From the category archives:

critical illness insurance

Foresters withdraws Term to 100, other changes

by Glenn on April 2, 2012

Independent order of Foresters (Unity Life, Foresters) has just announced that they are no longer offering a term to 100 life insurance policy effective April 30, 2012.

This is one more in a long line of price increases and market exits over the last year and a half or so.  Almost every insurance company in Canada has raised their premiums on these products or ceased offering them entirely.  And rumours abound that the rate increases are not over yet – we may be seeing another 20-50% premium increase on new issues of these products in the next 1-2 years.

But consumers aren’t the only ones helping Foresters out in the belt tightening.  From their release:  “Further, we will be changing the first-year commission rates of our Advantage Series Whole Life and Passport Universal Life products”

While I personally ignore commissions (I don’t recommend products based on my commission), I can tell you this much.  When a company tells you the numbers are ‘changing’ and don’t follow it with a marching band about rates doing down or commissions going up, then they’re telling you that commissions are going down. So, yes, commissions I assume are going down on these products.

And frankly, that’s fine with me.  There’s a large disparity in commissions between term insurance and universal life and I’d be just as happy to see that financial motivation removed from the marketplace.

(note: there’s a common misconception that lower commissions=lower premiums.  This is not the case – in fact frequently it’s just the opposite. )

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Canadian Tire Life Insurance – a good buy?

by Glenn on March 8, 2012

As a Canadian, we’re required to love and support Canadian Tire, second only to the love of Tim Horton’s. Nevertheless, is their life insurance offering a good buy for us?

I recently reviewed their website and came to the conclusion that in fact, no, it’s not the best product for most Canadians. In the cases that I reviewed, Canadians have far better products available, far cheaper.

1) No medical exam. I think consumers don’t understand this. You may think that you can just call, and you instantly have a life insurance policy. That is not the case. There is no physical exam, however there is an extensive medical questionnaire. That medical questionnaire is reviewed and underwritten, and if they don’t like it, you get declined.

Any number of life insurance companies offer insurance policies that don’t require a physical exam at smaller amounts of insurance. Rather than sending a nurse out, answering a variety of questions is used instead.

In short, don’t confuse ‘no medical exam’ in this case as meaning ‘no underwritting’. There is underwriting and you can be declined.

If you’re likely to be declined, you should use a broker who is able to shop the market from a variety of companies to find one that is lenient for your specific condition.

2) It’s term insurance. Actually, it’s 5 year term. That means the premiums are level for 5 years, after which point they increase. They don’t appear to disclose on their website what happens after 5 years.

3) Premiums are inexpensive. Uh, no. Not even close – expensive is the word I’d be using. I ran a Male Nonsmoker age 47 for $250,000 recommended you read. Canadian tire premiums for 5 years: $65.75. RBC premiums for 10 years (not 5 – level for 10), $33.64. Yes, you’re reading that correctly – you can get insurance with rates that are level for 10 years, at half the price of CT Life’s policy which is only level for 5 years. It pays to shop around.

4) What happens in 5 years? No conversion. A typical term insurance policy you would select through a broker would normally have the abilty to convert your policy to permanent. While not an option you may expect to use, this is a serious fail safe clause should you become uninsurable. With CT Life’s 5 year policy, you’re locked in to their policy with premiums after 5 years that they’re not disclosing until you get the policy – and it expires completely at age 75. If you become uninsurable, you have no options. With a typical term life insurance policy you can switch your term policy to permanent, thereby locking in your premiums level for life – with no medical exam and at healthy rates.

5) Who you gonna call? If you purchase your life insurance through CT Online, who you gonna call when you have questions? Need to change your banking? Have a claim? Canadian Tire? Really? As an online broker myself, I have seen this criticism of my model before – but there’s a difference. I do business remotely, but I am still a physical life insurance broker you can call for service (I just don’t come out to your home for sales presentations). With brokers, including online brokers, you typically are able to get service directly from a professional involved in the life insurance business – not a call center.

In short, consumers have products with similiar underwriting, better features, and substantially lower premiums. While I love my Canadian Tire store as much as the next Canadian, CT Life’s product is a case of using a great brand name to market a sub-par life insurance product. Shop around, you’ll be better off.

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More Universal Life Thoughts

by Glenn on February 28, 2009

I’ve previously commented on Universal Life Insurance but wanted to expand on that a bit.

Universal life insurance in Canada belongs to the permanent insurance category. Typically you would consider universal life if you’re looking at life insurance needs for the rest of your life – forever. i.e. you know today you want the insurance when you’re 60,70,90 or 300 years old.

A universal life insurance policy consists of two aspects or features. The first one is the insurance cost. The second part is the investment component. Within these two components we have a myriad of options.

Lets look at the insurance portion to start. Note that we can treat the policy as just the insurance portion and completely ignore the investment part. And it’s a good idea to do that as the basis for your investigation. Let’s say you purchase $100,000 of Universal Life (UL). We’re going to be keeping the insurance in force for a good long time, so we need to know what the insurance premiums will look like over the duration of the policy.

There are two basic premium structures available; level and YRT. Level insurance costs means the premiums are set to never change – they’re level for life. No surprises now, or later in life when it comes to the underlying insurance costs. As an aside, we only ever recommend UL with level insurance costs.

YRT premiums, or Yearly Renewable Term, has premiums that go up every year. The premiums are based on your age, so they start out cheap when you’re younger but increase over time.

There are other options available with some companies where they mix these two (YRT for 20 years, then going to straight level) but that’s they all tend to be mixes of YRT and level.

Now lets look at the investment part. The way this works is any money put into the policy above and beyond the basic insurance and administration costs go into the investment part (or you can just pay the base insurance and admin costs and leave the investment part at $0). Let’s say your basic insurance premiums are $50 per month. If you pay $50, you have your life insurance and your investment sits at $0. If you pay $100 a month, the first $50 pays your insurance and the remaining $50 is put into the investment ‘bank account’ where it hopefully grows and earns interest.

What type of investment options are available? Well, these investment options look a lot like mutual funds. They’re not mutual funds but viewing them as such does give us a pretty good snapshot of what they do. And just like mutual funds, the world’s your oyster when it comes to investment options. All the insurance companies have their own myriad of investment options and some of them actually track well known mutual funds. Manulife for example has something in the range of 25 to 50 different investment options. Wawanesa conversely has a handful, most of them the standard index funds (if you’re an index fund kind of investor…and if you’re not you probably should be).

But! just lke mutual funds, these investments are typically not guaranteed. This ability for investments inside a UL policy to crash and burn just like the stock market or your mutual funds is the biggest risk I see. Be aware when reviewing a universal life insurance presentation that if it depends on some investment option, that quite likely that investment option is not guaranteed. If your investments track mutual fund A, and mutual fund A just crashed by 40%……then the investments inside your UL policy just dumped by 40% as well.

Another thing to consider is that some UL policies will offer some guaranteed investment. Something like a GIC type of rate would be common, maybe at 2 or 3%. But you only get those guaranteed rates of return if you actually invest in those GIC types of vehicles. If you invest in the equity based investments, you’ll not have those guarantees so if your illustration shows equity based investments with GIC type of rates, be careful.

The next thing to carefully consider when looking at investments inside a UL policy would be surrender charges. Some investment options require that your money stay inside the policy for a minimum amount of time. Withdrawing money back out from the policy prior to that time results in very heavy charges. I see no need to invest in a product like this when there are plenty of products available that don’t have these fees.

So what’s the benefit of the investment inside a UL policy? Very simply, money invested inside the policy grows on a tax sheltered basis. Just like an RRSP, if you earn $100 inside the policy you don’t have to pay taxes on it as long as the money stays in the policy. Unlike an RRSP, you don’t get a tax break on deposits (which means that RRSP’s are your first line of investment strategy whenever possible).

I’m going to write about some advantages in my next article, but for now, lets look at some pitfalls with universal life. (Note that I believe Universal Life is a great product. But you need to know what you’re getting and what the risks are). Lets say you want to build up a bunch of cash inside the policy for some reason later.

How to do that? Well, we want to shovel as much money into the investment portion as we can, as early as we can. Since we always have to pay at least the base insurance premiums we may decide to minimize those insurance premiums by going with YRT insurance costs. This gives us more money (since YRT premiums are initially lower than the level insurance premiums) to start putting into the investment portion. That early start we assume allows that investment to grow higher, faster. And if things go well, that’s exactly what will happen.

But things can go not so well. Let’s say you go with this strategy, but your investments later crash and burn (remember, the investment portion isn’t normally guaranteed). Now you’ve got poor investments and worse, you’ve got those high YRT premiums to pay since they get expensive later.

Consumers can and have ended up in similiar situations. Because we’re dealing with long durations, sometimes spanning decades, we may not realize the problems until many many years in the future. So it’s vital that you address all of this upfront when you purchase the policy. If you didn’t, now’s the time to pull out your UL policy and have another look at what you’ve got.

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Five common mistakes when buying life insurance

by Glenn on January 17, 2009

Here are perhaps the five most common mistakes consumers make when buying life insurance. Avoid them, and you’ll be better off (and have more money in your pocket).

  1. Failing to shop around on price. Agents and brokers all have their own favourite companies they promote and sell. But does company matter? For most of us, and for most types of life insurance coverage, either the least expensive company or close to the least expensive is going to be as good as (or better) than other more expensive companies. If your broker isn’t recommending the least expensive life insurance company, you can run quotes on this site (see the life insurance quotes system in the top right of this page).
  2. Buying the wrong type of insurance. Do your research on the available types of insurance. Most consumers should be looking at some form of term life insurance. Purchasing whole life or some other form of permanent insurance when term life insurance is better suited means you’re going to spend a lot more money on life insurance. Conversely, for the smaller percentage of people who either need or prefer permanent insurance, buying term life insurance instead of something like universal life insurance means we’ll be out a lot of money over the long term.
  3. Failing to purchase term life insurance without the conversion privilege. This is probably the least frequently discussed feature on Canadian life insurance today – and it’s one of the most important….AND it’s available for free on most (but not all!) term life insurance policies in Canada. It’s an airbag for your life insurance policy, insurance for your insurance policy, your back door out of a term policy if everything’s gone wrong. Many won’t use this feature ever, but if you need it, it’s everything. It’s free, make sure your term policy has this before purchasing (and make sure it’s ‘term to permanent’ conversion, not term to term).
  4. Not getting everything guaranteed. In today’s life insurance marketplace, you should be able to guarantee just about everything. That includes future premiums (and not just the internal premiums, but the actual premiums you pay). For example if you want to have your life insurance policy premiums paid up or go to 0, you can do this on a fully guaranteed basis. Or you can get a fancy investment based calculation that may look good, but is not guaranteed. Purchasing a life insurance product that is not completely guaranteed is completely at odds with the insurance concept. And in today’s insurance marketplace, there’s little need to do so.
  5. Buying too little insurance. This typically goes hand in hand with purchasing the wrong type – get the wrong type of insurance and the only way to make it affordable is to buy too little. In addition, most consumers seriously undervalue how much life insurance they need to provide their dependents an income over a long period of time (say long enough to get the kids out of the house). If you’re spending your entire $50,000 of paycheque each year keeping the household together, how long do you think $250,000 is going to last when you’re not around? 5-6 years? That’s not long enough if you’ve got young kids. You can use the how much life insurance do I need calculator to get some estimates.

Pay close attention to those 5 tips and you’ll be a lot closer to ensuring you’re keeping your hard earned dollars in your own pockets.

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Drawbacks to Critical Illness Insurance

by Glenn on April 8, 2008

Critical illness insurance sales are hot in Canada right now. Agents love it, insurers love it, and all the industry magazines are full of long articles on how to sell it. It’s the golden child of the insurance industry. So why don’t I recommend it?

The answer is short, but the underlying philosophy is a bit longer. The short answer is that I don’t see the insurable need. What does that mean? Proper insurance need should be purchased to cover a potential financial loss that could be devastating. And that means that when I recommend insurance coverage I want to be able to point to a specific amount that we lose when the event happens. This concept is fundamental to all insurance.

Would you pay 50 cents to insure the loss of a loonie? Most of us wouldn’t. Would you pay $500 to cover the potential loss of a million dollars? Most of us would. This illustrates the idea that the potential financial loss should be devastating. It’s the same reason we have deductibles – if the loss is small enough you should cover it yourself.

Critical Illness policies are being sold these days for amounts of hundreds of thousands of dollars up to millions. Now stop and consider this before you buy a critical illness policy…..exactly where have you lost $250,000 if you should get a critical illness? Can you write it down in a list and add up the numbers to arrive at $250,000? I can’t.

However, the idea of getting $250,000 should we get a critical illness is extremely appealing to most of us. So is winning the lottery. And just like winning the lottery, the emotion behind buying critical illness is one of creating wealth rather than protecting it. Even the industry marketing material that crosses my desk touts emotional sales.

If you can’t write down specific numbers that you lose should you develop a critical illness, then in my opinion, it’s not insurance. It’s a lottery.

Let’s look at what others have to say on the subject. From the Financial Services Commission of Ontario:

In determining your need for critical illness insurance, you should consider benefits that may already be available to you through other insurance policies, such as life insurance and group health insurance. For example, the benefits offered through your employer’s group disability plan may provide appropriate and adequate coverage in the event of a critical illness.

You should also consider your personal circumstances and the added financial strain that could be brought about by dealing with a serious illness or disease. Public and private health insurance plans typically do not provide coverage for day-to-day living expenses such as travel to and from treatments, home care and child care.

They’ve been very careful to not provide a real breakdown of why one might need Critical Illness Insurance. I have however bolded the relevant sentence. And I agree – go ahead and add up your day to day living expenses, home care and travel care. What’s the upper limit on that? Now, how much are you willing to pay to cover those costs? And did those numbers come anywhere near $250,000? or 2 million? I’m sure they didn’t.
For most of us, those expenses would be difficult. But devastating? Not in my opinion. And if you’re that close to the line financially that you can’t cover your travel expenses, then I would suggest you consider how you’re going to pay the insurance premiums.

Here’s another take, from RBC:

If you are diagnosed with a covered critical illness or condition and satisfy the survival period, your plan will provide a lump-sum benefit to be used any way you wish. For example, you can pay for daily expenses related to your recovery, reduce or pay off debts, make alterations to your home or vehicle, seek specialized medical treatment, fund a leave of absence and more.

Notice that again there isn’t any well defined need created for insurance coverage to the tune of hundreds of thousands of dollars. Are those valid expenses they’re defining? Perhaps. Are they something you need to buy insurance for? Again, I’m not so sure.

There are two other needs thrown out by the insurance industry to define the amount of CI insurance. The first is that it can help pay for getting medical treatment in the US. I don’t dispute this, or even that for some folks it’s a good idea. But the fact is, what’s being highlighted is a problem with the Canadian health care system. If our public system is so bad that we have to go to the US for treatment, we need to fix the healthcare system, not by insurance. Call your MP, not your insurance agent.

The second big one is a potential loss of income. BINGO! This is very important and something you should definitely consider. If you become critically ill, you may not be able to work. You need a replacement income. I couldn’t agree more.

Except that Critical Illness Insurance is not the way to cover this need!

For most of us, financially and insurance speaking, we are a paycheque. If we suffer the loss of our paycheque, this is a large and devasting loss that we absolutely need to insure. There are two ways we can lose our paycheque as a result of not being able to work. We can die. And outside of the Canadian senate, that basically means we lose our paycheque. Secondly, we can be unable to work due to being disabled. The way to cover the first need is via life insurance. The way to cover the second need is via disability insurance.

If you have proper disability insurance and become disabled you recieve a replacement paycheque. You’re covered! Now it’s not perfect, but with proper disability insurance coverage you should be able to get by.

If you develop a critical illness there’s two things that can happen to our paycheque. We can continue to work (some folks do). So in my opinion you only need to cover the limited items mentioned above – is insurance needed? Not in many cases, since you’re still drawing a pay. Or you could not be able to work. With proper disability coverage you would now have a replacement income.

More importantly, critical illness only covers you if you develop the specified conditions. What happens if you get run over by a bus and can’t work? CI insurance won’t cover your loss of a paycheque. Disability insurance will. In other words, Critical illness focuses on and covers the condition, disability insurance focuses on and covers your loss of a paycheque – irregardless of any narrow list of conditions.

In summary, you should first and foremost – critically in fact – ensure you have proper life insurance and disability insurance. If you have both of those, have some disposable income and want to consider coverage for some less potentially devasting financial losses then I’d be happy to discuss critical illness coverage for you.

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