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.
Steadyhand Investment Funds sells no-load low-fee mutual funds directly to investors.
They've prepared an easy-to-read report called Five Essential Elements To Being A Better Investor (PDF). The focus is on sound, timeless basics rather than trendy quick-fix tips.
You can also watch my chat with David Toyne, their Toronto-based Director of Business Development on Tea At Taxevity (interview #20).
An Extension
The steps to becoming a better investor also apply to becoming better insurance buyer. The following list shows the Steadyhand recommendation in bold and my interpretation for health or life insurance in italics.
Have a long-term plan:prepare for your financial risks during your working years (disability), retirement years (longevity), throughout (morbidity, mortality) and at death (taxes!)
Commit to a routine:if your insurance gets cancelled because you missed premium payments (e.g., cheques bounced during a long vacation), you lose your protection.
Prepare for extremes:that’s precisely what insurance does by transferring unpredictable financial risks from you
Act as the CEO of your portfolio: be proactive to make sure you get the service for which you're paying. Without regular checkups, you risk having the wrong amounts of insurance and perhaps the wrong types of insurance.
The Steadyhand report is well-worth reading. You might even want to invest with them.
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?
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.
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.
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
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.
Because my dad didn’t have any life insurance, I had to drop out of high school to run the family business. I worked 12-18 hours a day, six days a week. I was the first one in and the last one to leave. — Buddy Valastro
It’s Life Insurance Awareness Month once more. This year, the ‘Cake Boss’, Buddy Valastro, shares his experience. Buddy’s father died three weeks after getting diagnosed with lung cancer caused by smoking. His dad was 54. Buddy was only 17. (In contrast, my son is 18 and left home for university last week).
Watch Buddy explain in his own words. Restrictions prevent the video from being embedded. Here is the link (opens a new window).
Why Not?
Why didn’t Buddy’s dad have life insurance?
Maybe he thought he didn’t need any because he had a business. Maybe he didn’t “believe” in insurance. Maybe he hadn’t found an advisor he could trust. Maybe he didn’t think he could die so young. Maybe he was procrastinating. Maybe he thought the coverage was too expensive.
What’s certain is the unnecessary damage caused.
The family persevered but imagine what they went through. The business could have failed. Buddy may have lacked the skills or interest to run it. Life insurance would have make a big difference.
The Tragedy
It turns out that Buddy’s father had life insurance until shortly before he died.
The irony of the situation is that my dad owned life insurance for many years. When my family started having kids, my dad bought life insurance but about six months before he was diagnosed [with cancer], his policy expired and he didn’t renew it.
I’m not exactly sure why. Cost might have been an issue. My dad was 54 years old and he smoked. So coverage was getting more expensive. He was also a very busy guy and probably thought it was something he could do later.
Whatever the reason, if there had been life insurance, I know things would have been a lot easier. I could have hired more staff, worried less and had a little time to grieve. — Buddy
Insurance only helps when it’s still in effect.
Buddy’s Buddy
Because of my experience, I bought life insurance as soon as my first child was born and as my family grew, I bought more. Now that the business has really taken off, I’ve worked hard with my advisor to add more coverage to make sure that everything I’ve worked so hard to create will get passed on the next generation. — Buddy
Opinions on whole life insurance get fiery. Advisors who sell it tend to be older. Whole life was probably the first product they sold. They've learned how to position it and deal with objections. They've convinced themselves of the merits. Criticize whole life and you're in for an argument.
Over the years, advisors have said that whole life pays higher compensation than any other life insurance product. Let’s ignore that. Let’s get to the core question: why do you buy insurance? To transfer risk to the insurer.
Whole life transfers risk back to you. Is that what you want?
Rejoice?
Tax refunds feel nice but why do you get them? Because you overpaid. Insurance dividends feel nice but why do you get them? Because you overpaid.
With participating whole life insurance, you pay more than the insurer needs. The insurer conservatively projects mortality claims, expenses and investment earnings. If actual mortality claims are lower, you get a dividend. If expenses are lower than projected, you get a dividend. If investment earnings are higher than expected, you get a dividend. That's nice but there's the other side.
Your dividends could be lower than you expect. Here are three examples.
AIDS: in the 1980s, AIDS became a concern for insurers who sold guaranteed products. There was no problem with par whole life since higher mortality claims simply meant lower dividends. If Hollywood is to be believed, there are epidemics and scourges waiting for us. With whole life, you get to share in the cost.
Y2K: upgrading computer systems was pricey. With whole life, higher expenses simply mean lower dividends. Who knows what might lead to higher expenses in the future?
Investments: with whole life, you're stuck with the returns on the investments the insurer selected. Maybe you wouldn't have done better but you would have had choices. If you’re not good at deciding, your advisor is there to help you.
Rather than return your premium overpayments to you, your advisor may encourage you to spend on more insurance. If you'd like to cancel your coverage, you'll be offered "nonforfeiture options", which are other ways spend your money the insurer instead of getting it back.
The Evolution
Whole life is an expensive black box. Clients and their accountants were looking for products which were transparent and cheaper. The solution was universal life, a combination of life insurance and investments. In essence, you're "buying term and investing the difference". You're also getting guarantees. Typically, you know the mortality rates and expense charges. As with whole life, the investment returns are unknown but now you and your advisor get to choose from the choices available. Premium tax rates may not be guaranteed.
With universal life, you win if actual mortality rates or expenses are higher than projected. The insurer wins if mortality rates or expenses are lower. Doesn't this give insurers an incentive to guarantee inflated rates?
They can try, but there's competition with other insurers, whole life and "buy term and invest the difference". Also, mortality has been improving and technology reduces costs. The projected savings can be factored into the guarantees.
In Canada, most insurers have stopped selling whole life insurance. Instead, the market has shifted to term life and universal life.
Trust
With tax, you or your accountant can calculate the costs. You're cannot verify or calculate a dividend. You're trusting the insurer, possibly for decades. Do you? The financial sector is the least trusted in the world … again.
Some insurers selling whole life rank low in corporate governance, a measure of keeping promises. I have a fondness for London Life because their coveted London Life Actuarial Scholarship helped pay my way through university. However, 1.8 million policyowners have not fared as well. In a class action, Great-West Life and London Life were ordered to pay $455.7 million for violating the Insurance Company Act and general accounting principles. An appeal court confirmed the decision but reduced the settlement to $220 million.
Companies change their behaviour. This week, RBC and TD announced they are ending free bank accounts for their older clients --- even if they’re been clients for decades. It's easy to change banks accounts. Right now, BMO, CIBC and Scotiabank still have free ones.
With insurance, you can’t easily switch. You undergo new underwriting and may face tax on the cancelation of your old plan. All that assumes you’re still insurable.
Stay Away?
Whole life insurance may may sense in some situations. If guarantees are important to you, ask an advisor you trust for other options before you decide
When they built you, brother, they turned dust into gold. When they built you, brother, they broke the mold. — Bruce Springsteen
How fickle we are. How quickly we forget.
We were terrified by 9/11 but now it's 2011. This week, we're shocked by the death of Steve Jobs. Next time, something else will jar us.
Each time, we Think Different for a bit. We're tempted to do something that matters but life gets in the way. Our most vivid memories fade. Routine returns to rule. We become part of the conforming crowd in the ‘1984’ commercial. But only with our consent and inaction.
Talk
We love talking but talk alone doesn't improve our lives. Or the lives we care about. We must act. We're surrounded by uncertainty. Each breath could be our last. Let that knowledge empower us. Not immobilize.
Steve
They say you can't take it with you, but I think that they're wrong. 'Cause all I know is I woke up this morning, and something big was gone. — Bruce Springsteen
Steve Jobs died at 56. He had pancreatic cancer and stepped down from running Apple just weeks ago. His death still came as a shock around the world.
Steve was relatively young. He could get the best health care in the world but his $6.7 billion couldn't buy him good health. Isn't that a valuable lesson?
As a Buddhist, Steve would have a theoretical understanding of mortality. In 2004, cancer gave him a personal perspective. He saw that his own life was finite. He shared his experiences at Stanford in 2005. His speech is well worth (re-)watching or (re-)reading … after you finish this post.
Buttoned Up?
"My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes." — Steve Jobs (2005)
Is your life "buttoned up" now while you have time to prepare? Steve didn't need health insurance to cover his hefty medical bills or disability insurance to replace his lost income. Steve didn't need life insurance to provide for his family. Few of us can say the same.
Suppose Steve wanted insurance. Too bad. You can only get coverage when you don't need any. You buy insurance with your good health.
Unless your health is improving, waiting until tomorrow is always worse than applying today. Getting approved can take months. If your health changes while you're waiting, you may be required to pay more — if you're even insurable. I'm working on a case right now where no coverage is available at any price.
Steve did more than button up for his family. He also took care of Apple. That’s called succession planning and is easily mangled, especially by small business.
Inevitable
"No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it." — Steve Jobs (2005)
We keep seeing the importance of planning but seeing isn't doing. We can focus on our circle of influence. Do what you can, while you can.
Yes, there's always tomorrow, but not necessarily for us. That's why what we do today matters so much. The winter chill is on the way. Are you buttoned up?
Last time, we wondered if your advisor is sleeping on the job. Let’s explore the extreme. What happens to you if your insurance advisor dies?
Not much.
Your policy is a contract with the insurer. They'll keep their obligations as long as you pay your premiums. Default actions take place if you die without a Will. Ditto for your advisor. Your policy may be an "orphan" until another advisor takes over.
Replacement
If the new advisor paid to buy the block of business, there is an incentive to sell more insurance to current clients. In a way, the new advisor bought a client database and some residual income. The real revenue comes from new sales.
If you don't already know the new advisor, there's not much advantage to using them. The dead advisor's firm might even get rebranded, which removes links to the past you may have valued.
What if the new advisor got the business for free? Again, the real revenue comes from new sales.
Premature Death
Anyone can die unexpectedly. That's the reason for insurance. If your advisor passes away prior to age 60, a successor may not be in place. If the advisor worked for an insurance company ("captive agent") or bank (an employee), the transition is easy. Ditto if that advisor worked as part of a team and you were served by different team members. The challenge is with an advisor who served you solo — even if they were part of a team.
Normal Death
Since advisors help you prepare for the future, you'd expect them to have succession plans in place well before retirement. You might be surprised ...
There are many reasons planning gets ignored. Here are some
death seems so far away
the current business is not well-organized or well-maintained (hard for anyone to takeover or agree to a high purchase price: outdated systems, lack of modern marketing using social media)
the seller feels the business is worth more than buyers are willing to pay
the seller feels the business will be worth more next month, quarter, year, … (as with real estate)
the seller is unwilling to let go (wants to remain involved, which can create conflicts)
Also, agreements fall apart. There's the whole problem of trust. There needs to be a smooth transition where the seller introduces the buyer to current clients and the buyer becomes the primary contact. This process can easily take years.
The Seller's Fear
The seller faces a fear: the buyer could take some of the best clients without completing the sale. During this phase, revenue is likely increasing since the clients are getting more attention and opportunities to buy. Relationship are also shifting to the buyer.
The Buyer's Fear
The buyer faces a fear too: the seller could change the sale date, terms or price (because the business is likely growing). There's also the problem of liability. What if the seller has lousy files, provided poor service or sold the wrong products? The buyer probably has the liability for what was done before.
When the seller is retiring, the clients could easily be of retirement age too. Maybe they have all the insurance they're ever going to buy. Their children may have their own advisors. The buyer may not get or retain as many clients as anticipated.
Legal agreements are designed to prevent these kinds of games but lawyers are expensive. I have seen situations where the sellers have taken advantage of the buyers — using them as cheap labour to revitalize the business and then not completing the sale.
Relax … At First
You don't need to worry about squabbling between the buyer and seller since your contract is with the insurer. However, your service may suffer during the transition.
Afterwards, count on attempts to sell you new coverage.
It's tough to sell consumer products you wouldn't buy. That's why asking advisors about their own coverage won't tell you much. Since they buy at a discount, they will likely have plenty. Instead, ask your advisor: "What happens to me if you die today?"
The Twin Towers were very special to me. I don’t like heights but visited the World Trade Center twice. The last time was in 1987 when I was working for Metropolitan Life. This time, I was brave enough to go to the windows and look out. You might yawn but this was a victory for me.
9/11 changed my world in a way that nothing else has. The end of innocence. The terrors that happened in other countries were now on our shores. Forever.
Today’s the 10th anniversary of 9/11. This is the first time I’m telling my story.
Where Were You?
On the morning of September 11, 2001, I was on stage in Halifax, Nova Scotia unveiling my biggest initiative ever, the SaveTax Project, which gave advisors personalized, functional websites.
Something was wrong.
I was going through my content too fast. Way too fast. Elsewhere across Canada, my audiences were smaller and carefully picked — generally 20-50 advisors. That lead to more questions. Here I was on a stage in front of 100-200 advisors. That's too many for spontaneous questions. By the time I figured this out, I didn't know how to slow down and interject questions for them.
The moderator was standing at the side. I didn't know why since I had so much time left. That affected my pacing too. I finished my 60 minute session in a record 38 minutes. The moderator then told us that a plane crashed into the World Trade Center.
My presentation no longer mattered.
Reaction
I was dazed. So was everyone else. Some were watching TV in the lobby. I went to my room and turned on my set. The newscaster was saying something about a second plane, other attacks and the shut down of airspace. I couldn't understand. That couldn’t be right. Why were they reporting this? There was talk of terrorists. Everything was getting shut down. Trains weren't running. Car rentals were blocked.
I tried calling home and got through. My wife and seven year old son were safe. They didn't know what was happening. Life seemed normal. I told them to turn on the TV and that I'd phone back once I found out how I'd get home.
How would I get back to Toronto?
Cash
I changed into my street clothes and went down to the lobby. No one knew what to do. There was more speculation about terrorists. To stop their communications, the Internet and mobile phone networks might be shut down. Was that even possible? To stop them from transferring money, the banking system might be shut down.
US flights were being redirected to Halifax. All hotel rooms were now booked. Since I hadn't checked out, I was told that I couldn't be kicked out. Several colleagues had checked but could not get their rooms back.
In a daze, I went down the street to a banking machine. I figured that I'd need cash if credit cards wouldn't be accepted. I don't know how, but I managed to insert my card into the wrong crevice. Now I had no bank card and little money. I went into the bank, which had tellers but no customers. I explained what happened. Would they believe me? They seemed numb too. Without question, they retrieved my card. I withdrew $500.
Like ET
Back at the hotel, arrangements had been made to rent two vans. This was possible because our host had a personal connection. We were going to be charged mileage. The cost was over $2,000. I don't remember if that was per vehicle or in total. It didn't matter. Capitalism thrives during crises.
I got something to eat but didn’t have much appetite. The roads were eerily quiet. We drove home with minimal stops listening to AM news radio. Sometimes we got a signal right from New York City. No one said much. We just wanted to get back to our families. For a while I was seated in the last row and not beside a door. I couldn't get out. I felt choked and claustrophobic. The rear air conditioning vent wasn't working (what you expect for $2,000?). I had trouble breathing until I calmed down. I didn’t tell anyone my predicament.
At the next break, I grabbed the front passenger seat and took turns driving. I don't know how I stayed awake and on the road. After about 20 hours of driving, we were safely home.
Epilogue
In 2002, I was in Washington DC:the SaveTax Project was nominated for an eFusion award from AM Best. There was so much security. Even getting into my hotel required a security check. Vehicles entering buildings were checked. You could no longer enter the Washington Monument with a bottle of water or pocket knife. These reactive measures felt like installing a security system after the jewels are gone: well-intentioned, expensive and ineffective.
I went to the 9/11 exhibit which had opened at Museum of American History on September 11, 2002. When I saw items from the World Trade Center that had melted from the extreme heat, I was moved. Movies show more extreme spectacles but this was real. And unreal. The exhibit brought me peace in a way I can’t explain. The next step was visiting Ground Zero in August 2009 and talking to New Yorkers who were personally affected. The final step in the cathartic process is this post.
Your Story
You'll have your own 9/11 stories. I may have some facts mixed up. Can you believe that 10 years have passed? Days turn to minutes and then distort into memories.
9/11 already feels like ancient history. It's easy to forget the powerful emotions we felt at the time. Time moves forward. Our lives get busy. Details fade. That helps us deal with tragedy.
Video Tributes
Here are two musicians with close connections to New York City.
Bruce Springsteen sang My City of Ruins weeks after 9/11. You’ll find better quality recordings but this one has a special intensity.
Both of Peter Gabriel’s daughters were in NYC on 9/11. Neither was injured but he didn’t know because he couldn’t reach them. He expressed his feelings in I Grieve.
A lot of people don’t think they’ll ever need life insurance, but how do you know? My mom didn’t, but look at how important her decision to buy life insurance turned out to be. — Lamar Odom
NBA fans will know of Lamar Odom (Wikipedia), but do you know how his mother saved his life with insurance?
Lamar Odom has seen seen plenty of tragedy off the basketball court. His dad, a heroin addict, left when Lamar was six. His mom was raising him alone but she died of colon cancer at 35 when he was just 12. His son died in his sleep at only 6.5 months old. His grandmother died at 80 (she raised him after his mom died). His cousin was shot and killed at 24. The SUV taking Lamar to the funeral indirectly killed a 15-year old pedestrian.
Lamar is now 31 and the ambassador for Life Insurance Awareness Month.
September ‘11
I’m sure my mom didn’t think that she’d die at 35, but that didn’t stop her from doing the responsible thing. — Lamar Odom
Lamar explains in his own words. (If the video doesn’t play, here is a direct link.)
Lamar’s mom left money and a caring grandmother. Both made a huge difference in his life.
What Type Of Coverage?
Perhaps Lamar's mom automatically got group life insurance through her employer --- one of the two types of coverage you can’t own. The death benefit is typically 1-2 times your annual salary and premiums are paid by your employer. Group life makes an excellent foundation but may not be enough.
The biggest problem is that coverage disappears when you leave your employer. Your departure may forced upon you. There's often a short window of a month to convert the group life coverage to the same amount of personal coverage without any medicals. I don't see this option exercised often. The ex-employee might not understand the value, act too slowly or be worried about paying. A new job may provide group life insurance and other benefits but there's a period with no coverage. That gap could last much longer than anticipated.
Whether Lamar’s mom was protected through work or privately, the important point is that she was protecting against the unexpected.
Parallels
If my dad didn’t have life insurance, everything would have changed for our family. We would have had to sell our home. — Leslie Bibb, LifeHappens.org
Do you see the parallels with Leslie Bibb's story from 2010? She was only three when her dad died and didn't realize the role that his insurance played in her family's survival.
Getting life insurance is boring and easy to delay. Lamar's mom and Leslie's dad thought otherwise. Simple planning and low cost protection saved their families.
Now's a great time to get your insurance coverage reviewed and updated. If not now, then when?
Warning: this post may be scarier than Halloween and encourage you to buy life insurance now. Reader discretion is strongly advised.
Major price increases are coming to some permanent life insurance plans. Manulife is projecting increases of 10% on average on their level-for-life rates. That's hefty. Expect to pay more if you're younger or female or buying for family estate planning. The changes take effect on December 4, 2010. Expect other companies to follow.
Here are three reasons for the price increases
low interest rates
tougher international standards
copycats
Low Interest Rates
Each year, we're closer to death (see Pink Floyd's insights on mortality). Your insurance rates should increase annually to reflect this, but if they did, you'd have trouble paying the premiums in future years when a claim is most likely. You see this pattern and problem with Term 10 insurance.
For permanent insurance, a consumer-friendly solution is level premium rates guaranteed for life. This sound choice doesn't seem to be widely offered outside Canada.
Here the insurer charges "too much" now and "too little" later. In the early years, the money which isn't need to cover the year's insurance charges gets invested to cover the shortfall in later years.
In a sense, the insurer is "buying term and investing the difference". Investment returns are important and have been lower than assumed in the product prices. The consequence is higher rates.
Tougher International Standards
Because of the world's recent financial woes, new International Financial Reporting Standards (IFRS) are on the way. The goal is to have companies set aside more capital in safer, lower-yielding investments. The intentions are good, but this increases costs which increases prices.
Canada didn't have problems with dumb money but is getting treated as guilty too. Higher prices for you.
Copycats
Okay, prices need to increase. What's the right amount?
The answer varies for each company depending on factors like their size, costs, claims experience, target markets, and — the biggest factor — competition. If a market leader like Manulife is boosting rates by about 10%, other companies aren't likely to stop at 7% or go up to 12%.
For an analogy, let's go to the gas pumps. Gas companies are eager to charge more but no one wants to be the first to raise prices. But when one moves, the rest quickly follow. Insurers are the same way.
Unlike gas stations, insurers can't raise prices instantly. The process often takes months because changes are needed to the
projection tools used by advisors
administration systems
marketing material (since other changes will probably be made at the same)
reinsurance treaties (arrangements with the insurers that insure the insurers)
So the first company to raise rates gets criticized and loses business. Other companies get rewarded while they scramble to do copy. To minimize the pain, the first mover tends to preannounce rate hikes to give competitors time to prepare.
Versa Vice
It's funny to watch price decreases. Yes, they do happen sometimes.
Here companies are secretive. They don't want competitors to know. They don't want advisors to hold off on sales until the new version arrives. Here the first mover wins since advisors can instantly switch to its products while competitors take months to react.
Competitors are eager to increase prices but sometimes defer price cuts until they see they're losing enough sales to matter.
Term Insurance
If you have term insurance you aren't directly affected … unless you decide to convert to permanent coverage. You pay premiums for the same risk class. So if you were an elite nonsmoker, you'll stay in that class even if your health and habits make you a bigger risk. That's the good news.
You may not realize that the rates on the new plan are based on your age at the time of the change. Also, you can only get permanent insurance from the same company. So you're affected by the whims of the market until you lock in the new rates.
Your Next Step
If you might be affected by rate hikes and have a proactive advisor, you probably already know.
You lose by waiting to get life or health insurance because, you're getting older: your premiums will go up even if your health doesn't deteriorate. Why be like the two who waited? They're no longer insurable.
That's what our son said when he was almost six. We were on vacation and he wanted to watch Small Soldiers on HBO.
Parents measure a baby's age in hours, days, weeks and then months.
Children measure age differently. Mere days after your 4th birthday, your 5th feels very far away. School and other "big kid" stuff looks alluring. So your age is 4 years and 3 months, then 4 1/2, then "almost 5".
Later, we measure our age in years and milestones like the "big 4-0".
Dennis The Menace once said that once you're "over the hill", life picks up speed. Some retirees say time moves faster. As a nonretiree, I find that hard to believe. If every day feels like Saturday, maybe a week passes overnight?
40 or 41?
Suppose you turned 40 on January 1. How old are you in March, June, September and December?
You'd probably round down and say 40. We age every day but give of our age as of our last birthday. Maybe this is a psychological trick to help us feel younger. Maybe it's just simpler.
What works in real life doesn't work for insurance. If you're 40.01, do you want to pay the same premiums as someone who's 40.99? That means you're subsidizing the older ones. Similarly, if you're a nonsmoker, you don't want your premium rates blended with smokers. If you're healthy, you'd want credit too.
To be fair overall, insurers usually base your premium on your age as of your nearest birthday. That means an insurance age of 40 covers a range from 39.51 to 40.49 years from birth. The calculations are done via computer algorithms. You needn't worry about them.
41 or 40?
Confusion may arise when you look at your age on insurance projections (often called "illustrations"). The output might show your age at the time of purchase (say 40) or at the end of the first policy year (say 41).
Practices vary by company. The projection may only show the policy year (starting at 1). These differences means you'll need to pay attention — especially if comparing proposals from different companies or different advisors. If you want to compare projections on your 65th birthday, the output might show 65 or 66.
Backdating
Using our example of you turning 40 on January 1, what happens if your insurance takes effect on August 2? Your nearest birthday is the next January, which means you pay premiums as if you're 41. That may not feel fair.
Companies will often let start coverage a few months earlier, say June 2. You'd pay the premiums for June and July for this option. This process is called "backdating" and lets you "save age".
40 or 44?
Insurers really want to estimate your biological age.
So an unhealthy 40 year old may get "rated" and pay the premium rates for a healthy 44 year old. Insurance ratings are much like the surcharges that banks add if your credit rating is shaky.
In the future, age might get calculated daily. So the longer you wait, the older you get and the more you pay.
Floods. Hurricanes. Power failures. Disease. Financial meltdowns. Drought. Y2K. Famine. Global warming. Killer bees. Toxins. Avalanches.
What do we learn from devastation? Sometimes, we can take simple, quick, cheap precautions like washing our hands and covering our mouths when we sneeze. Other reactions are very expensive, such as the gigantic costs in time, money and anxiety from the escalated security following 9/11. Since memories fade, the precautions only be temporary.
This post isn't meant to scare you about possible future horrors. Why complete with the news or movies?
We have trouble associating with big numbers but we connect with individuals. We like stories and listen to celebrities. Let's scale down to one family.
Leslie Bibb's Tragedy
Leslie played reporter Christine Everhart in Iron Man 1 and 2 but Tony Stark didn't avert a tragedy in her personal life. Neither did Superman, Batman, Spider-Man, Hancock, Defendor or Dr. Manhattan.
Her dad was the superhero.
He died in an accident when she was only three but had enough life insurance to keep her family going. She's got three older sisters and a mother.
We would have been sunk if it weren’t for your father’s life insurance.
— Leslie's mom
Leslie didn't realize the role this silent protector played. That's the magic of life insurance. You barely notice the premiums but you get immense peace of mind. Should you die, your family gets the financial resources to survive. The tax-free proceeds can payoff the mortgage, provide ongoing living expenses and fund higher education.
We would have had to sell our home. My mom would have been forced to work longer hours or get a second job. But none of that happened because of my dad’s thoughtfulness. — Leslie
Leslie is the spokesperson for the nonprofit LIFE Foundation and tells her touching — but hardly unique — story herself.
I can't embed this video, so you'll need to click to view.
Your Options
Some people think it's morbid to anticipate the worst. Well, sometimes the worst happens and thankfully for my family, my father had planned ahead.
I doubt people will buy life insurance just because I said so, but maybe it will remind them to follow through on something that has been on their to-do list for awhile.
— Leslie
We can't predict the future but we can protect ourselves and those we care about. This takes time and money. So does inaction.
A friend asked me to review an insurance proposal from his advisor. This is tough to do when your own standards are exacting but I complied. This walkthrough shows you the process and helps you identify signs of a fair deal.
The Situation
The case is simple. The client has a young family and wants to protect them in case of his untimely death. He owns a business but has no life insurance from his company. So he has $2 million of Term 10 in the form of two policies from two advisors ($1.1 million and $0.9 million). The policies are nearly 10 years old. An advisor provided three different proposals.
What should he do?
The Dilemma
Term 10 is excellent for short term needs. You get the most coverage for the fewest dollars. The problem is that rates shoot up every 10 years. That's partially because you're older and more likely to die. The bigger reason is product design. Initial rates are almost loss leaders due to competition. The insurance companies make their money if you convert your coverage to permanent insurance or if you renew after the 10 years at the much higher rates.
If you still need term insurance at renewal, you face a dilemma. If you renew you pay much more than if you bought a brand new policy. If you apply for new coverage, you undergo new underwriting that usually involves answering many personal questions, giving blood and perhaps additional tests. Not very appealing. Also, you're subject to extra scrutiny if you die within the next two years (contestability period and suicide exclusion clause).
Here are the common practices:
convert to permanent insurance: this contractual right lets you skip underwriting too
if you're healthy: apply for new Term 10 with full underwriting
if you're unhealthy: continue your current coverage at the new higher rates (a contractual right)
The Need
The process system quickly showed that the client wanted to continue his insurance. Changes such as a larger mortgage make $2.5 million a more suitable death benefit. He likes the tax advantages of permanent insurance but is currently investing as much as possible in his business.
The "obvious" solution is new Term 10 insurance with conversion to permanent coverage in 2-3 years when the current investments boost business revenue.
The Proposals
The advisor proposed $1.1 million of
Term 20
Universal Life
Whole Life
What's missing? Term 10 and a market comparison. All products were from one company (and in a folder from that company). The insurer ranks low in corporate governance, a measure of keeping promises. You'd think that would matter more than ever, given the turmoil in financial markets.
These proposals were prepared without consulting the client. That's efficient for the advisor but ignores the client's current situation. Coverage needs to be increased to $2.5 million. There were no plans to consolidate both present policies a new policy. The advisor didn't realize there is other coverage --- and didn't ask.
I did a market comparison and found that two insurers with excellent corporate governance offered better overall rates and better options for conversion to permanent insurance.
Why One Company?
If an advisor only proposes one company, are you getting the best options? Here are possible motivations
no choice: the advisor may be tied to a company and only be permitted to sell products they select
hidden incentives: the advisor may receive cash or non-cash rewards
personal biases: the advisor may simply like a particular company
By coincidence, one company may have the best products for your situation. Your advisor should be able to show comparisons that lead to the recommendations.
The Costly Mistake
The current insurance is owned personally. That's generally a costly mistake. You pay insurance premiums with after-tax dollars in exchange for a tax-free death benefit. Would you rather pay with a dollar that's worth
54 cents? (after personal tax at Ontario's top personal marginal tax rate of 46%)
84 cents? (after corporate tax of 16%)
The difference is huge. Business owners generally own insurance corporately, which also reduces the problem of "trapped" retained earnings. The option for corporate ownership was not discussed before.
When the original policies were purchased, the option for corporate ownership was not even discussed. That cost the client thousands of extra dollars over the last 10 years.
Warning Signs
If your advisor shows you insurance proposals, look for these warning signs of shortcuts
one company only: no company is ideal in every situation
folders from an insurer: perhaps the advisor is tied to that company (not independent) or pinching pennies
black & white printing: content is designed in colour these days
cheap paper: paper's cheap but maybe the advisor's even cheaper?
no narrative: just an assortment of pages. The kit was not organized in any meaningful way. It was just an assortment of illustrations
It's great to maximize benefits while minimizing costs, unless the rewards go to the advisor.
If my dad didn’t have life insurance, everything would have changed for our family. We would have had to sell our home. 
