May 31, 2007

Learning From Brian Tracy Live

It's always hard before it's easy
--- Brian Tracy
Brian Tracy spoke at a corporate event earlier today. I heard part of his presentation before I was forced to leave. Brian helps people improve their lives. I know him primarily through his audiobooks. Last year, I learned that he's Canadian. You know how we complain about the weather. He actually did something ... moved to California :)

Brian was discussing ways we can make more money. Unlike many others who discuss this ever-popular topic (see Too Good To Be True), his ideas work. But take work.

Learn and Apply New Skills
Brian explained that a Mercedes car is lost on the back roads. In comparison, a rusted jalopy on the highway goes faster and further. Our mind is like the Mercedes. We need to put it on the right track.
Aside: can't someone who can afford a Mercedes buy a GPS navigator to get back on track?
We are our most important assets. The world is moving ever-faster. If we don't continue developing our skills, we aren't standing still. We're falling behind. Eventually we're so far behind that we think we're first.

Self-esteem is critical and ours can suffer for many reasons, starting with how we were raised as children. We can replace the negatives with affirmations such as "I like myself" and "I love my work". Frankly, I was skeptical when I learned of affirmations from his video seminar "Achieving Personal Excellence" back in 1992. I tried them though, and they work. Try your own. With enthusiasm!

Brian also taught me
  • The Law of Attraction
  • modeling (do what the successful do and you'll be successful too)
While these ideas are available from other sources, they were new to me. He explained in ways I could understand and apply.

That's It?
As I was dragged out, Brian was talking about the Efficiency Curve, borrowed from the Boston Consulting Group. As we learn, our work takes less and less effort.

What I learned didn't make leaving any easier :(

May 23, 2007


Critical illness insurance (CII) provides very valuable protection and sells well in countries like the United Kingdom and South Africa. Why not in here? This has been a puzzle since the introduction of CII to Canada 11 years ago. We have a huge market, excellent products and fair prices. What went wrong?

Huge Market
Life insurance is considered a "selfless" purchase: the benefit is paid after your death. In contrast, critical illness insurance (CII) is "selfish": you use the benefits for yourself. So CII suits single people without dependents, males and females. Do you have a mortgage? If you're married, you and your spouse can have your own policies. You can buy coverage on children. You may want a plan that returns your premiums if you make no claim.

The World's Best CII?
Canada learned from the experiences of other countries and created what may be the world's best CII plans. In other countries, insurers were able to increase the prices after you've bought a policy. In Canada, prices were guaranteed. Thanks to competition, prices were also reasonable. Experience shows that the prices were actually too low for the benefits provided.

But Low Sales
In 2006, only 85,000 CII policies were sold in Canada --- a drop of 5% from 2005. Including sales from all previous years, there were only 322,000 policies still in force. That's roughly the population of Oshawa (ON), Victoria (BC) or Windsor (ON). That's not much considering our population is almost 33,000,000 (see the nifty Statscan Population Clock).

There are various reasons
  • lack of standard definitions
  • poor marketing by insurers
  • steep learning curve and discomfort of advisors
  • perception of high prices
  • high decline rates
Let's look at a few in more detail.

Mangoes and Papayas
Term life insurance plans are considered interchangeable. So products are often selected on the basis of price.

To prevent critical illness insurance from becoming a commodity, insurers used different definitions and covered different numbers of conditions. This made product comparisons more difficult.
  • Is it better to pay more to have more conditions covered (e.g., 21 instead of 19)?
  • Is it better to have stronger definitions and fewer conditions covered?
  • Does a higher price mean a better product?
Suppose you're a 30 year old female needing $100,000 of CII and you pick Term To 75 with level premiums and return of premium. The monthly price ranges from $53 to $94.

The Definitions
Suppose your policy defines a coma as a deep state of unconsciousness, with no reaction to external stimuli or internal needs, persisting continuously with the use of life support systems for at least 96 hours. Would your claim be paid if
  • still showed signed of primary defensive reflexes to external stimuli? or
  • you were in a coma but not on life support?
How would you and your family cope if the claim were not paid? How would you feel about the advisor who recommended the policy over one which would have paid? How would you feel about the insurance company which denied the claim?

The Price
The price of critical illness insurance looks high when compared with life insurance, but this is comparing mangos and papayas. They cover different risks and different probabilities of claim.

Denial of Claims
When you're interviewing job prospects, be wary of the candidate who's too eager to join you. They know something you don't. And that won't be in your favour.
A person who knows they are in the early stages of a critical illness may be highly motivated to buy CII, in the hopes that the insurance company won't find out. This does happen. A study by a reinsurer showed that 15% of claims were denied in 2001. Of these denied claims, here are the reasons why
  • 40% - misrepresentation by the client
  • 20% - 90 day cancer exclusion
  • 20% - in situ cancer
  • 20% - heart attack did not meet the contractual definition
So most of the denied claims were not paid because the person insured knew more about their health than they disclosed.

What This Means To You
Critical illness insurance offers valuable protection at fair prices to healthy Canadians (see Critical Illness Insurance: The Basics). Yet so few of us protect ourselves. You can investigate your own situation by finding an advisor who is knowledgeable about this type of product.

May 13, 2007


You can fool yourself
You can cheat until you're blind
It can happen to you
It can happen to me
--- Yes, It Can Happen
89% of Canadians have a family member or close friend who has suffered from a critical illness. Yet only 51% have a financial plan in place (Ipsos-Reid, June 2005).

What is a Critical Illness?
A critical illness or condition includes Alzheimer’s disease, aortic surgery, benign brain tumour, blindness, cancer, coma, coronary artery bypass surgery, cystic fibrosis, deafness, dismemberment, heart attack, heart valve replacement, kidney failure, loss of independent existence, major burns, major organ transplant, motor neuron disease (Lou Gherig’s disease), multiple sclerosis, muteness (loss of speech), occupational HIV, paralysis, Parkinson’s disease or stroke.

The "Big Three" are cancer, heart attack and stroke.

No matter how well we take care of ourselves, we could be affected. Marketing material invariably shows the scary statistics.

The Financial Risks
Thanks to medical advances, we are more likely to survive a critical condition. What about our finances? There are many costs that government or other health plans exclude. Here are examples:
  • faster or better treatment at a foreign hospital
  • cost of experimental drugs
  • home renovations or new vehicle (e.g., to accommodate a wheelchair)
  • travel and accommodation costs of family members especially if you travel to another city or country for treatment
  • cost of a family vacation or some other dream
  • offset income lost by you or family members during your treatment or recovery
If your condition arose from work pressures, you may want to take a less stressful --- lower paying --- job upon recovery.

The Financial Planning
So how do we plan to deal with the costs?
Canadian financial planning for critical illness
  • Use savings (54%)
  • Mortgage or sell their house (17%)
  • Get help from children (5%)
  • Get help from other family members (2%)
  • Sell other items (1%)
source: Ipsos-Reid, June 2005
Using savings or home equity (71%) creates another problem: less money for retirement. Getting help from family hurts their future finances too.

What is Critical Illness Insurance?
As you might expect, insurance is available to offset the financial risks of a critical illness or condition. A lump sum (e.g., $50,000 to $2 million) is payable 30 days after diagnosis. This money can be used any way you want.

Coverage is available to age 75 or even 100. Premiums can increase every 10 years or stay level. If you're fortunate to not suffer a critical illness, you can get a return of most or all of your premium, which you can then use for retirement income. The specifics vary among products.

Critical illness insurance has only been available in Canada since 1996 and the taxation is unclear. Since you buy coverage with after-tax dollars, the basic benefit is likely tax-free (as with disability income insurance). Is the return of premium option tax-free? This isn't certain.

Since term life insurance is considered a commodity, you can generally pick the lowest price from a major company. Critical illness insurance is different.
  • definitions vary among companies and the medical language makes comparisons difficult
  • the conditions covered vary --- some products insure over 20 conditions
  • very few advisors are knowledgeable about the products
How would you feel if your heart attack meets the definition of Product B but you bought Product A and get nothing? One strategy is to buy coverage from two companies to increase the chances that one will pay.

What if you suffer a critical illness but don't have insurance because your advisor didn't tell you about it? You can start suing. Or be proactive, get educated and take action now.

Picking the right product is not easy. And too few Canadians buy coverage which could benefit them.

Other Resources
By coincidence, today's Toronto Star has an article about insurance policies that benefit the living. Naturally, you can find more information online (or ask here). For example, is more educational than most.


May 10, 2007

Losing Ground: Investing For Retirement

Every child had a pretty good shot
To get at least as far as their old man got
But something happened on the way to that place
--- Billy Joel, Allentown
When my son was 3 years old, we noticed that our coin jar was getting lighter and his piggy bank was gaining weight.
"What are you doing?" I asked.
"Saving for retirement," he replied.

Jeevan is now 12 and still careful to save his money. He bought his first term deposit recently. Not everyone starts saving so young. Why did he? He was alarmed by my tales about people I came across who
  • had no pension plan
  • lost money because of poor investments
  • were working but not saving for retirement
  • dipped into RRSPs due to job loss, disability or illness
  • didn't repay money they took from their RRSPs to buy a home
  • retired but didn't realize they'll likely run out of money
  • retired, ran low on money and were forced to work again
Monkey hear, monkey fear, monkey save. We didn't need Grimm's Fairy Tales. If you're alarmed by the fear of running out of money during retirement, join the club.

As you might guess, there are publications geared at institutional investors and pension plan sponsors. The current issue of Canadian Investment Review looks at the typical Canadians instead.

Company Pension Plans
If you're among the 40% of the workforce with a company pension plan, you're fortunate. Money is being set aside for you. Ideally, you'll have a plan that pays you a specific lifetime benefit based on your years of service and your salary around the time you retire (defined benefit plan). Many employers prefer the less-expensive defined contribution plans, which transfer the investment risks to you. As with RRSPs, you make the investment decisions and your pension income depends on the value of the savings.

On Your Own
The remaining 60% have no company pension plans. Do they have the discipline to save?
I see small business owners who struggled for years and are now seeing some success. So they start the saving game late. Or spend instead of saving. It's their way of rewarding themselves for toiling in the lean years. They think their businesses will survive and become increasingly successful. So their plans to save slip into the future.
The study, Losing Ground, by Keith Ambachtsheer (University of Toronto) and Rob Bauer (University of Maastricht) shows that investing in mutual funds can chop retirement income by 22% to 64%, depending on what the fund charges.

We'll each have different solutions such as investing "better" (whatever that means to you), saving sooner or buying more lottery tickets.

So put away Grimm's Fairy Tales. Turn out the lights. Think about Losing Ground before you retire.

May 7, 2007

The Four Financial Risks

And the knowledge that they fear is a weapon to be used against them.
-- Rush, The Weapon (Part II of Fear)
Actuaries measure and manage risk (the probability of harm). I focus on financial risks. Here are the four main ones
  • longevity: outliving your savings
  • mortality: dying too soon
  • morbidity: getting sick
  • disability: getting disabled
Longevity Risk: Outliving Our Savings
Who would think that living a long life would cause financial risks? As we live longer, we need more money. If we're healthy, we may have expensive hobbies such as travel or cottages. If we're ill, we may face additional medical expenses.

We no longer believe that the government will be able to take care of us. Or rely on a company pension plan. We must save for ourselves. The sooner the better. There's plenty of (conflicting) advice on investing elsewhere. So I'll defer to those experts.

You can get guaranteed income as long as you live with a life annuity, which enjoys preferred tax treatment: each payment is a blend of interest (taxable) and return of capital (tax-free).

Mortality Risk: Dying Prematurely
If we have dependents, we need life insurance to cover the expenses of mortgages, education, etc. Inexpensive term insurance is available widely. The consumer site provides price quotes. Term 10 is the most popular choice.
Tip: for Health Risk, select "Regular". If you're healthier, you'll get lower rates. very few qualify for "Super Preferred".
As we age, term insurance becomes increasingly expensive. When we reach the ages where death is more certain, the term coverage unavailable. Why would you need life insurance when you're 70 or older? For estate planning --- for example, to offset the taxes on the capital gains from your cottage, investment real estate or shares.

Morbidity Risk: Losing Health
As we age, we realize how feeble our bodies can be. Even people who take excellent care of their health can be stricken with cancer, heart attack, stroke or require heart bypass surgery. Critical illness insurance can help by paying a lump sum in these situations. Some plans refund your premium if you make no claims. So you get another source of retirement income to tackle your longevity risk.

Disability Risk: Losing Income
If we become disabled, does our income go up? Expenses may rise, but income usually drops. The disability could last for years. Who has that much in savings? Or friends and relatives who are that generous? That's where disability income replacement insurance can be helpful. Maybe your employer provides this for you.

The Costs
How can we afford to insure against every risk? We can't (see Stagnant Family Incomes). We wouldn't even if we had the money. Everyone's situation is different. You'll need to see which risks are more likely and more financially devastating.

This is the point where you're tensing up because you're expecting me to tell you that I can solve all your problems ... for a price. Relax. I'm simply here to provide education and insights. A different perspective. Why? I've been helped by so many people. This is my way of giving back. With interest :)

Feel free to leave comments on topics you'd like to see addressed.

Canadian Tour of Personal Finance Blogs
Visit A Canadian and Her Money for links to the other participants.

May 2, 2007

Invent Your Ideal Investment

Ideal investment: the one you don't make
Dust off your thinking hat. Grab your magic wand.

Imagine you can create the investment which is ideal for you. What characteristics would it have?

Seriously. Please give this some thought and list your ideas as comments. In another post, we'll discuss which investments, if any, are close.