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.

THE PITFALLS OF MORTGAGE LIFE INSURANCE

When you're gambling, the “house” expects to win. They’re on the lookout to make sure you don’t have insider information that puts the odds in your favour.

Term life insurance is a form of gambling. The products are sold at the younger ages where death is unlikely. Rates increase sharply with age and coverage is not available near life expectancy where payout is most likely. Insurers also underwrite each applicant individually, medically and financially. You’re required to disclose insider information. If you're a smoker or otherwise unhealthy, you pay more or get rejected.

If you’re honest, healthy and financially sound, you’ll likely get insured. More important, your claim is very likely to be paid. You have peace of mind. That’s not true for mortgage life insurance from your lender.

Uncertainty

The mortgage life insurance your bank offers you works differently. Buying insurance makes sense since you wouldn't want your family to lose their home if you pass away. You might sense pressure to buy coverage from the bank. That’s called tied selling and is illegal. Yet you’re vulnerable. If you refuse, will your mortgage be approved at a preferred rate?

If you buy, you're getting what is called creditor insurance. The bank is the creditor which means you're the debtor. Creditors worry about protecting themselves, not you. They also make nice profits from this type of insurance.

Since there are so many mortgages and so few claims, underwriting you at the time you buy is expensive. Why not underwrite you at the time of the claim? That makes financial sense to the creditor but what about you? You don't know if you're insured until the exact point the money is needed.

Did you notice the inconsistency?

The bank does extensive financial underwriting for your mortgage because they're concerned you might default (and inconvenience them). They don't bother to do insurance underwriting because that would cost them now and the risk of claims is low. Put differently, they're more worried that you'll default than die. Do you have the same priorities?

Consequences

The perils of buying mortgage life insurance from the lender are well known. Here are seven articles for background:

1. Mortgage insurance not always a sure thing (CBC Marketplace video, Feb 2008)
2. Mortgage insurance vs life insurance (Canadian Capitalist, April 2009)
3. Perils of a mortgage life policy (Toronto Star, April 2007) + addendum (Ellen Roseman)
4. Don't buy insurance from banks (Ellen Roseman, April 2009)
5. Post-claims underwriting (Money Smart blog)
6. Why am I denied insurance coverage? (Thicken My Wallet, May 2009)
7. Why I won’t sell mortgage insurance (Dave The Mortgage Planner)

Protect Yourself

You protect yourself by buying your own insurance elsewhere for flexibility. You then decide where the proceeds go. You'll probably want to cover debts like your mortgage and leave money for your family to replace the income you provided. You'll likely save money too.

Insurance advisors range in quality. You won't get true peace of mind unless you take the time to select an advisor you can trust. That’s key to getting your claim paid.

There's one weak reason to buy mortgage life insurance. If your claim looks reasonable but is getting denied, the media may help. The bank may then make a business decision to pay to avoid bad publicity.

Post-claim underwriting is not consumer accountable but is still with us. Buyer beware.

Links

• Tips for first-time home buyers (new)
• Two types of insurance you may have but can never own  (new)
• Three keys to getting your claim paid
• What happens during a paramedical exam for life insurance
• The effect of banks selling you insurance online
• Three steps to keeping financially solvent
• How the wealthy feel about their advisors
• image courtesy of Svilen Milev (Bulgaria)

Podcast 127 (4:50)

direct download | Internet Archive page | iTunes

PS Before ditching your mortgage life insurance, be sure you have a replacement securely in place.

CASE STUDY: THE DOCTOR THE INSURANCE ADVISOR MISTREATED

A customer is the most important visitor on our premises, he is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favour by serving him. He is doing us a favour by giving us an opportunity to do so. 
— Mahatma Gandhi

Is this the era of bad service? A week without phone service. A summer of medical mistreatment in 2008. There's poor after-sales service with life insurance,

Doctors are among the most coveted clients. Even they get mistreated.

Doctor Says

Here's an email from a doctor

Hi Promod,

I'm a physician living and working in Toronto.

I recently met with my insurance adviser to transfer life insurance policies to my professional corporation (PC). He asked me to meet with an actuary to determine a fair market value in order to allow for their sale to the PC. I found your website through the Canadian Institute of Actuaries website.

Would you be able to assist with this assessment and what cost would be involved for your time and opinion?

Regards,

Response

Here is a simple but powerful rule: always give people more than what they expect to get. — Nelson Boswell

I've never, never, never heard of a single time where a client was told to arrange an actuarial valuation of their insurance on their own. I even asked around.

Experienced insurance advisors already know valuation actuaries. Novices can easily find you a pre-screened one with a quick email or phone call to the intermediary through which they sell insurance (called a Managing General Agent (MGA)). This is step 2 in the graphic from the Globe and Mail (click to read).

If your doctor prescribed an MRI, you'd expect them to arrange the details, guide you through the process and follow-up.

Advisors don't need much training to sell insurance. That's why solid support is readily available to them.

Prescription

How you do anything is how you do everything. Your “character” or “nature” just refers to how you handle all the day-to-day things in life, no matter how small. — Derek Sivers: Character predicts your future

How can you trust an advisor who takes a clear shortcut? There may be weaknesses with the insurance currently in place and the proposal to change ownership.

Before going further, this doctor would do well to get his insurance needs evaluated by an advisor he trusts. The Process System is a simple way. There are other models that achieve similar results with more steps.

What's Wrong?

There are no traffic jams along the extra mile. 
— Roger Staubach

Insurers pay salespeople the bulk of their compensation the moment you buy. You've prepaid for after-sales service and are entitled to receive it. The advisor could have helped the doctor in mere minutes.  How long does it take to make a phone call or send an email? Better still, the advisor could have taken care of the details to save the doctor's time.

Why would an advisor provide such lousy service? No immediate compensation. How sad.

Links

• Where are the customer service ratings for advisors?
• Why after-sales service stinks for life insurance
• The Globe and Mail on Canada's insurance loophole: what else is wrong?
• Does your insurance company win when you cancel your coverage?
• Do financial doctors make as many mistakes as medical doctors?
• Christmas in the emergency ward
• Surviving a week without phone service
• When doctors disagree: toe to toe
• Three keys to getting your claim paid
• The Process System for planning simply
• The foolproof measure of trust
• image courtesy of Steve Ford Elliott (Ireland)

Podcast 126 (4:41)

direct download | Internet Archive page | iTunes

PS In a future post, we'll look at the kind of post-sales service you deserve.

WHERE ARE THE CUSTOMER RATINGS FOR ADVISORS?

I've been looking for a video editing app that's easy to use and reasonably powerful. My video loving friends recommend Sony Vegas Platinum or Adobe Premiere Elements. These are lite versions of professional tools. Both are similarly priced and have learning curves.

SONY Vegas Platinum

My son "volunteered" to test out Vegas and created this video (The Living Legacy of Goodyear Toastmasters). The main changes were trimming, cropping and boosting the volume. Vegas kept crashing and was unintuitive. Adding/editing a title was not "obvious". Vegas does not use storyboards, for instance. We weren't satisfied. 

ADOBE Premiere Elements

Another friend recommended Adobe Premiere Elements combined with Photoshop Elements. Since I don't have a great photo editor, I liked this idea. There was a caveat: I needed a powerful computer. My ThinkPad X200 tablet is designed for portability, not performance. There's very little free disk space for new apps on the zippy-but-tiny 128 GB solid state hard disk.

Gutsy

TopTenREVIEWS gives Premiere Elements 9 a bronze star. That's pretty good. I went to the Adobe site and saw user reviews. The average of 11 reviews is 2.7 out of 5. That's bad. Customers complain about the slow speed and crashes. Those customers are lighthouses. They are being proactive within their circle of influence.

Why would Adobe allow critical reviews on their site? They must realize that customers can leave comments on many places. Maybe that's why they allow reviews on their site. When you do this, you can't censor.

Since Adobe knows about the problems, they will probably release an update (if they haven't already). There's no real downside to experimenting because there's a 30 day free trial. No credit card required.

Sony doesn't have reviews on their site. Because of Adobe's openness, I'm tempted to try out Premiere Elements anyway.

Other Places

I visited Amazon.com and found 153 reviews for the combo of Adobe Photoshop and Premiere Elements (amazon.ca has only 4 reviews). The results are inconclusive. Opinions vary widely. Issues may be arising because of hardware (especially video).

The Financial Anomaly

The financial world sells many products and services. Try finding customer reviews or ratings of the advisors. Couple that with low financial literacy / numeracy and you'll see that you're at a disadvantage when researching.

You don't get free trials either. You're in the world of buyer beware. When you buy an investment, you'll have trouble returning it for the price you paid. With life insurance, there's typically a 10 day money-back guarantee. That's far from 30 days. However, the process of getting your application approved can takes 2-3 months. That gives you the opportunity to change your mind during the process. It's unlikely you will if you have solid reasons for your purchase.

Also, you've been guided by your advisor. Where would you get a contrary opinion?

Links

• Buying a video camera: can we trust the experts?
• Reasons to be cynical
• Be proactive within your circle of influence 
• How to save on your next Audi, BMW or Mercedes-Benz
• The ABCs of 1-2-3: The key to financial literacy / numeracy
• Your digital tapestry

Podcast 125 (4:33)

direct download | Internet Archive page | iTunes

PS Since video processing requires a fast computer with lots of memory and disk space, I'll need an upgrade first. I hope my family isn't reading this post ...

WHAT'S WORSE THAN FINE PRINT?

It's the damage that we do and never know. It's the words that we don't say that scare me so. 
— Elvis Costello, Accidents Will Happen

Fine print is nasty and too common. And sometimes comical. Who realized that steaming coffee might be hot? Thanks for the tip. Want more? Here are 11 funny fine print warnings.

There's something worse than fine print: what's left out altogether. At least fine print makes the limitations clear. With white space, the onus is on you to

1. know what's normally included (e.g., spare tire with your new car)
2. notice what's missing (e.g., spare tire)
3. understand the impact (e.g., inflating/sealing canister instead of a spare tire)

For example, I got Zoom Q3HD video camera, which uses AA batteries. Batteries are normally included. They were this time but of low quality. This was okay because AA batteries are readily available and we've got lots. Guess what was missing? An AC adapter. The impact is high battery consumption even when you're near electricity. I bought an accessory kit with an adapter, tripod and case. (I was surprised that the case was not included.)

Examples Of White Space

We just survived a week without a dial tone. Vonage would have worked throughout since our cable Internet was unaffected. Their "unlimited" plan is capped at 3,000 minutes a month. That's far from the 43,200 minutes in a 30 day month but you know the limit at the outset.

In contrast, my "unlimited" mobile data plan appears to have penalties above 5 GB. I can't get a clear answer to what would happen. They don't want to define "unlimited". Here you may not notice the constraints until you exceed them.

Data roaming plans can be very expensive outside your country but you probably don't know how much you might pay.

Bad Example

Life insurance contracts run dozens of pages in length. They're written in legalese. You may infer what the salesperson implies ... but try proving that if there's a misunderstanding.

Recently, Sally (not her real name) took a policy loan. She used the cash value of her policy as collateral to borrow from the insurance company. She didn't want to pay tax on the amount loaned. She asked her salesman the maximum she could borrow. He told her $24,000. That's what she borrowed and repaid over two years.

She also got the tax bill she specifically asked to avoid.

What Happened

Insurance premiums in Canada cover the protection you're receiving and the excess provides tax sheltered growth. Withdrawals or loans above this Adjusted Cost Basis are taxable. This policy had a gain of $14,000 that was taxed at 46.4% here in Ontario.

How did this happen? The salesman was self-serving. He found out how much Sally could borrow without her policy lapsing (and his compensation ending). That's a very different objective than finding out how much she could borrow tax-free. The salesman now has one less client to worry about.

Recourse

Sally was not given a clear explanation of the tax implications of borrowing. Calling the insurance company's head office didn't help. They score low in corporate governance and did little more than refer her back to the salesman who caused the problems. This is another example of why after-sales service stinks.

Despite her pre-planning, Sally's reward is a tax bill of $6,400. She could have easily borrowed from a line of credit at a similar loan rate and paid no tax.

Links

• The fine print taketh away
• 11 funny fine print warnings (Woman's Day, Jan 2011)
• Reasons to be cynical
• Surviving a week without a dial tone
• Buying a video camera: can we trust the experts?
• Your digital tapestry is your legacy
• images courtesy of CryoSphinx (Canada)

Podcast 124 (5:39)

direct download | Internet Archive page | iTunes

PS If fine print baffles or bores you, look for someone who's good at seeing the invisible. Or search online.