RISCARIO INSIDER: life insurance

Showing posts with label life insurance. Show all posts

December 17, 2017

Leaving Your Employer? Get Your Insurance In Place First.

When you're leaving your employer — voluntarily or not — you have much to consider about your future. You could easily forget or undervalue the employee benefits you've been receiving.

Unless you put similar protection in place, you are transferring risks to yourself. You have other options.

Health and Dental Benefits

If you act fast, you likely qualify for Manulife FollowMe health and dental without underwriting. You need to apply and pay within 60 days of losing your current coverage (sooner is safer). You can apply for FollowMe through Costco to save money if you don't need guidance.

If you'd like better coverage with fewer limitations, consider Association plans, which are only available through advisors.

Tip: If you're out of time, get FollowMe first and then compare with the Association plans.

Disability Insurance

Your group Long Term Disability (LTD) will likely end. Personal disability insurance is worth considering if you or your dependants would be heavily impacted if you became unable to work due to a sickness or injury. The cost may seem high but the benefits are valuable.

The best time to apply is while you're still working since a discount usually applies. Upon leaving your employer, a well-constructed plan allows a special one-time top-up to replace the group LTD you're losing.

Tip: Group LTD has limitations. Consider personal disability insurance as a top-up even if you're working.

Life Insurance

You likely have a right to a short period to convert your group life insurance to personal coverage (e.g., 30 days) after your employment ends. Your employer may not emphasize this option because the insurer charges them a penalty on the assumption that some of those who convert are in below-average health. Personal life insurance is likely cheaper but takes time to put into place.

Tip: If you're out of time, convert your group life and then compare with personal life insurance.

Be Ready

When you're starting out on your own and uncertain about the future, insurance brings stability and peace of mind. Waiting until you're established brings risk.

Reminder: simplified for clarity. For specific answers to your personal questions, arrange a private chat.

February 28, 2015

WHY DO I NEED INSURANCE? | QanA #1

This blog is switching to a video-first format with a new YouTube series called Question an Actuary (QanA). You can read the transcript (this blog post) or watch the video (embedded at the bottom). You lose nothing and get more choice.

Question: Why do I need insurance?

Answer: Because bad things happen. Even if you’re good. Even if you prepare. Insurance transfers risk.

You — yes you — always have insurance. Even if you don’t want any. How good is your protection?
As a minimum, you are your own insurance company. This is called self-insurance. You transfer the risk to yourself. You might set money aside in a bank account for the projected claims. For instance, you could build a fund to repair broken appliances or to cover expenses during a disability. Self-insurance is riskier if you live alone by choice or because a til-death-do-us-part relationship collapses.
Beyond this, you have OPM: Other People’s Money. That’s terminology from The Millionaire Next Door by Thomas Stanley. Here you transfer the risks to others, often family. Parents, grandparents, siblings. Your rich aunt or uncle. They may willing and able to help. Don’t count on them being happy, though. You may pay them back in other ways: they now have power over you … and may like reminding you and anyone else who listens about their generosity. Charity begins at home. Arguments too.

You may be able to transfer some risks to your employer. Perhaps basic medical, dental, disability and life insurance. Employers often dislike self-insurance and transfer some risk to an insurance company. Employers often pay some or all of the costs. Whoever pays decides what you get. Insurance from your employer is called group insurance.

There’s another source: an affinity group where you're not connected by work. You could qualify through an alumni association, professional association or other group. Do you think affinity groups self-insure? At work, you have no say in what you get. Same here. At work, your employer helps with the costs. With an affinity plan you pay every penny — rarely guaranteed. Part of your premium goes from the insurance company to the affinity group. Employers don’t usually add a markup since they're already profiting from you.

The next stage is personal insurance. This you buy from an insurance company. Now you’re in charge and pay the premiums, which may be guaranteed. The protection stays with you if you change jobs voluntarily or involuntarily. Here you pay the stipulated predictable premiums. In exchange, you get a contract which states the benefits you get.

Insurance companies don't like self-insuring. They transfer risk to re-insurers who may transfer risk to retrocessionaires.

The insurer of last resort is the government. You may think they self-insure but we taxpayers pay. You may think you’re entitled to benefits because you pay taxes. Other taxpayers may not agree. Also, you don’t have control over what’s available. Rules change.

Do you need insurance?

Yes. The question is who insures you. Since we’re not good at assessing risk, we tend to be optimistic. That’s why people buy lottery tickets and get remarried.

We don’t need car insurance because we’re safe drivers. We don’t need disability insurance because we’ll remain healthy (or think we have enough coverage from work). Who needs long term care insurance? If we need money, we can borrow against the growing equity in our house (if the banks are still lending) or get help from our kids (which means a smaller inheritance for them). There’s the government too. We paid taxes for ages. They owe us!

What if you’re wrong? That’s when you’ll truly know if you need insurance. That’s also when you can’t get any. Sorry. Insurance companies also bet. To minimize their claims, they want low risks. If you’re eager to buy, they’re suspicious. Do you know something they don’t?

Even if you have insurance, you might find you don’t have enough if you have a claim. And feel you have too much if you never have a claim. Maybe something is better than nothing?

If you never have a claim, would you like your money back? This option is sometimes available for an additional cost. The refund takes place at cancellation or death. It’s as if you earned a zero percent return. You’re protected whether you have a claim or not.

You always have insurance. Have you explored your options and optimized your decision? The best time is now.

Do you need insurance? What do you think? Share your thoughts and ask your questions below. For private personal attention in Toronto, reserve time to Learn About Life.

Reminder: These answers aren’t a substitute for personalized financial advice. The general information isn’t tailored to your unique situation.

December 14, 2014

UNDERSTANDING THE INGREDIENTS OF LIFE INSURANCE (TERM AND PERM)

Michael James wrote a thoughtful post comparing temporary (term) life insurance and permanent life insurance. Like our canine friends above, both are similar, yet different. The best choice depends on different factors. A winner on one scale loses on another. As Michael’s analysis shows, comparisons can be misleading or omit important elements (like inflation).

Typical Plans

A temporary plan like Term 10 is often

renewable to extend coverage for another 10 years for a higher-but-guaranteed premium
convertible to permanent insurance without underwriting up to a maximum age

Since a permanent plan lasts for life, there’s no need for renewal or conversion options. Here are typical plans.

Temporary Life Plan	Permanent Life Plans
Term 10 (renewable, convertible)	Term 100
Term 20 (renewable, convertible)	Whole Life
Level term to age 65	Universal Life

We won’t be looking at which form of insurance is better. We’ll be looking at how they’re different.

First Principles

Mortality rates underlie all life insurance. The mortality rate is based on the true probability of someone like you (same gender, age, smoking status and health) dying during the year. Your mortality rate increases annually because you’ll die eventually (based on current medical science and how we define life).

Your retail premium rate is based on your wholesale mortality rate with margins added for expenses and profits. Your premium is the premium rate multiplied by how much insurance you’re buying. There may be additional loads for premium tax and Investment Income Tax (IIT).

One Year At A Time

When you buy insurance, you are getting one year of protection at a time.

Comparing With Property Insurance

With your car and home insurance, the insurer will usually offer you coverage for another year under similar conditions. Your new premium depends on factors such as their claims (actual vs. projected), expenses (actual vs. projected), investment earnings (actual vs. projected), capital requirements and profit targets.

The insurer could refuse to insure you next year or change the contract provisions (e.g., weaken protection for water damage). You could decide to switch companies.

The Additional Guarantees With Life Insurance

Life insurance also protects you a year at a time but usually

you have the right to renew your coverage until a maximum age (even if the insurer stops new sales)
your premium rate scale is fully guaranteed (e.g., you keep your nonsmoker rates if you start smoking or stop exercising in the future)
your insurer can’t modify the contract unless the change is an improvement

You get this extra protection because you may not be able to switch insurers if your health has deteriorated. You might even become uninsurable.

Yearly Renewable Term

The building block of all life insurance is Yearly Renewable Term (YRT), which is sometimes called Annually Renewable Term (ART).

Do you see the problem?

Your probability of dying during the year increases from 0.01% to 1% to 10% to 80% to 100%. This means your YRT rates will increase every year and become increasingly unaffordable as claims becomes more likely. That’s not good for you or your beneficiaries.

There is a solution: prefunding. Suppose you need insurance for 22 years. You could average the premiums and put that amount into a savings account every year and make withdrawals to pay the YRT premiums.

You could have the insurer invest for you instead. With Term 10 life insurance, you pay a level premium for 10 years at a time. The insurer does the averaging and bears the investment risk. At the extreme, Term 100 life insurance has a level premium for life (and is really permanent insurance and often continues beyond age 100 without further premiums).

Whole life insurance uses YRT rates (which might not be guaranteed). Universal life usually offers two guaranteed scales: YRT and LCOI (Level Cost of Insurance).

Start With The Need

Is your need for insurance temporary or permanent? If you’re addressing the risk of dying while you have financial obligations (e.g., children, a mortgage, a spouse or ex-spouse, other family members), life insurance is the ideal way to create or enhance your estate — if you’re insurable. How else can you get a specified tax-free lump sum at death?

For a temporary need, term life insurance is ideal. You get the most protection for the lowest price.

What If You’re Wrong?

A need which initially looks temporary may last longer than you expect. For instance, a child may have a lifelong disability due to an accident. If you guess wrong, term life insurance gets expensive. You can often renew coverage up to a maximum age without underwriting but the premiums shoot up each time.

Compared with renewing, you may be able to save money by buying a new term plan with new underwriting.

Conversion

Term life insurance often allows you to convert to permanent protection without underwriting up to a maximum age (e.g., 65). You pay the premiums for your age at the time of conversion (your “attained age”).

Example: Suppose you buy Term 10 at age 32. If you convert eight years later, you pay the permanent premium for a 40 year old. This will be more than the permanent insurance premium at 32 and may be more than what a newly underwritten 40 year old would pay for permanent insurance.

Why Permanent Insurance?

You might want permanent life insurance for estate planning. You may not see the need now because you’re not thinking of your legacy. Maybe you will in your 50s or 60s.

The tax-free insurance proceeds can be an inexpensive way to pay taxes at death, leave money for heirs or help a charity. Coverage is available in a cheaper form called Joint Last To Die (JLTD), which insures you and your spouse. The money gets paid when the longest living spouse dies. That’s when the bulk of taxes are due.

Some younger people buy a small amount of permanent insurance for their legacy and a large amount of term insurance for their temporary needs.

An Appreciating Asset

Why does permanent life insurance have a savings component? Further, why do the savings grow on a tax deferred basis? The government doesn’t give valuable advantages without reasons. There are ways you can benefit with planning.

Permanent life insurance grows in value every year because the payout becomes more likely — especially if your health has deteriorated. Your insurance contract could easily have a market value which is much higher than the cash surrender value. An investor may want to buy your contract, pay the future premiums and get the death benefit. That’s called a life settlement. They are legal in the US and several Canadian provinces (but not Ontario).

Permanent life insurance gives you the opportunity for tax-deferred savings. Universal life provides the most guarantees, flexibility and transparency. You could

invest more (limited by the Maximum Tax Actuarial Reserve (MTAR))
select the investments
stop paying premiums (e.g., in 20 years or at age 65), though not always guaranteed

Having more options helps with tax planning, especially for incorporated businesses.

Affordability

You can offset the cost of your insurance by reducing your coverage as

your financial responsibilities drop (e.g., children older, mortgage smaller, spouse’s income)
your assets grow (e.g., savings, pension)

Before you do, consider inflation which decreases the value of money. Also, your financial obligations could grow (e.g., new children, divorce, health issues).

Conclusion

Temporary life insurance gets compared with permanent life insurance but both cover different needs and timeframes. Since advisors get paid much more for selling permanent insurance, they may have biases they don’t even realize. Explore different scenarios before deciding and re-evaluate your needs over time.

For general questions, ask below. I'll answer what I can here or on Question an Actuary (QanA). For personalized answers, reserve time to Learn About Life.

November 8, 2014

WHAT IF INSURANCE WERE FREE?

If insurance were free (and there were no catches), how much would you get?

You might

top up your current coverage (e.g., more life insurance)
protect against risks you’ve neglected (e.g., critical illness insurance)
explore types you don’t know much about (e.g., long-term care insurance)

You might be willing to go through the hassle of the buying process. You might encourage your family and friends to follow your path.

Maybe you wouldn’t do anything what’s free (e.g., air) doesn’t seem to be worth much.

Sale Prices

If insurance were on sale, how much would you get? Your answer might depend on the size of the discount. If large enough, you might even buy protection you’ve refused in the past.

What if there were a one day sale? Would you buy then? Insurers avoid discounts because insurance isn’t an impulse purchase. Instead, they tend to have competitive “every-day” pricing. That’s to encourage advisors to consider their products. They may have contests to motivate advisors but you’re unlikely to know.

You don’t gain by waiting to buy. Even if your health and gender don’t change, you’re getting older. Your age affects the price you pay. Also, newer products don’t mean better guarantees.

Reducing The Price

You can’t save money by buying half an iPhone. You can save on insurance by buying less coverage. Granted, you get less protection but is no coverage better? Since insurance requires ongoing maintenance, you can re-evaluate your situation during a future inspection.

Insurance costs more as you age and even more if your health deteriorates. You reduce the future price by acting today. When the asset being protected is a human life, the premiums can often be guaranteed for life.

The Limits

A billionaire bought a record $201 million of life insurance, which required 19 insurers and an annual premium in the millions of dollars. Why not more? There are limits on how much insurance you can get even if you can pay.

Underwriters determine what you’re worth. Let’s say that’s $5,000,000. You’ll have trouble replacing more than that. If you try to buy $2,000,000 from five companies, don’t count on getting $10,000,000 of protection. That’s because each company will ask about your other insurance you already have and are in the process of getting.

Real Life

Insurance isn’t free. There’s no Boxing Day, Black Friday or Cyber Monday sale either. Insurance may look like a luxury or waste until you need it. Unfortunately, you can’t buy insurance at moment before misfortune strikes --- at any price.

Links

PS It’s currently Financial Literacy Month. Follow #FLM2014 on Twitter.

July 7, 2014

WHY DO YOU CARE WHAT YOUR INSURANCE ADVISOR GETS PAID?

Life insurance offers solid protection and powerful tax advantages when properly implemented. If buying puts you in a better position, why does the amount of money your advisor gets matter? Logically it shouldn’t. Emotionally, it does.

We Balk At The Unfair

We have an innate sense of fairness from birth. Give a child a cookie and they’re happy … until they see another kid got two.

Let’s say a stranger and you can share $10. The stranger decides on the split. If you’re not satisfied, both get nothing. If you were offered $1, you’re still ahead but would you let the stranger keep $9 (a 10/90 split)? Maybe you think a 50/50 split is fair but would accept 30/70. If you don’t get enough, maybe you’d cancel the arrangement leaving each with nothing. That’s what happens in the Ultimatum Game.

The Insurance Dilemma

Now suppose you don’t know how much money is available. You might might reject $7 if you think the stranger has more than $10 to share. Perhaps the stranger has $20 or even $100 to split.

With insurance, the products have margins built in. Advisors and buyers don’t know how much. Insurers decide on the split in value between the advisor and you. As the advisor gets more, you get less. Insurers who sell through independent advisors must pay compensation similar to their competitors. Otherwise, advisors are tempted to sell products from other companies (even if inferior).

You can’t tell if you’re getting an optimal deal since you don’t know what’s possible. There are different types of products (e.g., term, whole life or universal life), different companies varying in corporate governance and different ways to structure strategies. You only know what the advisor chooses to show you. You don’t know what factors influenced the selection.

Secrecy

If you paid your insurance advisor directly, you could compare what you’re spending with the value you’re getting. The industry fears you wouldn’t pay as much as advisors want. Their solution is to hide the compensation inside the products.

The lack of transparency has a side effect. You may think your advisor gets paid too much.

You probably don’t know what your peers earn and advisors don’t know what other advisors get paid. Compensation can vary by distribution channel (captive agents vs independent advisors vs national chains). While commissions are standardized within a channel, insurers pay varying bonuses (called “overrides”) to intermediaries called Managing General Agents (MGAs). In turn, these MGAs keep a small portion and pay the rest to the advisors contracted through them. Since top MGAs and top advisors get more, the rest get less. That seems fair — pay for performance.

Perceived Value

Becoming an insurance advisor requires little more than passing a multiple-choice exam. People who invested heavily in their careers — say by going to university, getting a professional designation or achieving financial success — may resent advisors making lots on a sale.

Sales success comes more from prospecting than technical skills.

Advisors who’ve been in business for 10+ years know how to sell. They look and act trustworthy. Appearances aren’t evidence of product knowledge or signs that you’ll get ongoing service. Advisors might keep selling what they’re used to selling rather than mastering better options.

When you have doubts about value and fairness, maybe you need more information?

Links

PS When you fill out an insurance application, your advisor finds out what you're paid and what you're worth.

May 24, 2014

IS YOUR INSURANCE POLICY AN ABANDONED ORPHAN?

It’s not your fault.

If your insurance advisor becomes unwilling or unable to provide service, you have an orphan policy. What happened? The causes vary. Advisors might:

leave the business: do something else or retire
switch firms: prohibited from taking the clients
stop doing business with an insurer: might lose their contract
have poor processes: makes servicing more difficult
avoid conflicts: the policy may have under-performed and created friction
prefer selling: dislike providing service

Whatever the cause, you pay for service you no longer get.

An Overlooked Cause

Your advisor may be active in the insurance world but is that enough? You might be on the path to the orphanage without knowing. The changes take place gradually as the service you get drops and possibly stops. You’re not alone.

Since life insurance usually pays most of the compensation at the time of sale, there is no strong financial incentive for advisors to provide ongoing service. Some products are “lapse-supported”, which means the insurer makes a profit when you cancel. Who’s on your side?

Another complication

Some insurance policies are “vested”. That means the old advisor keeps getting paid even if they tell the insurer that they won’t provide any more service. This arrangement protects that advisor at your expense. Why would another advisor help you for free?

There’s another possibility. Your old advisor may sell policies to another advisor (e.g., for two or three times the renewal compensation). Now your new advisor has more incentives to pay attention to you.

What Makes You Valuable?

The main reason you’re valuable to a new advisor is for new business. That’s reasonable. Beside life insurance, people often need more protection against the costs of

disability (unless you’re retired)
critical illnesses
long-term care (especially during retirement)

Even if the advisor isn’t paid, you may like the service enough to provide referrals.

Tip: Be wary if the new advisor attempts to replace your current coverage with new policies. That leads to more compensation but you may get better results by modifying your current policies.

The Transition

If you’re transferred to another advisor, how would you know? The insurer and your old advisor may not inform you. If you get a letter from a stranger claiming to be your new advisor, how can you be sure?

You can check them out online (e.g., LinkedIn) and chat on the phone. You might phone the insurance company. When you’re satisfied, why not meet? Insurance requires maintenance. Your new advisor may be more diligent and consistent than the old one.

March 23, 2014

WHY BILLIONAIRES BUY LIFE INSURANCE

If I had a million dollars, well, I’d buy you an exotic pet. Yep, like a llama or an emu. — Barenaked Ladies

If you had a billion dollars, you could buy a whole zoo. Or $201 million of life insurance. That record-breaking purchase happened in California. The premium is about $2 million a year but cost-effective — perhaps even a bargain.

Self-insure?

Billionaires have the money to insure themselves to

pay medical expenses: no need for medical expense insurance
offset the costs of life-changing diseases: no need for critical illness insurance
replace income if unable to work: no need for disability insurance
provide lifelong income: no need for life annuities

Some afflictions have no cure at any price (and hence no insurance). RIP Steve Jobs (pancreatic cancer) and Warren Buffett’s wife Susie (oral cancer).

Life insurance is different. Large amounts are available and there is no substitute. Even so, why would a billionaire buy coverage?

Maintain Privacy

Life insurance protects the privacy of the buyer. Despite the media scrutiny, the owner of the $201 million of coverage remains anonymous. We know the gender (male) but not the age. The seller is ‘not legally permitted to disclose the name of the billionaire buyer but said it was a well-known Californian tech investor’ (Forbes). The insurers can’t say either. We wouldn’t have known about the purchase if the buyer hadn’t given permission for limited disclosure.

Since death benefits rarely through an estate, the beneficiaries need not be identified.

Have Flexibility

The beneficiaries are not notified until the time of a claim. This allows the buyer to change the beneficiaries and how much each receives.

The buyer can cancel or adjust the amount of coverage. In the case of the $201 million of coverage, the owner says that "he wants his next of kin to keep working hard" rather than waiting for a payoff.

The owner can reduce flexibility by making the beneficiaries irrevocable. This may be required upon divorce.

Save Or Grow A Business

A growing business may need outside money from lenders or investors. Those supporters want some assurances. The business might collapse upon the death of a key person like the owner, especially in the early years.

Ted Rogers is an excellent example. His dad died when Ted was only five: "He didn't have a lot of life insurance at that age, so the businesses were sold or shut or stolen."

In building Rogers, Ted borrowed from banks many times. They required he
have life insurance payable to them as protection. Term life insurance is ideal here --- the most coverage for the lowest price. Later, the temporary coverage can be made permanent for tax planning and estate planning.

DiversifY

You can put all your eggs in one basket and have that basket watched 24 hours a day. That doesn't mean problems won't arise. That basket may not be diversified. Billionaires have lost their fortunes (e.g., Allen Stanford, Sean Quinn, Patricia Kluge). Celebrities have gone broke too (e.g., Abraham Lincoln, Mike Tyson, Michael Jackson).

A solution is to invest in different classes of assets. Permanent life insurance allows, tax sheltered growth, tax-free access via leveraging and a tax-free death benefit. The payout is a predetermined amount at an unpredictable time (death). No other asset offers these characteristics.

Investments inside insurance may fluctuate and lack guarantees. That's true of investments outside life insurance too. However, permanent life insurance keeps growing in value because the date of death keeps getting closer. Can other investments make that claim?

What if an insurer goes bankrupt? There may be protection in those cases (e.g., by Assuris in Canada or a state government in the US). The risks are reduced by spreading coverage over multiple companies. The $201 million of coverage is spread over 19 insurers, each at risk for less than $20 million.

Pay Estate Liabilities

At death, large sums may be required to pay taxes and other obligations such as loans. Permanent life insurance is often the cheapest, fastest way to get cash for those liabilities. Also, there’s no need to have a rush sale on assets at an inopportune time. As a result, more of the estate gets preserved.

Caveats

Life insurance is only available to the healthy. The unhealthy pay more (e.g., smokers). Sometimes the risks are so high that no coverage is available at any price.

There are limits to how much coverage is available on one life. Maybe $201 million is less than the buyer wanted. Insurers want to prevent incentives for

murder (example the ‘professional hit’ on Claude Dray)
suicide (George Bailey in It's A Wonderful Life?)

If the coverage gets cancelled before death, there won't be a payout. It helps to earmark money to pay future premiums.
If affording the life insurance becomes a problem, some jurisdictions allow the sale of the policy to an investor. These life settlements get icky because the buyer gets a higher return the sooner the death.

Surprises

Apparently, the advisor behind the $201 million of insurance (Dovi Frances) didn’t get paid a commission. The firm (SG LLC) “charges clients a flat (and one can assume, steep) annual fee for advisory services ranging from asset management to alternative investments.”

The advisor got the client 4-5 years ago through a direct mail campaign.

Smart

Billionaires have access to excellent advice from top advisors. They do buy life insurance. How about you?

Links

PS There may be larger life insurance coverage on billionaires who value their privacy more than a Guinness World Record.

March 2, 2014

BUYING A CAR VS BUYING LIFE INSURANCE

You’re probably more familiar (and interested in) getting a car than getting life insurance. Let’s compare key elements of both decisions.

The Research

You’ll find lots of information when shopping for a vehicle. There are lots of reviews and comparisons online. You’ve seen the vehicles on the road. You can take test drives. You can visit more than one Toyota dealership and also try other brands.

Life insurance is very different. You’ll find very little information online. Where is the Build Your Own option to configure your insurance, estimate costs and compare companies? You won’t see what other people have and the products are complex. These factors nudge you towards advisors but do advisors help with your financial literacy?

Related: How would Mike Holmes fix the financial sector?

The Price

The price you pay for a vehicle depends on factors such as demand and your negotiation skills. There are often specials which expire at the end of the month. Repeat customers might get loyalty bonuses.

With life insurance, your premiums depend on you (age, health) and your advisor (skills, companies represented). You’re usually required to buy at list price, which means you don’t need to worry about negotiating. Choosing a different advisor won’t cut the price.

Depreciation

No matter how shiny or well-maintained, a vehicle drops in value. Resell the day after you buy and you’ll take a loss.

Life insurance becomes more valuable each passing day because the probability of a claim keeps increasing. Permanent insurance will pay a benefit one day. Temporary insurance may not for two reasons. We’ll use Term 10 as an example:

Premium increase sharply every 10 years when you renew coverage.
Coverage ends at an age like 75 before claims are most likely.

Maintenance

Vehicles have maintenance schedules you’re encouraged or forced to follow. You might get a gentle reminder each time you start your engine.

Don’t count on a prompt to update your life insurance, regardless of how long since your last inspection or how your life has changed. Advisors earn more from selling than servicing.

Surprises

The cost of repairing and maintaining a vehicle increases every year. You never know what surprise is lurking. The biggest risks lie outside the warranty period when you’re liable for the full cost and suffer the full inconvenience.

Life insurance requires some maintenance too. As long as you keep paying the premiums, you don’t need to worry about breakdowns. Your coverage may not remain suitable for your evolving needs. You’ll probably need help from a suitable advisor to explore your options.

Related: What happens if my life insurance company goes out of business?

The Nudge To Buy

There are lots of incentives to get another vehicle. The repair bills on the old one might start stacking up. Perhaps you visited an autoshow or saw an intriguing ad. Your lease might be ending. Maybe a friend or neighbor got new wheels.

There isn’t much pressure or motivation to buy insurance. These days, life changing events no longer trigger insurance purchases (e.g., marriage or the birth of a child). We have “tax season” and “RRSP season” but no “insurance season” (though the US has Life Insurance Awareness Month each September with celebrities like Boomer Esiason, the Cake Boss, Lamar Odom and Leslie Bibb). It’s easy to delay buying insurance.

Preowned

You might save money by getting a used vehicle. You save on depreciation but face higher maintenance costs and don’t know how long your ride will last.

You can’t buy used life insurance because the coverage is personalized to you. You can save money by getting coverage that’s temporary rather than permanent — like leasing instead of buying.

Reselling

You can sell your vehicle for cash. The value keeps going down with age and condition.

Permanent life insurance grows in value after purchase. You might be able to cancel your coverage and get some money back. If legal, you could sell your coverage to an investor (a “life settlement”), though it’s creepy to know the buyer gets a higher return the sooner you die.

Finding The Money

A vehicle is expensive. Where do you find the money? We’re good at getting what we want by distorting our spending. Perhaps more money for a car means less dining out or road trips instead of flights.

Life insurance gives you peace of mind but you can’t touch that. We don’t think anything will happen to us, which makes insurance premiums look like a waste.

Changing Your Mind

“Unlike most other contracts, vehicle purchases are binding once signed, and can only be cancelled under certain conditions.”
— Office of Consumer Affairs

Buying a vehicle gets emotional and the advisors have ways to add to the pressure. Once you sign the contract, try changing your mind. It doesn’t look like you can unless you got a lemon (which you won’t know until later).

Life insurance is different. You have a 10-day free look from the time you take delivery of the insurance contract. You can change your mind for any reason without penalty.

The Biggest Difference

For many, getting a new vehicle is exciting and even the search is enjoyable. New wheels might be a necessity. Heated seats, navigation and great sound aren’t but make driving more pleasurable.

Getting life insurance isn’t like that at all. The first challenge is finding an advisor who will help you and nudge you to take action.

Links

PS Do you have better insurance on your tires and rims than on your life?

January 18, 2014

YOU BUY LIFE INSURANCE WITH YOUR HEALTH

Disaster-proofing your life is the foundation of financial success, according to Preet Banerjee (and me). That means protecting your biggest asset: your future income. You need insurance for disability and death. Getting coverage takes more than money.

You buy insurance for the four financial risks with your good health. If you're in poor condition or have harmful habits like smoking, you pay higher premiums. No law forces an insurer to cover you. In extreme cases, you can't get coverage at all. That’s when you most need protection.
How do you get the health insurance or life insurance which you and your family need? Here are three strategies that work alone and together.

Buy young
Buy more now
Stay healthy

Buy Young

You tend to be healthier when you're younger. That means it's easier to qualify for insurance. You also pay lower premiums since you’re less likely to make a claim. The price always go up because you're getting older, even if you get healthier.

Younger people tend to ignore the savings available to them. Perhaps they have less money, a smaller perceived need for insurance and other priorities.

Buy More Now

You can always reduce your coverage but can't always add more later. You face new underwriting each time. The testing is becoming more sophisticated too. Future prices are always higher because you're older.

If you buy more coverage now, you have better protection and reduce the need to add more insurance later. Even if you have lots of money, you're limited in how much protection you can buy. To be prudent, insurers limit the amount of coverage for which you qualify.

Exception: you might be able to add a “guaranteed issue” option to buy more insurance later with no questions asked about your health. This flexibility is especially helpful with disability insurance since you’ll likely want more coverage as your income increases. (You can also add options to offset the effects of inflation.)

Stay Healthy

Since we can't predict the future accurately, we can't anticipate all our changing future insurance needs. If you're healthy, you can apply for more coverage later. You also enjoy a better life.

Maybe you're in the midst of improving your health (e.g., by stopping smoking). Don't wait to buy insurance. You can apply for lower premiums later. In the meantime, you're protected.

Health is wealth. Health is the price you pay to qualify for insurance.

Links

PS Get help with your insurance at Taxevity.

January 12, 2014

DISASTER-PROOF YOUR LIFE: THE FIRST RULE FOR FINANCIAL SUCCESS FROM @PreetBanerjee

“Most people don't want to learn and read about money but we must to a certain extent.” — Preet Banerjee

Preet Banerjeee quit his job the day after we first met. That’s coincidence. He was an investment advisor for a bank and I did advanced marketing for a life insurance company. We also met just before he started writing for The Globe and Mail, while he was filming Million Dollar Neighborhood, and other times too. He’s followed a squiggly career path.

The financial sector is filled with two kinds of people: salespeople (know how to sell) and technicians (understand what’s being sold). Preet stands apart. He’s very likable. Even better, he has a deep insider understanding of how the financial sector works, provides objective advice and says what needs to be said.

Stop over-thinking and get Preet Banerjee's book at Amazon.ca

Preet spoke at Rotman about his new book. I already read and recommended Stop Over-Thinking Your Money: The Five Simple Rules of Financial Success (review on GoodReads). I attended to support him. The quotes in this post are from his live talk and have been lightly edited for readability.

Rule #1: Disaster-proof Your Life

“The risk of running out of money is important and something you need to address. But if retirement is potentially 40 years away, there are a lot of risks that exist between now and then. Your future income is your single biggest asset.. Protecting it is one of the most important things you can do.

What are all the different ways you can lose that income?

If you die, clearly you're not going to have any income and your family's lifestyle may be put in jeopardy
If you become disabled, you're going to lose your future income
If you lose your job, you're going to lose your income"

How true.

1. Life Insurance

“Life insurance is boring if you are not in the industry. Even if you're in the industry it's pretty boring.”

I find insurance exciting, but I’m an actuary. What else provides a predictable lump sum tax-free at an unpredictable time of need? That’s peace of mind. I designed products, helped advisors sell them and use that insider knowledge to help the public review their protection.

We’ve changed. We understand the consequences of dying with financial obligations remaining but don’t always prepare. Term life insurance is inexpensive but life-changing events no longer trigger insurance purchases. For instance, the birth of a child creates expensive responsibilities. Yet 60% of parents don’t get life insurance within two years of their family addition. Does that surprise you? Maybe there are challenges affording the insurance.

If you’re single and without dependents, you might think you don’t need life insurance (but read this). Regardless, you likely agree you need insurance to replace your income if you become disabled.

2. Disability insurance

Disability insurance is complicated (see the guide to disability insurance, which includes links to an article and video by Preet). If you work for a company, you may think you have proper coverage. How do you know? Products are complex and life insurance literacy remains low.

How do you do you gauge

the stinginess of the definitions
the generosity of the benefits
the quality of the guarantees

At work, you’re stuck with group coverage, one of the two types of insurance you can’t own. That puts you at risk because your employer has full control and likely wants to reduce expenses.

Your benefits aren’t guaranteed even if you pay part of the cost. Remember Nortel? The long-term disability insurance covered 50% of pre-disability income. Would that be enough? Many employees didn’t think so and topped up coverage to 70%. Unfortunately, Nortel went bankrupt leaving the 357 disabled with only 35% of their expected benefits. Could you live on that? How would you feel knowing that lawyers and other professionals have already received over $1 billion in windup fees?

If the Nortel employees got independent advice, they might have purchased personal disability insurance that Assuris guarantees will pay at least 85% of the promised benefits if a member insurer goes bankrupt.

If you’re self-employed, don’t you need disability insurance too?

3. Job Loss Insurance

You can’t buy job loss insurance. That doesn’t stop you from taking precautions to bulletproof your career, following the eight steps to getting a job today or taking a Krypton course.

You can self-insure against job loss by establishing an emergency fund once you decide on the right size. Yet 45% of Canadians have no savings for emergencies. How’s that for optimism?

Act

Knowing isn’t doing.

Disaster-proofing your life isn't glamorous. The process takes time. Preet tells readers to get started by contacting suitable advisors immediately: “Put down the book and book the appointment. You do not know when these [unpredictable] things could happen. Do it. Get the ball rolling.”

An author telling us to stop reading? At least Preet didn’t tell us to leave his talk. That’s advice we would have ignored. What advice will you act on?

January 4, 2014

THE 2013 POSTS FROM RISCARIO INSIDER

Here are all 51 posts from Riscario Insider from 2013. You can select them by image or by category.

By Images

The title of the post shows when you hover your cursor over the image. Click to read the post.

THE BEST AND WORST TIMES TO CANCEL YOUR LIFE INSURANCE

IS YOUR LIFE INSURANCE LIKE A SHOVEL, SNOWBLOWER OR SNOWPLOW?

IF YOU HAVE/HAD/WANT MONEY, READ ‘POUND FOOLISH’

FIGHT BACK AGAINST CORPORATE TRICKERY WITH ELLEN ROSEMAN’S INSIDER TIPS

BLACKBERRY’S CONFUSING MESSAGE AT THE 2013 TECH LEADERSHIP CONFERENCE

BUDGET 2013 PUNISHES THE INNOVATION OF “10-8” INSURED LEVERAGING

THE BATTLE BETWEEN TEMPTATION AND PERSONAL RESPONSIBILITY

DO YOU HAVE A FINANCIAL DREAM OR A FINANCIAL NIGHTMARE?

THE UNWELCOME LESSON FROM THE RBC-iGATE SAGA

LIFE CHANGING EVENTS NO LONGER TRIGGER INSURANCE PURCHASES

TIPS FOR FIRST-TIME LIFE INSURANCE BUYERS

(MAILBAG) SWITCHING INVESTMENT ADVISORS: BAD TO WORSE?

SHOULD YOU CHANGE ADVISORS WHEN YOU MOVE?

HOW TOM HANKS GOT CHEATED BY HIS INSURANCE ADVISOR

CHOCOLATE, PRICE-FIXING AND SALMONELLA POISONING

ULTIMATE UNLIMITED INTERNET? HOW ROGERS FOOLED US THREE TIMES

HOW WOULD MIKE HOLMES FIX THE FINANCIAL SECTOR?

WHY ARE WE FLOODED WITH BAD WEATHER FORECASTS?

HOW HONEST ED TURNED $212 INTO $100 MILLION

CTRL ALT DELETE: MITCH JOEL’S EIGHT STEPS TO GETTING A JOB TODAY

A REVIEW OF ROGERS UNLIMITED INTERNET (AND HOW TO USE IT)

HANDCUFFED: COMPARING MOBILE PHONES AND LIFE INSURANCE

HOW TO GET YOUR ROGERS INTERNET WORKING OVER WIFI

AT AGE 7, BOOMER ESIASON LEARNED NO ONE IS GUARANTEED A TOMORROW

CASE STUDY: SELLER BEWARE vs BUYER BEWARE

#KRYPTONTUESDAY: JOIN A GENUINE INNOVATION IN FREE LIFELONG EDUCATION

MONEY 50/50: THE PERFECT LIVE EVENT TO MASTER YOUR MONEY

NETFLIX FOR LEARNING: UNLIMITED ACCESS TO eMAGAZINES, eBOOKS, AUDIOBOOKS

HOW TO TELL IF YOUR ADVISOR IS INDEPENDENT

HOW TO SCREEN YOUR SOURCES FOR FINANCIAL LITERACY EDUCATION

WILL YOU HAVE FINANCIAL FREEDOM AT 35, 55 OR 75?

THE WEALTHY BARBER RETURNS WITH MORE WISDOM

By Category

You’ll find all the 2013 posts arranged by category and then in chronological order.

Advisors

Behavior

Careers

Insurance

Financial Planning

Health

Money

Tech

Trust

Miscellaneous

That’s 2013. The Riscario Radio podcasts stopped after 250 episodes. Look for more video instead — though not weekly!

PS Thanks for reading for another year.