Chartered Life Underwriter

 

A case for insurance.

One of the most common oppositions to buying insurance is understanding the need, and making the issues a priority.  As a Chartered Life Underwriter, I try to help clients navigate through the difficult and confusing world of protection versus investment.  I will try to outline the types of insurance available and the factors to consider.  Whether the insurance be for debt coverage of a mortgage or Long Term Care for your older years, each product has a specific purpose and should be analyzed for its specific value.

Insurance will not only protect a person, but it can also provide a healthy return on investment. 

Term to 100 Insurance

This type of insurance has a 100% guarantee to pay out to your beneficiaries at some point, as death is certain.

Important things to remember about these types of policies:

1.      If a client dies prematurely, no other investment will provide his or her family with as high an after-tax return as this type of policy.

2.      If he or she dies before the age of 80, the investment in this policy will pay the net of 6.5% to 13%. To get the same type of return from a guaranteed investment (assuming a top marginal tax bracket of approximately 45%), the client would have to net between 12 to 26% per year on a pre-tax basis.  This yield is just not realistic.

3.      Even if the insured was to live to the age of 100, he or she will still receive a return of 2.74%, comparable to a pre-tax rate of 5% and similar to what you could expect to yield in the long run if investing in five-year GIC’s.

Here are the downsides to an investment in a life insurance policy:

·        It is illiquid:

·        You have to die in order to cash in on it:

·        It doesn’t benefit you directly, but does take care of your loved ones;

·        If you cancel the policy, you won’t get your money back

Of course these negatives are irrelevant, if your goal is to protect the loved one’s you leave behind.

Term Life

This type of policy is good for specific purposes such as mortgage insurance or protection for child and spousal support.  It is not as expensive as some of the permanent policies; however, it does expire, and will not pay, if the insured does not die during the protection period.

 Critical Illness

Unlike life insurance, critical illness insurance protects you against a possible event, not a certain one. This means that the return’s are only possible, and not guaranteed (unless you purchase a return of premium policy).

The probability of a critical illness occurring prior to age 75 is significantly greater than death. In fact, the probability sits just below 50%.  So if some-one offered you insurance for your income or for your investments, would you consider it?  Critical illness insurance is a living benefit that provides for a lump sum payment should you find yourself in a situation that would be covered.  This payment is then for whatever use, you want to use it for.

Since we don’t have the benefit of certainty, the insurance option again proves to be the best solution.

Disability

This type of insurance is a little more complicated in terms of deciding on what you need, can afford and are willing to pay for.  In many cases Critical illness insurance has replaced disability insurance because it is clearer cut as to what is covered and when.  With most disability insurance’s you must constantly provide proof that you are still disabled. Having said that, there are some instances where it is very important to consider this type of coverage.  Business owner’s have the greatest need

Long-term care

Unlike other types of insurance, Long-term care premiums are not guaranteed. The probability of a loss of independence event occurring is typically only significant when a client is more than 65.  A loss of independence event will typically reduce a client’s life expectancy. This is also a living benefit, which means that you are simply dividing your earning potential to work for living expenses now and in the future.  If you paid for the policy for 20 years and experienced the worst-case scenario of a 50% premium increase for 15 years, the total premiums paid would equal $32,021. A $100 per-day policy would pay back the premiums in only 321 days- a payback period of less than one year. Given that most people who enter a long term care facility live longer than one year, the investment in this type of insurance is worth considering.  A friend recently told me his mother was paying in excess of $200.00 a day to have extended help with his father when in a care facility.  This type of expense can not only be a huge burden, it can deplete assets that are required for the surviving spouse’s life time.  Long-term care insurance is something that everyone should consider.

If you are interested in learning more, or wish to have a quote on any of the insurance outlined above, please feel free to contact me at   dhartzman@pro-invest.ca .  Although it is understood that no one likes to pay for insurance, in its proper context the protection out ways the cost.