Insurance you need and don’t need

Some types of insurance are optional, others not so much

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(Paper Boat Creative/Getty Images)

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Q: What insurance should I get besides life insurance? How do I find the right insurance?—Jizza

A: I think it’s prudent, Jizza, that you are considering your insurance needs. Ignorance is not bliss when it comes to your finances and in particular when it comes to insurance.

I find that, more often than not, the primary focus for insurance needs is life insurance. This focus seems to be that of not only consumers, but also for insurance agents. The resulting risk is that people have the wrong type or amount of coverage or certain types of insurance are outright overlooked.

There is something about the severity of life insurance that makes it seem so important. It’s literally a life or death financial product. Almost anyone who has group benefits has life insurance coverage. And life insurance is definitely the most common policy I see purchased by clients separately from their group coverage.

Disability insurance

I find disability insurance is frequently overlooked when people consider their insurance needs. I’d say this should be your number two insurance consideration. Life insurance is for income replacement in the event of death, while disability insurance is for income replacement in the event you can’t work, but you’re still alive.

Disability insurance is important for just about anyone who is working and needs the income from their job, which accounts for most of the working population. Group benefits typically include disability insurance, but often the definitions of disability are strict or the monthly coverage does not adequately replace one’s income. So be sure to look at the specifics on your group coverage, as gaps often exist.

Business owners in particular are at risk because if they aren’t able to work, they may have business expenses to cover and their income may dry up if they’re disabled. At the same time, business owners may find it difficult to get adequate disability coverage because their income may be less predictable than that of a salaried employee.

Critical illness insurance

Critical illness insurance is a newer type of coverage that pays out a lump-sum in the event of one of about 25 critical illnesses like cancer. I think this is more of an optional insurance coverage myself, but you need to assess your own situation, Jizza. If you want a lump-sum of money to provide for medical treatment or for a spouse to take time off work with you in the event of a critical illness, this type of coverage could be worth considering. That said, disability insurance may provide some protection—income replacement—in the event of a critical illness.

A return of premium option is generally available on critical illness insurance policies if you don’t make a claim.

Long-term care insurance

Long-term care insurance is likely to grow in popularity in the coming years as long-term care needs rise, as a bit of a knee-jerk reaction to the number of Canadians who will be in need of long-term care. It provides a monthly or lifetime benefit to cover long-term care expenses in the event you are unable to perform some of the daily activities of life on your own.

It’s a tough insurance coverage to assess, because those with modest means may be hard-pressed to find the resources to pay the premiums. And those with means might otherwise be self-insured. Beyond that, how much you need is a guess at best given your eventual long-term care needs may be short-term, long-term, in the near future, in the distant future, or non-existent.

Once again, I see long-term care as an optional as opposed to a mandatory insurance coverage. But if you want to protect your retirement assets or ensure coverage beyond what the government might otherwise provide, you should consider the merits of long-term care insurance as at you approach retirement.

Ask a Planner: Leave your question for Jason Heath »

How do you find the right insurance? I’d definitely take the time to educate yourself on the types of insurance out there, either before or after speaking to an insurance agent. Some insurance is more important than others and some is optional or personal in my opinion.

Consider group insurance coverage options as well as professional associations and alumni benefits as they may offer lower premiums than an individual policy, albeit at some risk if you change jobs or if the rules or definitions of an alumni or professional association’s coverage change. Beyond that, consider a broker who can access competitive quotes at different companies rather than just a single company.

As with all things financial, a little bit of due diligence can go a long way.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

3 comments on “Insurance you need and don’t need

  1. Thank-you Jason with writing this article.

    Commenting not for the Canadian audicence but American consumer, there are valid reasons to own Long Term Care Insurance.

    a. Financial planners have written for years that the affluent will pay from their cash flow for care giving services because it is assumed they have the capital and cash flow allocated towards care giving. I would sugggest that the affluent rarely have funds allocated towards care giving. As with people with different levels of capital, it would be in their interest to protect their family from the consequences of care giving with a LTC plan. It does not need to cover all the costs but 50-70% would allow the cash flow allocated towards lifestyle to constinue.

    b. I recommend that financial and wealth managers collaboarate with a competent agent who has knowledge and expertise with these benefits. I guarantee that no matter how affluent, there will be a moment where a financial or wealth managers receives a call — what can we sell as John or Martha needs additional funds for care giving expenses.

    c. I never guess about LTC benefits when I consult with people. Less then 1% of cash flow would be feasable to pay for a LTC plan. The point of owning various insurance is to transfer the risk to an insurance carrier. The affluent do it all the time. They want to protect their capital as people who are less affluent want to protect their capital.

    Why?

    Care giving affects everyone. A person who wants to help their family will own a plan so that their lifestyle, cash flow, and estate planning for the future will continue.

    People are living longer. They may not always have some chronic illness but if you live long enough you will become frail. In order to remain at home, in your community, and have freedom to not feel isolated at home or with your daily life — having a care giver or paying family members for various levels of care giving helps the family, your cash flow, and your life as you move forward.

    Reply

    • “People are living longer. They may not always have some chronic illness but if you live long enough you will become frail.”

      Good point Raymond, and insurance companies realize this as well so the pricing for LTC insurance is quite high, especially for people over 60, even if they have no major health concerns. I don’t know about the US but premiums approximately double from age 55 to 65. If people want to get LTC coverage to protect their assets from draining at an accelerated pace, they should plan for it in their 40s and 50s while premiums are still reasonable. Otherwise, this product is reserved for the affluent past a certain age, as the average person will not be able to afford the premium in retirement.

      Reply

  2. Make an attempt to read through the terms and conditions of your group benefits from your employer if you have them. I thought I was covered under short term disability, but found out that they have very strict check lists to be able to use that feature. I was told that since I work on a computer and my brain, fingers and eyes work, I am considered to be capable of working and therefore not covered. Even though I can barely make it up the stairs to get to my office and am at constant risk of collapsing as my leg is injured. I’m just glad I live in Canada and am now of sickness EI benefits to help with expenses for the next few months.

    Reply

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