial insurance plans, in-home nursing care, special equipment or devices, and so on. For younger families looking to set up an emergency medical fund, critical illness coverage of between $25,000 and $50,000 is typical. For higher net worth families, a more comprehensive formula should be used, including at least six months’ income, estimated medical expenses, living expenses, debt coverage, and so on. Coverage can range upwards of $100,000.

If you’re thoroughly confused now, don’t worry. Insurance is inherently a confusing business and the big insurance companies delight in keeping it so (remember that $4.7 trillion with a “T”). Those policy premiums can represent a big outlay, so before you sign on the dotted line, consult a Certified Financial Planner to be sure you’re properly covered, not overpaying, and integrating insurance properly into your financial plan.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.