RISCARIO INSIDER

November 26, 2011

INCOME REPLACEMENT: A GUIDE TO DISABILITY INSURANCE

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

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

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

Statistics

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

You probably know people who are disabled at least partially.

Differences

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

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

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

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

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

Nortel

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

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

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

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

Problem

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

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

Podcast 145 (hmm)

direct download | Internet Archive page | iTunes

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

November 19, 2011

IS THE BEST ADVICE FREE OR FOR-FEE?

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

For-Free or For-Fee?

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

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

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

For-Fee

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

The optics vary.

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

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

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

Other Sources For Free Advice

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

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

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

The Sellers

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

When Paid Advice Doesn't Pay

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

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

The Dilemma

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

The Biggest Problem

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

Podcast 144 (4:59)

direct download | Internet Archive page | iTunes

PS What do you think of my free advice?