TWO TYPES OF INSURANCE YOU MAY HAVE BUT CAN’T OWN

You can look at the menu,
but you just can't eat.
You can feel the cushion,
but you can't have a seat.
— Howard Jones

There are two common types of insurance you may have but can’t own

• mortgage life insurance (which has pitfalls)
• group insurance

There's an easy way to tell: you don't receive a policy contract. Instead, you receive a certificate. The contract belongs to the creditor (for mortgage life insurance) or employer (for group insurance). They can make changes. There's nothing you can do about it.

If you're healthy, you're subsidizing those who aren’t. That's because you are not underwritten personally. Your rates are blended. It’s like everyone borrowing at the same loan rate, good risks and deadbeats. How fair is that? This structure is simpler for the insurer and policyowner. You probably don’t care (or know) unless you’re paying some or all of the premium.

Which Is Worse?

Mortgage life insurance from your lender is a poor choice since it's not designed to protect you. The creditor is concerned about themselves. Yet they make you pay to protect them. What about protecting your family and yourself? That's not their concern.

The creditors have immense buying power. They could get insurance at low wholesale rates. Instead they add a large mark-up and get you to pay the premiums. Not only are you protecting them, they're making a profit. People still buy. That's marketing!

Group insurance is reasonably good. Your employer has an incentive to find low rates because they pay for some of the coverage. There are limitations and drawbacks. Our dental insurance used to pay for cleanings every six months but that's been changed to nine months. We weren’t told. We don’t have a say. The bigger drawback is that you lose coverage when you leave the employer. Your departure may not be your decision.

If you have your own life insurance and critical illness insurance (and perhaps disability insurance) in place, you're immune. You've already built the costs into your budget. You're used to paying. If you don't buy insurance until you lose your job, you're in a bind. You've lost your income and face the stress of seeking a new job. You'll notice the new expenditure. You might even decide to forgo insurance until you're working again. What does that do to your stress level?

What’s Better For You?

When you’re paying the premiums, your best solution is to own your life insurance personally. You then have full control because you're the policyowner. You choose how much coverage to get. You choose from the products available. You choose your beneficiaries. Depending on the structure, you have 100% creditor protection for extra peace of mind.

If you own a private corporation (Canadian-Controlled Private Corporations), you can have the insurance owned there. You're now paying premiums with lower-taxed corporate dollars. However, you lose creditor protection. You can reduce the risk by owning the insurance in a holding company rather than an operating company. Choices, choices, choices.

Links

• The pitfalls of mortgage life insurance
• The problem of “trapped” retained earnings
• image courtesy of Neils Timmer (Netherlands)

Podcast 128 (4:40)

direct download | Internet Archive page | iTunes

PS When you're on the road, recall the most dangerous part of driving.