Leaving Your Employer? Get Your Insurance In Place First.

Courtesy of Michael Schwarzenberger

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. 

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).

More

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.

Links

• Life Insurance: Permanent vs Term (Michael James on Money)
• How Pink Floyd’s insights on mortality help you
• Does Warren Buffett “buy term and invest the difference”?
• The two drawbacks of investing in life insurance
• image courtesy of nafets

PS Remember insurance for disability, critical illnesses and long-term care too.

CAREER ADVICE FOR GRADE 8 STUDENTS

I’ve got a newfound respect for educators after guiding 30 lively Grade 8 students through the Junior Achievement Economics for Success program with Dana Mitchell for Advocis during Financial Literacy Month. Thanks to teacher Maureen Deeney and Principal Julie Aube at Christ The King Catholic School for the opportunity.

Here is career advice for students to consider.

Look For What’s Missing

Spotting what’s missing is more valuable than seeing what’s there. What’s missing leads to opportunities. Searching hones your detective skills and helps you stay curious. You get better at spotting distractions and identifying the real clues. You’re not looking for Waldo. You’re looking for where Waldo isn’t --- and wondering why.

Observe the challenges other people face and look for solutions.

Do they have trouble with deadlines? Learn to meet them. Do they start studying too late? Start earlier. Do they forget assignments? Find a system that works for you. You’re then building skills which are scarce and hence valuable.

Develop The Habit Of Saving

Saving means putting something aside now to have more later. Money is an example but not the only one. What about

• saving time: you can do some things more efficiently (which may mean investing time in developing a process) and stop doing some things which don’t need to be done (note: leaving your room untidy may not be an acceptable idea).
• saving health: we have only one body for life. Exercising, eating well and sleeping enough build resilience and help preserve what may be your most valuable asset.
• saving attention: with all the demands and distractions around us, we’re tempted to multitask and prioritize. Both are exhausting. Cutting out stimuli simplifies life. Maybe you’re too knowledgeable about happenings in sports and music. Entertainment is important but maybe less would do? (extreme example: years ago, I stopped watching TV, listening to the radio and reading the newspaper.)

Be Generous

We can each help others for free. We can give of ourselves, our time, our attention, our caring. You’re then making the world better in your own unique way. You’re also changing yourself. You’re thinking in terms of abundance (giving) rather than scarcity (hoarding).

You’re helping change the world since some of the people you help will follow your leadership and help others too.

Develop Portable Skills

You’re unlikely to stay in the same role forever. You’ll likely advance in your career and might even change careers. The cause might be opportunity or necessity. Either way, you’re better prepared if you keep developing your skills.

A portable skill stays with you and helps regardless of what you do.

For instance, communication is essential. Are you improving your ability to read, write and speak? Are you mastering new media? For instance, you write differently for school assignments, blogs and tweets.  Other portable skills include managing your time, getting along with others and finding problems to solve. How can you lose by getting better?

Build Your Network

Success requires willing support from the people you know and — more important — the people they know.

You already have a network. How well do you plant seeds, nurture and prune? Consistent generosity gets noticed and can be free (e.g. the gift of information). Most people feel obligated to give back. Reciprocity is the #1 universal principle of influence.

If you’re in Grade 8 now, you’ve lived your entire life with the Internet. Connecting, sharing and staying in touch is easier than ever via social networks. In-person contact still matters, though.

Market Yourself

You can’t expect the world  notice your brilliance without your help. You need to stand out (or at least be good). You need to be remembered. You need to be findable. The Internet makes this easier for those who bother.

Persist

The path to the future includes drudgery. Persist. To quote Zig Ziglar:

When you do the things you ought to do,
When you ought to do them,
The day will come,
When you can do the things want to do,
When you want to do them.

Best wishes for a wonderful future.

Links

• What is STEM education? (well worth exploring)
• The best/worst jobs list and you
• Mailbag: more career advice
• Warren Buffett’s tough career choice
• Escape from the cage of mediocrity
• Ctrl Alt Delete: Mitch Joel’s 8 steps to getting a job today
• image courtesy of Cliff

PS Please leave the world better than you found it.

A CHALLENGE FOR FINANCIAL LITERACY MONTH (#FLM2014)

November is Financial Literacy Month in Canada. Getting attention during the busy period between Halloween, Black Friday, Boxing Day and New Years Day isn’t easy. According to Google Trends, interest in financial literacy has been growing. That’s great news. Kudos to everyone helping create awareness.
There’s more to do.

The Challenge: Current Creators

If you already create ongoing financial education, Thanks! Why not try something new:

• change your format: you likely prefer text, audio, video or photos. Try a different one.
• go live: e.g., hold a Hangout On Air, speak at an event or have a Twitter chat
• adjust your frequency: create more content or cut back to make time for something new
• alter the length: you could make your content longer or shorter
• experiment with a different platform: are you using the LinkedIn Publishing Platform or Pinterest?

You might reach a new audience and feel more enthused to create more content. 

The Challenge: The Silent Million

According to Statistics Canada, 1,122,300 people worked in finance, insurance, real estate and leasing in 2013. That’s 6.3% of the workforce (1 out of 16 people). How many of them publish their own original content to help the public understand money better? Now’s an ideal time.

If a mere 2.7% published a single article during Financial Literacy Month, we’d have 30,000 new articles --- 1,000 a day. And 100,000 articles only requires 8.9% to volunteer for a worthy cause which their employers likely support.

Others know about money too. For instance, accountants, entrepreneurs, executives, lawyers, professors, retirees and teachers. Include them and 1,000 pieces of fresh content a day looks even more feasible.

If each creator promotes to their connections, imagine how many new people could be reached and helped. 

Case Study

I’ve been looking for ways to engage people who aren’t especially interested in learning more about money.

For last year’s Financial Literacy Month, I organized Money 50/50: Insider Advice For Today’s Topsy-Turvy Times at the University of Toronto (like TEDx plus Q&A).  November got postponed to February and the Ted Rogers School of Management (see recap). Since TEDx Talks become videos, I decided to skip a live event and interview these insiders who might have been speakers:

1. How much money do you need before getting financial advice? (Joe Barbieri)
2. Financial independence at 31 (Sean Cooper)
3. The Capital Gains Exemption isn’t a gimme (Mark Goodfield)
4. Insights from an advisor to the insurance industry (Ross Morton)
5. Reaching the unreachable (Jonathan Chevreau)
6. Investing outside the markets (Vikram Rajgopalan)
7. Five essentials to being a better investor (David Toyne)
8. Planning for aging (Gary Hepworth)
9. Demystifying SR&ED (Julie Bond)
10. Retirement planning for small business owners and professionals (Clark Steffy)

This month, I’m

• guiding Grade 8 students through the Economics For Success via Junior Achievement
• sharing Business Strategies For Taxing Times at the Toronto Regional Board of Trade
• launching a series of short educational videos called QanA (Question an Actuary)

Thanks to past, current and future creators of money-related content. Thanks also to everyone who invests in learning.

Links

• Three reasons financial literacy eludes us
• The A-B-Cs of 1-2-3: the key to financial literacy / numeracy
• Do your advisors help with your financial literacy?
• How to screen your sources for financial literacy education (#FLM2013)
• Forget your financial literacy: check your pizza literacy
• Why don’t financial educators have a larger audience?
• Jim Flaherty on the economy and financial literacy (2009)

PS Money matters every month

RETIREMENT PLANNING FOR SMALL BUSINESS OWNERS AND INCORPORATED PROFESSIONALS

There’s more to retirement planning than RRSPs. If you’re a small business owner or an incorporated professional in Canada, you might want to explore

• IPPs (Individual Pension Plans)
• PPPs (Personal Pension Plans): a blend of defined benefit and defined contribution
• RCAs (Retirement Compensation Arrangements)

Clark Steffy knows about retirement planning. He’s the Regional Vice President, Sales for Atlantic Canada, Ontario and Western Canada at Industrial Alliance Insurance and Financial Services. . You'll find more about Clark on LinkedIn.

I worked at IA years ago but our paths didn’t cross because I was in the world of personal life and health insurance. He was in group savings and retirement. We got introduced through David Peck, the first guest on Tea At Taxevity.

The Interview

Other Considerations

Universal life insurance can provide tax-free retirement income later and protection today (see the overlooked advantages). Since disability could impair your ability to earn the money you’d save for retirement, consider income replacement insurance.

Links

• The problem of “trapped” retained earnings
• The overlooked advantages of universal life insurance
• Why you need to reach The Moolala Guide to Rockin’ Your RRSP by Bruce Sellery
• Longevity over the last 100,000 years
• Will you have financial freedom at 35, 55 or 75?
• Are you saving too much for retirement?
• Prescription for Canada’s ailing pension system
• The original and overlooked Tax-Free Savings Account (TFSA)
• Losing ground: saving for retirement

PS Before acting, consider your options.

MAILBAG: A DAY IN THE LIFE OF AN ACTUARY — MORE CAREER ADVICE

Here’s another request for career advice.

Hello Promod! I’m a first year student currently enrolled in the Mathematics and Statistics Co-op program at the University of Toronto. I am willing to become an actuary in the future and have no personal connection with anyone as of yet. I have a few questions regarding the career itself, and possible paths one would need to take in order to attain this career. I would appreciate if you could answer them as it would help me make my life’s first important decision.

Firstly, I would like to know how you go about handling your duties on a daily basis, in other words, if I were to be an actuary for a day, what I am going to be facing that day as a guarantee. I am also willing to know if the daily activities of an actuary are repetitive, or will my work differ from day to day? Another thing I’m willing to find out is the challenges actuaries face as a result of their career, internally and externally, whether it be the actual tasks that they complete, or whether it be the people that they face, or even potential consequences they may have. I am hoping to find what the future holds for these careers. Here, not only am I looking for whether or not the job opportunities will increase or decrease, but I am also looking for other careers that may use the skills that I have attained in these career areas.

By analyzing your responses to these questions, I would be able to figure out whether or not I see myself as an actuary in the foreseeable future. Your response to these questions would be greatly appreciated. Thank you for your time!

When I was still in the corporate world, a student asked seven questions. Another asked to job shadow me to “witness the daily activities that an actuary performs and see if I can picture myself doing the same 20, 30 or 40 years from now.”

The requests are thoughtful but life is unpredictable. Here’s another attempt at answering the underlying questions.

Starting Out After Graduation

In each of 1983 and 1985, Metropolitan Life hired six actuarial grads for the Canadian Head Office (CHO) in Ottawa. In 1984, the economy was bad and they only hired me. The unemployment rate among my classmates was 77% (only 4 of 17 got jobs). Is the economy any more predictable today?

I got the usual actuarial equipment: a big electric printing calculator and a monochrome terminal connected to an unseen mainframe computer. No Internet. No smartphones. No answering machines.

On the plus side, you couldn’t take work home.

I shared a telephone with a coworker who smoked at her desk. Another colleague got sent home for forgetting to wear a tie. At the time, Metropolitan Life was the second largest life insurance company in North America. Within years, they left Canada. I had already moved on.

My Evolution

You gravitate toward the type of work you like and are good at doing.

I’ve been good at learning, experimenting and communicating. Much of my work was project-based. For instance, launching a new product. I liked variety, uncertainty and making decisions. You might prefer work which is more predictable and guided.

Shortly after I started working at Met Life, the Chief Actuary (my boss’s boss’s boss) wanted basic color graphs for an important presentation. I didn’t know how to create them but no one available did either. We were in the early days of computers and graphing printers used expensive felt pens. I learned how to graph and found ways to communicate results better than expected. I made my boss, boss’s boss and boss’s boss’s boss look good. Do that and you look good too.

In those days, actuaries did coding (then called “programming”) in APL — powerful but tough to use well. I became good through self-study, which opened up more opportunities. Even today, coding is considered a must-have job skill. You can learn for free on your own time, how many bother?

You gain a valuable edge when you do what others can’t or won’t do.

A Typical Day

There’s no typical job, which means there’s no typical day. Roles change with circumstances, your abilities and your level.

An actuary is trained to measure and manage risk. That seems technical but computers simplify the work. Success requires many soft skills such as getting along with others, communicating clearly, thinking independently, innovating and meeting deadlines.

There are many different kinds of actuaries. I’ve worked primarily in the world of personal insurance (life, critical illness, disability). While the product actuary at National Life, I had three actuaries reporting to me. We focused on universal life insurance optimized for wealthy clients. Success required creativity, a deep understanding of the tax laws and the creation of effective point-of-sale computer-based tools.

The Team

I had an actuary for each of these core responsibilities:

1. New product development:  analyzing competitiveness, calculating profitability including “what if” scenarios, writing product descriptions (for the launch process)
2. Advisor support: answering questions, developing/testing point-of-sale computer-based marketing tools, gathering market intelligence
3. Administrative support: getting the customer service systems updated to accommodate the product features, drafting policy contract wording, projecting performance of inforce policies

Each role was important but required different skills and personalities. My other seven staff were also involved, primarily with advisor support. Managing people was necessary but not as easy or enjoyable as I first thought. I invested time in learning how to get better.

Career Stages

When you get your first job, you'll be doing work related to your skills. Since your skills are limited, don't count on doing work which is especially interesting. You're learning how to meld into the working world — skills you only master by doing. Demonstrate your growing skills and and you’ll get new opportunities.

Changing Roles

Big insurers like Met Life had a rotation program for students writing the actuarial exams (10 at the time). You work in a department for two years. The first year, you learn from the actuarial student who's about to leave. The second year you train your replacement. This process helps you decide which department suits you. I worked in Corporate Finance, Personal Insurance and Group Insurance. That left Investments and Pensions but I left the company by then.

You also got paid study time (3 workdays per hour of exam). For a five hour exam, that's 15 days (three workweeks). Write twice a year and that's 30 work days (six workweeks). Add three weeks of vacation and you’re away nine weeks a year. Plus you get juicy salary increases for passing.

I don’t know what the practices are in today’s leaner world since I’m in the nontraditional role of helping the public review, repair and renovate their insurance at Taxevity.

Your Brand

There's tremendous value in building a personal brand. That was very difficult in the past, even if you wanted to stand out. How could anyone find you? Now we have Google. How could they gauge your experience? Now we have LinkedIn. How could you show your thought leadership? Now we have blogs. How could anyone  hear or see you? Now we have podcasts and YouTube, respectively.

What’s your strategy? When will you start? When you’re looking for work, your classmates are your competitors …

The Opportunities

As a student, you’re usually too young to make the right decisions for a 30-50 year career. It’s easy to get fooled by common career myths. Look around. Despite best efforts at planning, many people hate their jobs and even change careers (though the oft-repeated estimate of  seven career switches seems unlikely).

The good news is that you don’t have to make the right decision today. You just need to make a good decision and then adapt. Keep developing portable skills to keep fresh and maintain your edge as new opportunities arise.

Links

• Mailbag: career advice for students
• Me an actuary? Seven questions from a student
• Why do so many people hate their jobs? (Forbes, Mar 2013)
• Mitch Joel’s 8 keys to getting a job today
• Join a genuine innovation in free lifelong education
• image courtesy of Dani Vincek

PS Even if you’d rather not, keep building trust with networking.

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

• Does Warren Buffett 'buy term and invest the difference'?
• Warren Buffett’s tough career choice: actuary or billionaire?
• Donation guidelines from Warren, Bill and Melissa
• Billionaire Sir Terence Matthews on how to compete with India and China
• Does billionaire Seymour Schulich help you get smarter?
• Secrets to billionaire success
• image from Gulfstream G650 gallery

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

HOW TO CHANGE YOUR BEHAVIOR

At Insider Advice for Today’s Topsy-Turvy Times (which went well, thanks for asking), participants asked how to change the way they behave. That’s an essential but overlooked aspect of mastering our money — and our lives.

We often know what to do (e.g., payoff credit card debt, stay employable, get insurance). We may even know how (or can ask Google). That doesn’t mean we will do anything.

There’s a big gap between knowing and doing. Three steps make the difference: wanting, starting small and getting help.

Want IT

Those who have a ‘why’ to live, can bear with almost any ‘how’.
— Viktor Frankl, Holocaust survivor

Without a compelling goal, will you invest the effort needed after your initial enthusiasm wanes? You must want — really want — the outcome. That’s the second of the seven habits of highly effective people: begin with the end in mind. A strong why defeats an inconvenient how.

What do you want enough to take action now? Put other items on your bucket list or balk-it list for the future.

Example: I want to improve my general health now to prevent problems later on. I’m not a morning person but selected a 16 week yoga class which meets on Saturday from 7 AM to 9 AM. Today was week six and I’m keeping up.

Start Small

If we take on too much, we’re likely to fail. If we take small actions, they soon become automatic and faster. We can then add more.

Do you remember the transition from a trike to a bike? We already knew how to pedal, brake, turn and ring the bell. Now we learned to balance, first with training wheels and soon without. We had scrapes along the way but our desire to ride a bike helped overcome them. Help from our family and friends did too.

Example: In each yoga class, we repeat what we’ve already learned and are taught new items (theory, demonstration, practice). This understand-watch-do process and gradual pace makes progress easier.

Benjamin Franklin and the 13 Virtues

Benjamin Franklin wanted to cultivate 13 virtues, such as Frugality, Humility and Cleanliness. That’s a lot to remember and manage. It’s easy to deplete our willpower and falter. Ben had a solution. He worked on only one virtue per week, which works out to four times in a year. Doesn’t that look more manageable?

Suppose this is the week for Silence (“Speak not but what may benefit others or yourself; avoid trifling conversation”). That’s not an excuse to abstain from Cleanliness (“Tolerate no uncleanliness in body, cloaths, or habitation”). Instead, you maintain the other virtues at their current levels, which improve with each cycle.

Get Help

It’s very easy to break a habit and much tougher to restore it. Think of exercising. Do you remember Newton’s first law of motion? Objects in motion tend to stay in motion. Objects at rest tend to stay at rest. Changing from motion to rest is easy. Changing from rest to motion is tough. Restarting may be toughest of all because we know we failed (even if we have reasons).

We often need a little push or guidance to keep us in motion.

People are good motivators but people are busy. If you can’t find anyone, consider using apps. You likely have your smartphone near you. Your device can remind you, instruct you and track your progress.

Example: Yoga students sign an agreement to attend classes and practice. We get group instruction and personalized tips. Attendance is marked each time. There’s support and monitoring. In between classes, I use the general purpose Trello app to keep track of the instructions.

Links

• Where there’s willpower, there’s a way
• Reach your goals with the Pick Four peer support system
• Quotes from The Seven Habits of Highly Effective People
• The battle between temptation and personal responsibility
• How to change your behavior for good (Psychology Today, Jun 2013)
• 29 ways to successfully ingrain a behavior (Zen Habits)
• 5 steps to changing your behavior (Discovery Health)
• 5 sweet ways to cut back on sugar
• From bucket list to balk-it list
• image courtesy of D Sharon Pruitt

PS Small victories build our confidence for bigger challenges.

WHY YOU NEED TO READ "THE MOOLALA GUIDE TO ROCKIN’ YOUR RRSP" BY BRUCE SELLERY

Does the world really need a book about RRSPs? The topic is quite narrow and there's lots of information online with more added during the January-February RRSP season. Here are the five latest from Google News at the time of writing:

1. So what is the point of RRSPs anyway?
2. The best strategies for your RRSP and TFSA when money’s tight
3. Will Malcolm (66) and Catherine (64) run out of RRSP gas?
4. Borrowing for your RRSP: Here’s how to calculate how much you’ll need
5. Slap your hand if it dips into the RRSP jar

These three are from Melissa Leong alone:

1. How RRSPs are like social media (Jan 29, 2014)
2. For young people, debt might come before RRSPs (Jan 28, 2014)
3. Should you raid your RRSP to pay debt? (Jan 13, 2014)

Tip: Be sure to see Melissa speak live at Insider Advice for Today’s Topsy-Turvy Times on Feb 6th.

What’s Missing?

The sheer volume of RRSP information quickly overwhelms. The contradictions don’t help. For instance, The Globe and Mail tells you how to borrow for your RRSP and the Toronto Star says don’t borrow. How do you decide?

Consider a unified voice, especially if you want to learn well. A book helps. Bruce Sellery’s Moolala Guide to Rockin' Your RRSP: Start Rockin' in Five Easy Steps (Amazon link) makes an excellent choice.

I first met Bruce at the 2013 Canadian Personal Finance Conference organized by Preet Banerjee and Krystal Yee and then at the 2014 Art of Sales. We’ve exchanged numerous emails in between. Bruce has an engaging personality, high energy and breezy way of communicating the complex. You’ll see that in his book.

Why write a book?

Writing a book takes time and too few read regularly. Since RRSPs are most discussed during January and February, the market seems small. Why not write a book with broader appeal which includes RRSPs as a component?

That seems like a wiser strategy. Bruce already wrote a general book called Moolala: Why Smart People Do Dumb Things with Their Money - and What You Can Do About It. Maybe that's why he decided to specialize this time. This video lets him explain.

Why read it?

A book that’s only about RRSPs would be shorter and (probably) boring. Bruce’s book is about much more.

Bruce asks a simple but powerful question: why are you saving for retirement.

He’s saving for adventure, which includes travel. Unless you know your why, how motivated are you to save? A distant goal must be compelling to move us. Saying you want financial security during retirement may not be enough. That’s vague.  A vacation or new car or home renovation is often much more tempting.

You Participate

Bruce includes many quotes from real people. That's unusual and effective. The book feels interactive and engaging — a workshop, rather than a lecture. Bruce encourages you to write in the book, which makes it more like a workbook (see write a workbook instead of a book). You’re then more likely to act and less likely to lend your copy — more sales!

Myths About Retirement Income

Bruce starts by tackling beliefs about retirement income, which you might share:

• “The government will cover the basics”
• “I can’t afford to save for retirement right now”
• “I’ll just work longer”
• “My family will provide for me”
• “My retirement plan is simple: I won’t need much”
• “My house is my retirement plan”

For more details, read this book excerpt in MoneySense.

He only leaves out lotteries, which 34% hope to win. How likely is that? There’s a much greater chance of getting disabled before age 65. The likelihood for a 30 year old nonsmoker is 36% for males and 41% for females. Too few worry about this (use the risk calculator from Manulife yourself).

It’s easy to be optimistic ways that cause financial harm.

Five Steps

Bruce gives five solid steps for retirement financial planning.

1. Lay the foundation
2. Determine how much you need
3. Develop the plan
4. Take action
5. Stay engaged

The book guides you through the process. Yes, you can go through the steps yourself. No, you don’t need to know much about RRSPs to start.

Act

Unless you’re one of the few with a secure defined benefit pension plan, you need to take steps to prepare for retirement on your own.

A secure tomorrow requires sacrifices today. We know that but don't always take the steps. Bruce helps you build good habits that can help you for the rest of your lives — even if you win the lottery (and don’t get disabled).

Links

• Bruce Sellery: moolala.ca, @brucesellery, MoneySense
• How to rock your RRSP (Cityline video)
• Secret 7: The best tax sheltering in Canada
• Will you have financial freedom at 35, 55 or 75?
• The four steps in wealth management
• The first rule for financial success

PS Bruce has generously donated autographed copies of the Moolala Guide to Rockin’ Your RRSP for giveaway at the Money 50/50 live event on Feb 6, 2014 — another great reason to attend.

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.

1. Buy young
2. Buy more now
3. 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

• Disaster-proof your life: the first rule for financial success
• What happens during a paramedical exam for insurance?
• How to afford the insurance you need
• What do you learn from getting sick?
• The four financial risks
• image courtesy of Elnur

PS Get help with your insurance at Taxevity.

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.

By Category

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

Advisors

1. Imagine your advisor winning an Oscar
2. (mailbag) Switching investment advisors: bad to worse?
3. Should you change advisors when you move?
4. How Tom Hanks got cheated by his insurance advisor
5. How to tell if your advisor is independent

Behavior

1. Stop blaming your parents
2. The battle between temptation and personal responsibility
3. Case study: Seller Beware vs Buyer Beware
4. We’re easy to fool (with examples)
5. 12 timeless tips for wise shopping

Careers

1. The unwelcome lesson from the RBC-iGate saga
2. Ctrl Alt Delete: Mitch Joel’s 8 steps to getting a job today
3. Join a genuine innovation in free lifelong education
4. Netflix for learning: unlimited access to emagazines and ebooks

Insurance

1. How to afford the insurance you need
2. Test your life insurance literacy
3. The best and worst times to cancel your life insurance
4. Is your life insurance like a shovel, snowblower or snowplow?
5. Budget 2013 punishes the innovation of “10-8” insured leveraging
6. Life changing events no longer trigger insurance purchases
7. Tips for first-time life insurance buyers
8. Handcuffed: comparing mobile phones and life insurance
9. Insurance lessons from Breaking Bad

Financial Planning

1. If you have/had/want money, read Pound Foolish
2. What’s your financial Plan B?
3. At 7, Boomer Esiason learned that no one is guaranteed a tomorrow
4. Will you have financial freedom at 35, 55 or 75?
5. The Wealthy Barber returns with more wisdom
6. Are your finances snowed in?

Health

1. How healthy are you really?
2. Five sweet ways to cut back on sugar
3. What do you learn from getting sick?

Money

1. Do you have a financial dream or a financial nightmare?
2. How would Mike Holmes fix the financial sector?
3. How Honest Ed turned $212 into $100,000,000
4. Money 50/50: The perfect live event to master your money
5. How to protect your money from Goliath
6. How to screen your sources for financial literacy education

Tech

1. Blackberry’s confusing message at the 2013 Tech Leadership Conference
2. Avoid Windows 8
3. Ultimate unlimited Internet? How Rogers fooled us three times
4. A review of Rogers Unlimited Internet (and how to use it)
5. How to get your Rogers Internet working over WiFi

Trust

1. Customers behave like Pinocchio too
2. Fight back against corporate trickery with Ellen Roseman’s insider tips
3. The reaction to Apple’s tax avoidance
4. Chocolate, price-fixing and salmonella poisoning
5. Why are we flooded with bad weather forecasts?
6. 23 lessons from mall Santas

Miscellaneous

1. Your favourite posts of 2012
2. A teen predicts the future in 1978

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.