What you need to know about life insurance in 2018, otherwise it might cost you

What you need to know about life insurance in 2018, otherwise it might cost you

How much life insurance should you own?  How much life insurance protection do you need if you have children?  With the legalization of cannabis coming in 2018, should you decide to smoke it, are you going breach your life insurance contact?

Should you own disability insurance?

Should you own critical illness insurance?

Big, important questions to answer.  Luckily, I have some answers here.

Life insurance and other forms of insurance are very important parts of financial planning.  This is because overall financial health goes far beyond what Exchange Traded Funds (ETFs) to buy and hold.

I recently caught up with Lorne Marr, Director of Business Development at LSM Insurance (affiliate) to discuss these questions and more, including what else I need to know about insurance trends in 2018 (otherwise it might cost me).

Thanks again for the time Lorne.  I have my assumptions about all things life insurance but it’s great to hear from experts who live this stuff every day.

Thanks for having me back Mark.  Nice to see the growth of your site over the last few years!

Thanks! 

OK, let’s face it.  Nobody wants to talk about insurance.  It can be very boring.  But like investing, boring can be good.  Meaning, your holistic financial plan should be both comprehensive and sloth-like to mitigate long-term financial harm.  Do you think people understand insurance?  In that, it’s a risk management approach to avoid financial catastrophe?

I think life insurance is misunderstood by a lot of people, even by many people within the industry.  It’s a very unselfish purchase.  You mentioned this before on your site Mark but life insurance is not for you; it’s for the people you care about.  Life Insurance allows your family future to continue to go from Point A to Point B if the unexpected happens to you.

It’s a powerful tool that allows you to secure your family’s future.  This financial security can be very inexpensive when you compare it to other major purchases in life, like cars and especially houses.

The first step (when buying a life insurance policy) is to figure out how much you need and why.  From there, you can determine which type of plan is best.  An independent broker can definitely guide you through this process because owning life insurance products should be designed around needs, not fear.

Some time ago, we discussed life insurance 101 on my site.  Should folks be considering term/temporary life insurance over permanent life insurance in 2018?  Why or why not?

If you take a young couple or a young family with a $750,000 mortgage (I have seen clients with this obligation!), this is a sizeable liability.  They probably have other obligations as well, like saving for their children’s education via a RESP.  With everything young families have on the go, a permanent life insurance policy is likely not going to be within their budget and beyond that, it could be the wrong product.  The reason being is permanent life insurance starts off higher in cost but the premiums generally remain level for life.  Compare that with term life insurance.  Term life insurance policy premiums start off lower in cost but go up as you get older.  Life insurance is not one-size-fits-all.

How much life insurance should I/we own?  Historically, I thought about the following when it came to our answer for our current term life insurance policy:

• Income substitution for my wife for a few years (should I die young)
• Enough money to pay off all outstanding debts in full (like our mortgage)

I arrived at the conclusion that a policy worth $500,000 each was “enough” life insurance for us.  What are your thoughts/what did I miss?

A rule of thumb (and that’s just that Mark – not a hard-and-fast rule) frequently used in the industry is purchasing 5 to 10 times your annual income.

Again, it all begins and ends with a thorough needs analysis but as a starting point we discuss 5 times for people with children over 10; 10 times your annual income parents with under age 10.  We use these starting points in our discussions with clients since life insurance can be more important (meaning there is greater financial risk to cover) with younger parents who have with younger dependents.

I think you were smart to think about income substitution and ensuring there was plenty of coverage to cover all outstanding debts.  Dealing with those things would be the last thing your spouse probably wants to do.

We don’t have any children but I can appreciate other folks want to ensure their children’s financial well-being is taken care of – should anything happen to them.  How much life insurance do you need if you have children?  What should parents consider?

There are no firm rules to live by here but I believe the decisions are influenced by a few key factors beyond what we discussed above.  People with young children likely need more life insurance than older parents with teen aged kids but I can also see coverage needed as kids get older, to offset private school expenses or university costs.  Income replacement would be critical for a longer period of time than just a few years depending upon the age of the children.  Like you thought about above Mark, it is important to look at how dependent one spouse is on the other spouses’ income.

In the case of a couple with no dependents – paying off the mortgage and all debts is a good start (with life insurance coverage) but there may be other factors to consider such as using life insurance to make charitable bequests.

Ok, let’s get the interesting stuff.  The legalization of cannabis is coming in 2018.  If folks decide to light one up, will they be in breach of their existing life insurance contract – based on the health questionnaire they answered years ago?   Furthermore, how is this legalization changing life insurance underwriting practices?

Your insurance policy is based on your health information at the time of application.  I can tell you each insurance company has its own underwriting protocols.  These protocols continue to evolve, with or without the legalization of cannabis.

My advice is to make very sure you read the health questionnaire questions over closely and if you are unsure of a question during the application process, get clarification in writing from the company.

Given each insurance company has its own fine print I would also suggest you read the fine print about your existing policy.

My take on disability insurance has always been:  get it.  Why?  The odds are greater than 1 in 5:  adults between the ages of 25 and 65 will be disabled at one point during their working career.  This “forgotten insurance” shouldn’t be missed.  Disability insurance is for you and those that depend on you to earn a living.  What’s your take?

My bias is yes.  For most people, owning disability insurance definitely makes sense. 

Protecting your income is crucial.  Human capital is your most precious asset.

It should be noted the chances of becoming disabled, even on a temporary basis, are generally much higher than the chances of dying over a 20 or 30 year period.

My take on critical illness insurance is:  this form of insurance is a bridge my salaried income and when disability benefits kick in. If you can self-insure as your bridge, that’s ideal but I can appreciate some folks cannot do this and others don’t want to take on that financial risk.  What’s your take?

Sure, you can self-insure Mark but not everyone can.  I would also say while critical illness is important –if you had to choose between that and disability insurance I think that latter is more important.  The odds of you becoming disabled during your work career are actually, and sadly, good.

One last question – what words of wisdom do you have for Canadians this year? 

For younger people, especially those with dependents, I think life insurance and disability insurance are crucial.  Older applicants may still need life insurance to offset any debts or for estate planning purposes.  Boomers may also want to look into Long Term Care Insurance although less companies are offering this type of coverage in Canada and again, depending on your assets and needs, it may not be required.

A reminder for your readers Mark, there are several types of life insurance in Canada – here is quick primer for some types:

• Term Life – life protection that will expire at the end of a set term (e.g. after 5, 10, 20 years) and which does not accumulate any value.  Easy to understand and usually low-cost compared to other forms of life insurance. Be mindful term insurance will increase in cost after your term is over; it will increase as you get older.
• Universal Life – combination of a life insurance product and an investment component. A portion of your premiums go into a tax sheltered savings component. This product, especially the level cost of insurance version starts off higher than term insurance but the cost of the insurance portion is level for life.
• Whole Life – a complex life insurance product; like Universal Life, this policy has both insurance and investment components.  However, these products may offer less flexibility (e.g., the insurer decides how the investment component is invested).

At the end of the day, each life insurance product has pros and cons.  Do your own homework and get some professional advice to find the best product for your family.

Summary

As you have probably guessed by now, life insurance is not really for you, it’s for others.  Our existing term life insurance policy will be coming to an end in another few years and we’ll have some important decisions to make on that in our house.  We intend on using a life insurance broker to get the best products to meet our needs going forward.  You can consider doing the same.

LSM Insurance (affiliate) has been helping Canadians with their life insurance needs since 1993 and has a combined 50 years of experience to draw from.