Peace-of-mind can, indeed, be bought
You aren’t going to live forever, so read this
by Marjo Johne
Renee Talavera-Siao will never forget the first customers she sold life insurance to: a young immigrant couple just starting their lives in Canada, with two children aged 5 and 9.
About six months after the enrolment papers were signed, Ms. Talavera-Siao got a phone call from the wife saying her husband had died suddenly.
“I remember her asking me, ‘What am I going to do now?’.” recalls Ms. Talavera-Siao, a financial adviser with Assante Wealth Management (Canada) Ltd., in Toronto.
“Thankfully, we had converted their previous $50,000 whole life policy — which was all they could afford because the premiums were so expensive — into a term life policy with a much higher value.
“So at least I was able to reassure her that she and her kids would not be financially devastated because of her husband’s death.”
For the 17.5 million Canadians who own a collective total of $2.7-trillionÖ in life insurance policies, Ms. Talavera-Siao’s story is further confirmation that money can buy peace of mind.
According to the Canadian Life and Health Insurance Association, each year Canadians pay close to $13.5-billion in life insurance premiums to ensure that, when they die, their spouses, children, parents or other dependants are left with a chunk of cash to live on or, at the very least, pay for funeral costs.
Canadians are armed with other types of financial protection as well. CLHIA says about 21 million people have supplementary health care insurance, which covers medical expenses that provincial health plans generally won’t pay for, such as prescription drugs and eyeglasses.
More than 10 million Canadians also have disability insurance, which provides a monthly income if the policy-holder is unable to work because of a disability or serious illness.
While millions of Canadians have life and health insurance, there are many still who are unprotected because they don’t know what kind of insurance they need, or if they even need insurance at all.
Ms. Talavera-Siao acknowledges that shopping for insurance can be confusing, even intimidating at times. But, she adds, it can be boiled down to a simple question: what do you need insurance for?
“Do you need it for income replacement — to provide income for your spouse and dependent children in the years after your death, or are your children all grown up and you’re looking at life insurance as a way to offset the taxes they’ll have to pay when you pass on your estate?” she asks.
Sally Praskey, co-author of The Insurance Book: What Canadians Really Need to Know Before Buying Insurance, says your family status should help you determine whether you need insurance and what kind you should get.
“For example, if you’re just starting out and have no dependents to support, then you might not need life insurance,” she says.
“But if you’re single and buying a house, the bank might insist that you buy life insurance,” she notes. “That way if you die, there’ll be money in your estate to pay off the mortgage.”
Ms. Praskey, who is also editor of Insurance-Canada.ca, a website loaded with information about insurance, says some couples make the mistake of insuring only the partner who brings in the paycheque, and forgetting about the one who is keeping house and taking care of the kids at home.
“I would suggest taking out a policy on the spouse who’s staying home to look after the children,” she says. “Because if that spouse dies, you’re probably going to need additional income to cover the costs of child care and housekeeping, and these costs can certainly add up.”
So how much life insurance coverage is enough?
Ms. Talavera-Siao says a policy’s “face value” — basically, the amount your insurer says it will pay your beneficiary when you die — should depend on the reason you’re buying insurance.
If you want life insurance to replace your earned income after your die, she suggests a face value 10 times your annual salary.
If, on the other hand, you’re planning to pass your estate to your children and want the insurance payout to cover the taxes incurred by the transfer of capital property, then the face value should reflect the projected tax fees, says Ms. Talavera-Siao.
But for many people, the cost of an insurance policy is as important as its value. Heather Cook, a Calgary-based freelance writer, says the deciding factor for her and her husband’s insurance coverage was the monthly premium cost.
For $27 a month — a discounted rate for joint policies — each gets coverage worth $250,000, which Ms. Cook acknowledges falls short of Ms. Talavera-Siao’s “annual income x 10” formula (unless she and her husband die at the same time, in which case the payout increases to $750,000).
“We didn’t want to pay a lot per month because living in Calgary, everything is so expensive and, literally, $30 makes a difference,” says Ms. Cook.
Beyond a policy’s face value, life-insurance shoppers must also consider the type of protection they want. Life insurance is available in three main types:
Whole life: A permanent policy covers you until you die and generally charges a uniform premium throughout the life of the contract. Whole life policies usually have a cash value that grows as your policy matures. Some pay out dividends based on the insurance company’s financial performance.
Term life: This provides coverage for a fixed number of years: one, five, 10 or 20, or until the policy holder reaches a certain age, usually 60 or 65. Because such policies do not accumulate cash values or pay out dividends, the premiums tend to be lower.
Term to 100: This type covers policy holders until they turn 100 years old. While these policies are often lumped into the permanent category, term-to-100 policies don’t have cash values or dividends and typically feature lower premiums as well.
Many people choose term insurance because it’s the cheapest way to get high levels of coverage, says Ms. Talavera-Siao.
But she offers one caveat: “Term is temporary and you have to renew when the term ends, and by then you’ll be older and will be charged higher premiums. Knowing this, you need to choose a term that makes sense for your needs.”
For example, if you have young children and a mortgage, then a 20-year term would probably be the smartest choice, says Ms. Talavera-Siao. But if your kids are in their teens and you’ve got just a few years left on your mortgage, then a shorter term would make more sense.
Along with life insurance, Ms. Praskey recommends that stay-at-home parents sign up for critical illness insurance, a relatively new type of coverage that gives policy holders a lump sump if they’re stricken by one of several illnesses covered by their policy.
Since stay-at-home parents generally don’t quality for disability insurance, critical illness insurance can provide a financial safeguard if they become seriously ill, says Ms. Praskey.
And what about your children — should they be insured too?
Ms. Praskey and Ms. Talavera-Siao both shake their heads at the idea.
“I don’t believe in that because children have no responsibilities or liabilities,” says Ms. Talavera-Siao. “If anything happens to a child, all you need is money to pay for last expenses like the funeral.” (Parents worried about their ability to shoulder these last expenses can add a “children’s rider” worth up to $10,000 to their own life insurance policy, she notes.)
But Paul McDougall, who owns McDougall Insurance in Peterborough, Ont., says insuring children while they’re young could help guarantee their insurability in the future. Some insurers allow policy holders to add a “guaranteed insurability” to children’s insurance policies. When the child turns 18 and it becomes time to convert their insurance to adult policies under their own names, the rider ensures they won’t have to have a medical examination.
“Even if they had developed a disease or condition along the way, they’re guaranteed insurability,” says Mr. McDougall.