Key Takeaways:
- Choose Brokers Wisely: They might earn commissions, but a good broker offers value beyond buying online.
- Protect Income First: Disability insurance is key—your ability to earn is your greatest asset.
- Consider Coverage: When you are uncertain, buy a shorter term with a convertibility option
- Prioritize Saving: Max out TFSAs before considering permanent insurance.
Novel Wealth delivers a fully integrated, done-for-you approach to managing your money - and insurance! If you're ready to move beyond one-size-fits-all programs offered by big banks and insurance companies, Novel Wealth is a great choice.
There is a lot of conflicting advice about insurance. Friends, family and Reddit feel justified in giving advice without professional training. Insurance agents make commissions and therefore have a conflict of interest. So…who do we believe?
In your mission to protect yourself and those you love, here’s the tech professionals' guide to protecting their families with insurance.
1. Buy insurance through an insurance broker.
You are not getting deal when you buy life insurance directly online, in fact, it can be more expensive. This is not like selling real estate, where you can cut out the realtor and save the 6% commission. When you cut out a broker, the price is the same, but you are cutting out the professional who can advise you on how each policy/company works.
Yes, they have a conflict of interest because they are paid commission, but an experienced broker is usually experienced because they play the long game and treat people fairly.
It’s not just buying the policy you need to think about. You need to think about what happens during the life of the policy. When you have a question or a policy change, do you really want to wait on hold at a call centre? Even worse, what happens if you're going to make a claim?
You should always work with a professional, especially if the cost is the same.
2. Your most valuable asset is your ability to earn an income, so disability insurance is the most important insurance to have.
Insurance brokers are always thinking about the odds. You are more likely to become disabled at age forty than you are to die. It is also financially draining to live with a disability due to the costs associated with treatment. That's why it makes so much sense to manage the risk of disability first.
Some employers offer disability insurance as part of their group benefits, but many do not. It is an optional addition to group health and dental coverage, and some employers choose not to include it in their plans to save costs. This can lead to some individuals believing they have disability coverage without looking into it.
Even when you have coverage through work, it usually isn’t enough. Here are a few reasons why:
1. The non-evidence maximum is the coverage amount every employee receives, regardless of their health status. This amount is usually very low compared to their income, and to purchase more coverage from the group provider, you need to fill out a health questionnaire. It's not advisable to purchase more coverage from the group provider because you can buy a higher-quality policy from a private insurer.
2. Almost every group plan switches the definition of disability after an employee has been on a claim (receiving disability benefits) for two years. It works like this: For the first two years, if you can’t perform the duties of your regular occupation, you are considered disabled. After two years, the definition switches, and they now ask if you can perform the duties of any occupation. The word any is extremely broad, and therefore, this definition switch causes a lot of people with serious issues that prevent them from going back to their original job to be deemed able to work in another job, which ends their claim. Note that you do not need to have another job lined up; you only need the insurance company to deem you fit to perform the duties of another job for your claim to be ended.
This is not how good private disability policies work. A private Professional Series Disability Policy will cover you to age 65 if you cannot perform the duties of your regular occupation. However, very few insurance companies in Canada are selling these high-quality policies, so it's best to consult with a professional.
3. If your employer changes or cancels its disability insurance contract with the group insurance provider, your policy will change. This can be an unpleasant wake-up call, as you have no control over it.
4. If you leave your employer, you can’t take your disability insurance with you. Do you think you will be with the same employer for the rest of your life? What happens if you develop something that prevents you from purchasing a private plan in the future? What if you leave for another employer, but your condition prevents you from buying more optional insurance above and beyond the Non-Evidence Maximum? Many situations could leave you without proper coverage.
In summary, relying on your employer to protect you and your family is a gamble, and losing your ability to earn an income is so catastrophic that you shouldn’t roll the dice. Always protect yourself with a private, professional series disability policy.
3. Do not buy permanent insurance until you have your TFSAs maxed out
There are two types of insurance: Permanent and Term.
Term insurance is much less expensive than permanent insurance. It stays the same price for the length of the term, after which the price will increase significantly. Term insurance covers temporary liabilities, such as the risk of passing away with young children or a mortgage.
Permanent insurance has a level of cost, so it doesn’t get more expensive. The policy stays in force for your whole life or until you cancel. It is there to cover your permanent needs. For instance, you may not want your children to sell the cottage when you pass away, but they can’t afford the capital gains tax. Maybe you have a child with a disability that you need to support, regardless of when you pass away. There are excellent reasons to have permanent insurance, but you should wait until you have those reasons before you purchase it.
Here are three reasons why you should wait:
- Permanent insurance is much more expensive than term insurance; therefore, purchasing permanent insurance can strain your monthly cash flow. These policies are some of the first things that are cancelled when things get tight at home. If you cancel them early, you will lose a lot of money.
- Term Insurance can convert to permanent Insurance. You don’t need to rush to buy permanent insurance because almost all term policies come with a convertibility option that allows you to exchange part or all of your term policy for a permanent life insurance policy. This conversion happens at a healthy person’s price and is guaranteed. No matter how bad your health is, you are allowed to convert.
- The Tax-Free Savings Account has practically all the benefits of a permanent life insurance policy but several advantages. You should never buy a permanent life insurance policy when you have TFSA room. TFSAs can be left to anyone you want, tax-free, upon your death. This is the main benefit of permanent life insurance, as well. In the meantime, however, TFSAs are more flexible, you can draw upon them in an emergency, and after a withdrawal your contribution room will reset the following year.
In almost every case, the best strategy is to buy term insurance and focus on filling up your TFSA and RRSP. As you get older and max out your TFSAs, maybe you develop a good reason to purchase a permanent life insurance policy and then you convert all or part of your term without doing a medical.
4. Term insurance skyrockets in price at the end of the term, so ironically, a ten-year term is often the best way to go when you are uncertain.
When a term life policy reaches the end of its term, the price goes up substantially. With most companies, it increases much more than the cost of buying a new term at a healthy person’s price. Sometimes, the increase is 10x the cost of the original term. If you find yourself approaching a term renewal while you are unhealthy, you are faced with a tough decision – do you cancel your insurance when you need it the most, or do you pay the exorbitant renewal cost because you are unhealthy?
To avoid this situation, plan your term renewal to coincide with a time when you would be okay cancelling it or taking dramatically less coverage. For instance, if you feel your family will be much less vulnerable when your youngest child graduates from university at age 22. Your renewal date should coincide with that date.
But if you're going to purchase insurance now and haven’t had your last child, what do you do?
To solve the term length dilemma, your first term insurance purchase should be a ten-year term. Ten-year terms are very inexpensive, and you can convert them to longer terms and permanent insurance without doing a medical. By purchasing a ten-year term, you guarantee your future insurability until your situation and needs are more predictable. You might be asking, “Why don’t I just buy a twenty-year term and convert that to a longer-term?” The key here is that most ten and fifteen-year term insurance allows you to convert to a longer-term insurance policy in the future without a medical, but most twenty-year and thirty-year policies do not. Once you buy these longer terms, you can only convert them to permanent insurance.
Therefore, a person who isn’t sure how long they need their policy should buy a ten-year term now and convert it to a longer-term when they have clarity. For instance, a couple might buy a ten-year policy when they get married and get a mortgage, then convert to a twenty-year term when their last child is born.
The other reason we like a ten-year term is that it allows you to purchase a lot of coverage for a very low price. Most people are buying insurance at a time when losing their income would be catastrophic, like when they have a mortgage and young children. A thirty-year term might be the most cost-effective way to purchase insurance over the next 30 years. Still, the cost of the policy today is very high relative to a ten-year term, so thirty-year term insurance purchasers will often look to buy less coverage to keep the price down.
Consider this: How much insurance do you really need when your children are young adults? Do you need as much as when they are infants? Probably not. So why would you purchase a policy that gives you as much coverage in the 29th year as in the 1st? In almost every circumstance, you would be better off buying a much larger ten-year term and reducing your coverage through conversions as your needs go down. For example, instead of buying a $1M thirty-year term, you could buy a $2M ten-year term and convert it to a $1M twenty-year term once your children are out of daycare.
Insurance can be complex, with many moving parts to consider. I hope this blog has helped you understand what's at stake. If there is one key takeaway, it's this: almost everyone needs a disability policy beyond what may be offered at work. Add that to a term life insurance policy, and you’ll be well on your way to protecting yourself and your family for years to come.
Novel Wealth delivers a leading-edge, fully integrated, done-for-you approach to managing your money - all under one roof. Unlike high-street financial advisors, the Novel team has a legal fiduciary duty to prioritize clients’ financial needs.
If you're ready to move beyond one-size-fits-all programs offered by big banks and insurance companies, Novel Wealth is a great choice.
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