January 19, 2013


piggy bank and coins If insurance were free, how much would you get? [I heard that at a seminar.]

You’d probably get as much as the underwriters would approve based on your physical and financial health. Since cost is a factor, you've got to prioritize. You may skip some forms of insurance, or reduce the amount you buy.

How do you find the money to pay the premiums?

Types Of Money

We mentally put money into buckets. This for groceries, that for vacation. Don’t touch the beer money. We end up with conflicting goals such as topping up your RRSP or paying down your mortgage (Globe and Mail, Feb 2012).

We might spend "found" money such as lottery winnings, bonuses and perhaps tax refunds with less care. Easy-come, easy-go.

Yet money is money. Knowing this lets us stretch our savings by using one pot for more than one purpose.

Universal Needs

You probably have life insurance, especially if you have a family. Inexpensive term coverage is widely available.

There are bigger risks.

We can face a critical illness or disability and survive. Since the probabilities of getting stricken are relatively high, the premiums look high compared with term life insurance. The easy solution is to skip getting coverage. You're winning ... until you're not.

Untapped FUNDS

You probably understand that saving for retirement is important. We can’t rely on governments. We might not have guaranteed pension benefits from work.

What if your health impedes your journey to a financially-secure retirement? If you get a critical illness or disability, you risk higher expenses and less income. You might be unable to work again. You could take some of the money earmarked for your retirement to buy insurance for critical illnesses and disability. You're then protected while you're working.

With permanent life insurance, you get lifelong protection and an envelope for tax sheltered growth. Maybe you put some of your savings here for access later.

Get Your Money Back

If you’re convinced you’ll have a claim, the insurer doesn’t want to cover you. If you don’t think you’ll have a claim, buying insurance may look like a waste of money. We can’t tell what will happen.

What if you could get your money back if you didn’t make a claim? You’d lose the investment growth on the money but returns are unpredictable anyway.

Some critical illness and income replacement plans refund your premiums if you cancel your policy at an age like 65 (assuming you haven’t had a claim). You now have another form of retirement savings. The money comes from the insurer's investments and other buyers who didn’t have the patience to wait.

With life insurance, you can’t get a return of premium when you retire but can at death.

You do pay more to get your premiums refunded. Because of the poor investment environment, the option is becoming more expensive or disappearing.

Ideal For you

Unless you have money for everything, you might want to combine pots for related goals like getting to retirement. You won't get money back from your car or home insurance. You can with insurance on your health and life.

The best insurance is what remains at the time of a claim. [I also heard that at a seminar.]


Podcast 203

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PS Review your situation with an advisor you trust and be wary of schemes that look too good to be true.

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