INCOME REPLACEMENT: A GUIDE TO DISABILITY INSURANCE

In this week’s Globe and Mail, Preet Banerjee investigates the financial aid available to the disabled. I’m quoted. The interview took place via Bluetooth while I was driving to the sold-out Toastmasters conference. (There, Jonathan Holowka and I showed ways to turbocharge clubs with social media.)

Disability is a dreary subject and you avoid buying insurance, but the topic is popular this week. Advisor.ca, has articles to help salespeople clear the sales hurdle and pitch disability coverage. There is even a script for them to use on you. If you start getting contacted in the near future, maybe that’s why.

This post gives you more insider thoughts about disability insurance, which is sometimes given the glitzier name of income replacement insurance.

Statistics

There are many eye-popping statistics about the high risk of disability and how long income can be lost. You can watch a no-longer-embeddable video from PPI Solutions.

You probably know people who are disabled at least partially.

Differences

Death is something an actuary can calculate fairly easily and accurately. Predicting who will become disabled is not so easy. It is a calculation based on chance.
— New York Times, April 2011

Life insurance pays a fixed amount upon death. Critical illness insurance pays a fixed amount upon diagnosis of a covered illness. Within reason, you decide how much coverage you want.

Disability insurance is different. It only replaces a portion of your lost income. If you were able to replace your full income and get indexed benefits, where is the financial incentive to return to work? If the economy is bad and layoffs are pending, getting disabled may look like an exit strategy.

To counter abuse, insurers have ongoing checks to make sure you still qualify. With life and critical illness insurance, you're only checked at the time of the claim.

Disability has subjective elements. Insurers have leeway in deciding who qualifies for benefits. There are three key ways to getting your claim paid.

Nortel

You can't rely on disability protection from your employer even if you pay the premiums. We already looked at the two types of coverage you may have but can't own.

Nortel is a sad example. Instead of getting real insurance, the company decided to insure employees themselves. Since Nortel is bankrupt, their promises mean nothing. The disabled lost their benefits. If real insurance were used, then benefits would have continued. If the insurer failed, Assuris protection would step in.

In British Columbia, the government is not paying legislated benefits to thousands of disabled people.

If you can't rely on an employer or government, can you rely on yourself? If you don't have your own DI coverage, you are your own insurer. Since you cannot tell if you're going to become disabled or for how long, self-insuring can prove very costly unless you're independently wealthy.

Problem

Statistics Canada reports that 1 in 7 Canadians are disabled. The rates increase with age. Not only is disability common during your working years, the benefits could be paid until age 65 and might even be indexed. While the protection is worthwhile, it's pricey. It has to be. That’s why some people buy critical illness insurance instead. That's valuable coverage but hardly a substitute.

The perceived problem is that you can spend lots of hard-earned money on insurance and never get a long term disability. Isn't that better than having a claim? You had peace of mind and your health.

Links

Disability

• Risk calculator (Manulife) (new)
• video: The importance of disability insurance (Preet Banerjee, Oct 2013) (new)
• Disability insurance: preparing for the worst (MoneySense, Jan 2012) (new)
• Financial aid is available for the disabled (Globe and Mail, Nov 23, 2011)
• Preet Banerjee: articles in The Globe and Mail and blog posts at Where Does All My Money Go?
• Disability insurance wiki (riscario.com)
• What you need to know about life and disability insurance (NY Times, April 2009)
• The six financial fears of Canadians and the four financial risks
• Thousands of disabled denied legislated benefit (Globe and Mail, Jul 5, 2011)
• Two types of insurance you may have but can’t own
• Oblivion: What happens if your insurance company dies?
• A week in a handicapped hotel suite

Salespeople

• Disability Insurance Discussion Checklist (advisor.ca, Nov 23, 2011)
• Pitching disability coverage (advisor.ca, Nov 21, 2011)
• Clearing the DI sales hurdle (advisor.ca, Nov 23, 2011)

Nortel

• Disabled Nortel workers suffer again (Toronto Star, May 2011)
• Nortel disability advocate Peter Burns dies at 54 (CBC News, May 2011)
• Self-insured company disability plans (Canadian Personal Finance Blog, May 2010)
• image courtesy of Julya Katkova (Russia)

Podcast 145 (hmm)

direct download | Internet Archive page | iTunes

PS Relying on your employer for your pension is also risky. Defined benefit plans are becoming rare in the private sector and we're living longer than ever.

IS THE BEST ADVICE FREE OR FOR-FEE?

The answer depends on where you're getting the advice and the business model of the advisor. When a billionaire sells advice via a seminar, I'm skeptical. Why not show generosity by giving the information away for free? The Khan Academy does and is changing lives.

For-Free or For-Fee?

There are many places you can go to get a free financial plan. If they sell mutual funds, count on the proposal including mutual funds (instead of cheaper ETFs). If they sell insurance, count on a recommendation to buy some (and probably not cheap term).

Even if you pay, there may still be biases. If they sell investments, you may be encouraged to move your portfolio to them. Do that and they may even waive their fees for the plan. The result is the same as if you got a free plan. Their real model might be asset accumulation.

However, the criticism may be unwarranted. Time and expertise cost money. A monkey will work for peanuts but maybe you don't want a hire a monkey.

For-Fee

What about for-fee planners? We're reluctant to hire them when we can get free plans elsewhere. They may also get compensated for the investment or insurance sales that arise from their recommendations.

The optics vary.

To appear independent, they may send you to someone else in their firm. In the bank-owned world, the investment advisors make referrals to the insurance specialists and share in the compensation. Management may get incentives to ensure both groups to work together.

In private firms, revenue can be shared too. Let's say an accountant sets up a company with a planner, investment advisor and insurance advisor. All revenue could go to this one-stop shop and get shared through the ownership structure.

For-fee planners often establish informal affiliations. They could get paid for the referrals they give by getting referrals in return. That's reciprocity. Buyer beware again.

Other Sources For Free Advice

If you're getting advice from someone who doesn't sell financial products, you may be getting good advice. Bloggers, journalists and authors can be excellent sources. They make their money in other ways.

Retirees may have valuable advice if they've kept their knowledge current and can connect with younger generations. Former insiders are another source but find out why they left. If you sense they were booted out for poor performance, they have biases.

If they're giving free advice, how much are they putting online? If none, they may have difficulty learning new skills. Perhaps they don't have much to say that would withstand public scrutiny.

The Sellers

You could get good advice from someone who's selling but you might not. If the advisor only sells mutual funds, will you get any recommendations to buy low-cost ETFs?

When Paid Advice Doesn't Pay

I've met advisors who wanted to give unbiased paid advice but they couldn't create a viable business model. So they added commission-paying elements like investments or insurance.

You're not keen to pay when you can get free advice elsewhere. This says the for-fee advisors haven't been able to show value for your money. To compensate, some will give you lengthy financial plans that are mainly fill-in-the-blank templates. There's more value to you if that content is online, hyperlinked and kept up-to-date. You could then get a much shorter plan — maybe one that fits on a single page and has clear action steps.

The Dilemma

Even if you're paying for advice from someone who's really good, they probably sell something related and get rewarded for referrals. Without those subsidies, the advice would likely cost you more.

The Biggest Problem

The biggest problem with free advice is compliance. Or rather, your lack of compliance. We place less value on what's free even when we agree. Here's the paradox. If you pay, you're more likely to value the advice, act and get the benefits. You then get more than your money's worth.

Links

• The elusive search for financial advice (Globe and Mail, Nov 11, 2011) 
• Where does your insurance advisor get advice? (new)
• The car mechanic: Are you paying for effort or results?
• Why financial planning is ignored
• The foolproof measure of trust
• The effect of banks selling you insurance online
• Dan Sullivan on selling your wisdom
• image courtesy of Bartlomiej Stroinski (Poland)

Podcast 144 (4:59)

direct download | Internet Archive page | iTunes

PS What do you think of my free advice?

THE HORROR OF ROGERS “ULTIMATE” INTERNET

How is your Internet access these days? We “upgraded” to Rogers’ priciest Ultimate plan 1.5 months ago and have periodic problems. The speed is inconsistent and access has been intermittent the last three days. I can’t even run SpeedTest.net. The usual steps of unplugging/replugging the equipment hasn’t helped.

Here’s another example of the risk of innovation.

Previous Plan

Our Hi-Speed Extreme Plus plan had downloads of 25 Mbps, maximum 125 GB. In August, we got upgraded to 32 Mbps and 150 GB for a few days. The faster speed made a noticeable difference and seemed "just right". In September, that became our normal plan ... except now everything seemed sluggish.

What happened?

We had a rental wireless modem for $7 per month. The range was lousy compared to our previous wireless N router. As a compromise, we turned the Rogers gear into a wired modem and connected to our own wireless router. We’ve done this for years. It works well but we were paying Rogers for wireless services we were not using and did not need.

Costco To The Rescue

While vacationing in the US in late August, we bought a Motorola Docsis 3 modem, the fastest available. The price was $75 at Costco. After returning home, we tested it for several days. The results were excellent ... until I returned our rental modem to Rogers. Service slowed down. I thought this was due to the back to school crowd or technical problems. We waited patiently for weeks.

Consequences

I called Rogers and found that we'd been put on an ancient plan with 18 Mbps and 95 GB/month. We're still paying the same $70/month but losing 14 Mbps and 55 GB per month! That's crazy. By upgrading, we ended with less. Using convoluted logic, the rep explained we weren’t paying more because of price hadn’t gone up.

This was the consequence of returning the Rogers equipment. We were not told at the time. We could only get the previous service if we were willing to pay an extra $7/month to rent Rogers equipment we clearly didn't need.

Fastest

I asked if I could upgrade to Ultimate which is 50 Mbps and 250 GB per month. This costs $100/month plus $7/month wireless modem rental plus tax. In the past, this plan required digital cable. That's a nonstarter since we don't even have a TV: we use Netflix, mobile devices and a projector.

This time, I was told that I could upgrade and did. We couldn’t get the published plan, though. We’re on a faster backbone that isn’t available everywhere. The rep put us on an unadvertised plan: 75 Mbps and 200 GB/month.  Faster is better but why chop usage by 50 GB? Google is piloting 1000 Mbps and unlimited usage via fiber optics. That’s forward-thinking.

Rogers Ultimate is inconsistent as others have reported. Sometimes great. Other times sluggish. Maybe it’s time to call tech support again.

		Speed Tests 75Mbps? VIEW SLIDE SHOW DOWNLOAD ALL

Links

• What’s up with Rogers’ high speed Internet (Ellen Roseman, moneyville.ca, Oct 21, 2011)
• Very slow Ultimate (Rogers forums)
• Ultimate super slow at Bloor/Avenue (DSLreports.com)
• The right way to view Netflix in Canada
• The folly of the Rogers/Bell attack ads
• The risk of innovation

Podcast 143 (4:53)

direct download | Internet Archive page | iTunes
PS How is your Internet access these days?

THE RISK OF FINANCIAL INNOVATION

Innovation gets overrated.

In the financial world, innovation may not be in your best interest. What looks “new and improved” may be worse. A bicycle is more stable with square wheels but (a tad) tougher to pedal.

What's wrong with solving underlying problems with proven strategies? Do you want to be among the first to use a new parachute? If your goal is peace of mind, then no.

We have the same six basic fears that Napoleon Hill identified in the 1930s. We have the same basic solutions. Why? Because they work.

Innovation is a sales strategy.

Risks

Governments are getting more aggressive in collecting tax and less lenient in making exceptions (example). Do you want to become a test case? You reduce your risks when strategies are backed by at least two major companies. This may mean waiting. You’ll still need to use your judgment. Mortgage life insurance has major pitfalls no matter how many banks sell it.

Mistakes are most likely when a new strategy is introduced. The unintended consequences can't all be known because … they're unintended.

Introducing rabbits to Australia seemed like a good idea in 1788 (Wikipedia). The subsequent innovations were a rabbit-proof fence (1901) and then the fatal myxomatosis disease (1950). There’s now a vaccine for pet rabbits but usage is illegal in Australia. That’s a lot of unneeded innovation. Rabbits never asked to go to the land of the kangaroo.

The tax rules could be misinterpreted or misapplied. If the innovation goes wrong, the accountant usually gets blamed. That’s the downside of being the most trusted advisor. If they are compensated to approve the strategy, their advice may be biased. Unless they accept incentives, their natural response is to skeptical, even of sound strategies. That can lead to suboptimal results like advice to "buy term and invest the difference" (you lose the opportunity for tax-sheltered growth) or invest only in fixed-interest investments (you save your capital but may fall behind in after-tax after-inflation returns)

Safe Innovation

In the world of life insurance, there hasn't been much innovation in years. In the 1990s, universal life insurance became the dominant product, displacing  whole life. In recent years, whole life has resurged because universal life isn't as universal as the marketing implied. Advisors do more work since you make the investment decisions. This requires more care and more skill. It's easier to sell whole life

The last major new strategy was "10-8" leveraging (now 9-7). That's from the late 1990s. CRA expressed concerns in December 2008 with threats of audits. The insurers continue to stand behind the strategy and no major accounting firm has withdrawn their support. Even so, CRA has created enough uncertainty to frighten some clients and accountants — and collect more tax.

The Real Change

Products don't change much. The major differences are in the packaging. These take the form of "strategies" (which don’t change much either). Internally, they might be called "wrappers" since the same basic products are underneath the shiny new skin.

Then And Now

When I was designing products and strategies, more seemed better. That's because advisors crave the new. Innovation was a way to get their attention. Accountants were also shown the new stuff for the same reasons.

You might watch reruns on TV or go to session after session on a topic of interest, but advisors were reluctant to attend the same presentation again. They craved the new. Many would have invested their time more productively by re-learning strategies they saw before. As the 10,000 hour rule demands, mastery takes time. Mastery takes practice.

Innovation doesn't matter much to you. As a client, you don't know what's “new and improved”. You're buying now. You're unlikely to "trade up" to the new model three years later. Even if the features are better, you'll face higher prices because you're three years older and you'll need to go through underwriting again. Guess if the criteria will be more lax? Don't count on stronger guarantees either.

Links

• The six basic fears from 1930s via Napoleon Hill
• How accountants feel about insured strategies
• Your trusted advisor:  what you like/dislike
• How CRA identifies issues that concern them (and then you)
• CRA refuses to back down on tax demand (Toronto Sun, Nov 2, 2011)
• Tax planning: The top five insured strategies
• The pitfalls of mortgage life insurance
• image courtesy of AppolloNui (US)

Podcast 142 (5:57)

direct download | Internet Archive page | iTunes

PS Outside the financial world, new usually means improved. Would you want to buy last year’s gadget?