Insights & Resources

Insurance can often be a tough thing to talk about. Conversations about insurance often focus around “worst-case” or unimaginable scenarios and is something we pay for with the hopes of not having to actually collect on. 

However, if one of these “worst-case” or unimaginable situations occur, like an accident or death, insurance will do exactly what it is intended to do – help you focus on healing, and avoid worrying about finances. With a lump sum payout or monthly tax free payment, insurance can help prevent bankruptcy or erosion of your hard earned savings, at a time when your time and attention are on more important matters.

There are several forms of personal insurance, so it’s important to know what the different types of personal insurance are, what they are used for, what they protect, and some common mistakes people make when considering these types of insurance.

1) Term Life Insurance

Term Life Insurance is a form of life insurance that covers you for a specific period of time (the “term”), often 10 or 20 years, but can be longer. A Term Life policy will provide a tax-free lump sum payout to a beneficiary when you pass away as a way to protect against lost income – in other words, it provides a payout in the event you pass away and are therefore no longer bringing an income into your household. 

Who is it for? Ideally, Term Life insurance is appropriate for anyone in their working years supporting a family either as a primary caregiver, or monetarily.

How might Term Life Insurance help? Consider the following example of Tim & Joanne, a young married couple currently living in a $1.5 million home with a $400,000 mortgage. Joanne is the primary income earner, making $150,000 per year while her husband Tim is the primary caregiver to their 2 children. He works part time and makes $25,000 per year. In the event Joanne were to pass away, Tim’s salary alone would not be enough to cover their monthly mortgage payments. Even if he was to find a full- time job, he would still need additional income to pay for childcare. On the other hand, if Tim were to pass away, Joanne may need to cut down on her work hours or pay for additional childcare. Under both these scenarios, the income of one parent alone would not be enough to stay in the home and maintain childcare. A payout on a Term Life policy would mean the surviving spouse now has a tax-free lump sum of money that could be used to pay for the mortgage and/or childcare, in this example, without having to sell the family home. 

The Term Life Insurance payout is providing lost income of the deceased spouse to the surviving spouse. In terms of the amount of coverage, a Term Life insurance policy can vary across a wide range (within reason), for example, between $25,000 to $2,000,000 of coverage. 

Term Life Insurance is generally one of the least expensive types of insurance you can purchase for yourself. With Term Life insurance, payments can be made monthly or annually, and your payment amount will be dependent on your age as well as any potential health factors. For example, things like age will play a major role in the cost of this insurance, with younger folks generally paying less than older folks of the same health status and coverage amount. 

Major Term Life Insurance Mistakes

#1 – Purchasing through your bank or mortgage lender when you set up your mortgage. 

While this type of insurance is advertised as term life insurance there are a few key differences. Firstly, the primary beneficiary is the mortgage lender, not your family. This means that if you pass away, the mortgage lender pays themselves with the proceeds. Another pitfall is that with this type of insurance purchased with your mortgage, the monthly cost will remain the same despite the amount of coverage decreasing as your mortgage principal is paid off. Finally, approval of the policy is done at time of claim not application. This means that the mortgage lender who provided the insurance could reject the insurance claim when you pass away meaning the mortgage is not paid off. 

With a traditional private Term Life Insurance policy not done through your mortgage, you choose the beneficiary, your coverage does not change and approval is done at the time you apply, not the time a claim is made.

#2 – Assuming the coverage you have through work is sufficient.

Often employers will provide term life insurance coverage through their Group Benefit’s package. Many employers offer 1-1.5 times your annual salary. Using the example above with Tim & Joanne, if Joanne were to pass away, Tim would receive one time her annual salary of $150,000 which is not nearly enough to pay off their $400,000 mortgage or pay for additional childcare expenses. 

As well, if you leave your employer, the insurance coverage also ends which means you may need to purchase your own life insurance anyways. This will probably come at a higher cost as you will be older when applying for this new insurance versus when you first started working. 

With a traditional private Term Life Insurance policy, you keep your insurance coverage regardless of whether you change jobs or not.  

2) Disability Insurance

Disability insurance is a form of insurance that pays out a monthly tax-free payment in the event you become disabled, and helps to replace lost income should you be unable to work due to disability. 

Many insurance companies will provide their own conditions on what is considered a disability for the purpose of collecting insurance. However, loss of a limb or vision, or mental incapacity are a few examples. 

Some insurance companies will also allow you to choose “own occupation” disability coverage meaning that if an accident occurs preventing you from working in your current occupation, but you are able to work another job, you can still collect the disability insurance payouts. 

For example, if you are an electrician and suffer damage to your arms and are unable to perform your job functions, but later obtain a desk job working as a bookkeeper, you may still be eligible to collect your disability insurance payments. This means you would be earning your income as a bookkeeper and your disability insurance payments. 

Who is it for? Anyone that is working, under the age of 65 and does not have another source of income that is sufficient to support their monthly cashflow needs. 

The amount of coverage is often based on your annual income at the time you apply. 

Continuing with our example of Tim & Joanne, if Joanne makes $150,000 of income per year she may be eligible to purchase Disability Insurance that will provide her with $6,000 of income per month. This amount would help alleviate some of the cash flow constraints that will occur from her being unable to work, should she incur a disability. 

Major Disability Insurance Mistakes

#1 – Using your savings to cover your cash flow needs if you have to stop working

In the event you were to become disabled and do not have a disability policy in place, you may be required to dip into your savings. If you require $6,000 a month to live (including mortgage, hydro, property taxes, food, gas) and have $100,000 saved up, you will exhaust these savings in under a year and a half. If these savings were put aside for retirement your retirement plans may change drastically as well. 

#2 – Assuming you won’t need it

The chances of becoming disabled may be greater than you think. Research shows that 1 in 4 Canadians won’t be able to work due to illness or injury for 90 days or more before they reach age 65. Should this situation last longer than 90 days, its average length is nearly 6 years1. 

A Disability Insurance Policy will help to replace your income in the event you are unable to work due to a disability and reduce erosion of your savings. 

3) Critical Illness Insurance

Critical Illness Insurance is a form of insurance that provides a one-time lump sum tax-free payment to you in the event you become critically ill. 

Critical Illness insurance payouts can be used to cover anything from treatment to transportation costs to rest and relaxation. A payout from a Critical Illness insurance policy allows you to focus on healing vs. worrying about finances. 

Many insurance companies will provide their own conditions on what is considered a critical illness for the purpose of collecting insurance (cancer, stroke or heart attack are a few examples.). For example, if you have critical illness insurance coverage and become diagnosed with cancer, your critical illness policy will pay out your coverage amount to you tax-free relatively soon after diagnosis. These funds can be used to pay for treatment or costs associated with getting to the treatment centre, or house bills while you recover and are not working and not collecting an income. 

Who is it for? Anyone that is working, under the age of 65 and does not have another source of income sufficient to support their monthly or immediate cash flow needs. The amount of coverage can vary and is not tied to your current income. 

For example, using our example of Joanne and Tim above, Joanne and Tim both purchase $100,000 of Critical Illness insurance coverage. Tim suffers a stroke and collects his $100,000 critical illness insurance payout. Tim uses this money to pay for transportation to and from the rehab facility where he goes three times a week for physical therapy, and for the treatments themselves which are not fully covered by OHIP or his employer plan. Tim recovers and is able to resume most of his daily functions. There is a small sum of money left over from the insurance payout and the family uses it to rent a cottage on the lake for a week for some much needed family time and rest after the past year. Because of the insurance payout, Tim and Joanne did not need to pull from their retirement savings to pay for Tim’s treatments and transportation. 

Major Critical Illness Insurance Mistakes

#1 – Assuming your Employer’s Group Benefit Plan is sufficient

While many employers do provide insurance protection, some differentiate between Critical Illness and Disability and do not provide both. If they do, coverage may be limited compared to what you would be eligible for if you were to obtain your own plan.  Like Employer Group Term Insurance, coverage often goes away if you leave your employer. 

#2 – Waiting too long to apply

Two major factors in determining the cost of a Critical Illness Insurance Policy is your age and health status.  As we get older, the cost increases. If we suffer any health condition, the cost increases. This also applies to family members. For instance, if your parent is diagnosed with a serious health condition, this may increase your Critical Illness insurance cost as insurance companies often consider family health history in their underwriting process. The cost cannot change if your health status or family health status changes after the Insurance Policy is in effect. 

A private Critical Illness policy allows you to control the amount of coverage, the timing of when you apply and how the payouts are directed so you can focus on your health instead of your finances if you are diagnosed with a Critical Illness. 

How do you decide what is right for you?

In a perfect world we would all have sufficient personal insurance protection to cover all scenarios. However, the reality is that everyone’s financial and health situation is different and having all three types of coverage listed above may not be realistic. 

If you would like to speak more about what type of coverage or coverages makes most sense for you now, please contact us and we will review the options and different quotes with you.