Financial Fundamentals (Pt. 5.5) - Insurance, do I really need it?
Well you know you are officially an adult when you start talking about whether or not you need insurance! And once you start thinking about insurance, you realize there are a TON of types of insurance out there (and lots of conflicting information about which ones are the most important). Add to that - your employer offers you some coverage, and is that better or worse? It’s no wonder insurance is a word that tends to cause people to glaze over (along with “non refundable tax credits” and “annual home maintenance schedule”). Like those other things, it’s an important topic that can cost you if you put off looking into it! The big question people tend to have is “which insurance do I need?” and I am going to do the most insurance-y thing and say “it depends”. If you have three kids and a mortgage your needs are very different than if you are single and renting an apartment, so there is no one-size-fits-all approach. This will be high level review, some of the more complex types of insurance will get their own topic at a later date (I know, good time alert). Buckle up, and grab that BIG coffee, because it’s insurance time!
Life Insurance
This is the one everyone knows about - and for an insurance that has such simple claims criteria, the policies are varied and can be incredibly complicated! For that reason, life insurance will also get it’s own breakdown detailing the types of policies available and the situations they make sense in.
As I mentioned, for a long time life insurance was the type of coverage we worried about - we were more likely to die than to get sick and wanted our families taken care of. There are many reasons to get life insurance, from paying off debts and replacing income to your family, to minimizing tax liabilities on your death via charitable giving, or ensuring a tax free wealth transfer to your children / grandchildren outside of your estate (avoiding lengthy probate and claims from creditors). If you have dependents that you
want to protect, a loan that needs to be protected, or want to look at tax efficient wealth transfers you should speak with your financial advisor to determine what policy type and amount is best suited for you.
Disability Insurance Coverage
More people are familiar with disability coverage as many employer programs offer some coverage - but many individuals are still underinsured in this regard. This is one of those complex types of coverage that will be covered on it’s own in more detail but the big takeaway should be: if you work because you have to, you need some sort of disability insurance. If you work because you love your job and if anything happened to change that you would simply retire and have no ill effects, congratulations! Most of us aren’t in that boat however, and need to protect our income.
At its core, disability insurance pays a monthly income to you if you are unable to work due to an illness or injury. There are a lot of moving parts that can be customized, such as how disabled you have to be to claim, if you want to protect future income or inflation protect your benefit, if you want to have
savings automatically made for your retirement if you are disabled, if you want to extend the disability period for life, or returning some premium if you don’t make a claim. These should all be discussed with your advisor to determine what level of protection makes sense for you, particularly if you are working with a group benefits program as well.
I refer to critical illness and disability as “selfish” insurance. If you have life insurance, you are protecting other people who rely on you. If you have DI & CI, you are protecting yourself because you will still be around to make a claim.
Critical Illness Coverage
Few employers offer critical illness (around 10% of group plans), and if they do it is typically in a fairly nominal amount. Critical illness insurance is the insurance industries response to medical advancements. Way back in the day, if you were diagnosed with cancer or had a heart attack it was pretty much a death sentence. Your family was understandably very sad, but on the other hand the medical bills are no longer accumulating and the life insurance cheque is arriving to make sure they are financially protected while they grieve. Now we are lucky that often people are able to recover from these illnesses, but unfortunately that means the life insurance money doesn’t come through - and the family has one party unable to work (or forcing themselves to work rather than recover) and they are incurring new costs.
Critical illness coverage provides a relief valve when you are diagnosed with a serious illness. For most conditions benefits are payable from date of diagnosis as a lump sum amount that is paid with no strings attached. If you want to pay off your mortgage and make sure nothing happens to your home? Great! Want to head to the US for private treatment? You can do that! Want to take your family on a once-in-a-lifetime trip? Sure thing. It’s designed to give you flexibility and options in the event there is a serious diagnosis.
There are many bells and whistles you can add to these policies, waiving premium if you are disabled and not claiming, returning premium after a certain amount of time if you don’t claim, limited second claim options, etc. as well. The exact plan type and amount should be discussed with your advisor to determine what makes sense for you, but if you would need to rely on family & friends (or increasingly GoFundMe), a loan, or cashing in your retirement savings in the event of a major illness than critical illness is something that you should consider.
Travel Coverage
After the Covid lockdowns, people are back to travelling in larger numbers than ever, so making sure we have travel coverage is important! Many employer plans will cover this and if you are taking a week or two holiday to Hawaii or England with your family this is likely all you really need. If you become a contractor you will want to determine if this is coverage you need, either on a per-trip or on an annual multi-trip basis (some personal health and dental plans include travel, many do not).
If you generally travel for extended periods of time (most group plans cover trips up to 60 days), regularly travel to countries with government advisories, have unstable
medical conditions, or like to engage in extreme sports such as sky diving or scuba diving you will want to review your group coverage and see if you will actually be covered. You may need to seek out coverage that specifically covers extreme activities, or does not exclude specific countries. It never hurts to speak to your advisor when you book a trip and confirm that your current coverage is sufficient.
Health and Dental Coverage
From university on, most of us will have some sort of benefit package. While it will include other benefits, the one people tend to focus on the most is Health and Dental coverage. And why not? Particularly at younger ages, things like making sure your trips to the dentist don’t cost an arm and a leg are usually our biggest concerns. For most of us, the coverage offered by our employer will be sufficient to meet our needs, and will be the most cost efficient way to protect ourselves and our families. If you have a spouse with their own employer plan, you can each cover your whole family and claim to both plans, effectively doubling up on your coverage!
In some cases, however, it can make sense to seek out additional coverage. If your plan has a lower drug maximum (such as $2,000 or $5,000) and you get a diagnosis of say, rheumatoid arthritis, you can go through your entire annual allotment within months. If you have a particular medical equipment need that is not covered by a group plan, such as continuous glucose monitor, certain individual plans can fill the gap left by the group plan. Or, perhaps you have children and you expect you will need braces and your plan does not offer orthodontics. Quite often we see people move from an employee to a contractor and now need to replace their benefits entirely.
There are a few things to note with individual health and dental coverage, namely that there are a lot of options to choose from! There are multiple carriers that offer plans, and they often offer 4-6 levels of coverage for each of “medically underwritten” coverage and “guaranteed acceptance” coverage. For
this reason, it is generally a good idea to speak with your financial or insurance advisor to discuss the pros and cons of the various options and determine what makes sense for your family and your wallet.
I’m not going to get into all the differences, as carriers tweak plans annually and there are just so many options - but I will speak to the medically underwritten versus guaranteed acceptance plans. If you have not had group coverage, carriers will want to get an assessment of the level of risk you provide and they will ask questions about your medical history. If you are currently treating a condition they may exclude the condition or not cover drugs for that particular condition, as part of a “pre-existing condition limitation”. You may say “well that is exactly why I want the coverage, why would I take it if they won’t cover my asthma inhalers”? And the short answer is, insurance is designed to protect against unforeseen events. For the same reason you check the condition of a rental car before driving it off the lot, carriers note any scratches or defects, and will cover you for anything else that happens, but not the issues that are currently known. In exchange for this, the drug coverage limits are typically quite high and a wide variety of medical supplies / diagnostics / ambulance / accidental dental benefits are covered so that if something bad does happen you are covered. They also offer massage, chiropractor, etc. vision and dental benefits but depending on your needs you may be better off saving some premium and paying for those benefits out of pocket.
Now, if you’ve had group coverage within the last 60 to 90 days, things are a little bit different. There are plans that will not ask about your prior medical history and guarantee to offer you coverage. Of course there has to be a catch, and it is that your drug limits are quite a bit lower (usually you will cap out at $2,700, compared to some medical plans offering as much as $250,000 in drug coverage); and in exchange for the uncertainty about your health premiums tend to be a bit higher. Depending on where you are located, you can sometimes combine a program with some government drug coverage to protect against higher drug claims - but again you will want to review your options with your advisor.
TL/DR: If you have a special need that’s not covered, lose coverage, or have a family history that makes you think you may have higher claims one day you may want to seek out individual coverage. It is much easier to get comprehensive coverage when you are healthy as opposed to waiting until you are already on a pricey medication.
Long Term Care Insurance
This coverage, while available to younger individuals, is typically targeted at older Canadians. The idea being that as we are starting to live longer, we are unfortunately more likely to live part of our lives requiring specialized care either in our homes or in a facility. These policies will pay a monthly amount once you are no longer able to care for yourself, to ensure that when you require care you have the flexibility to receive the care of your choice (whether it’s staying in your home, choosing a private care facility, or staying in a public facility). These policies have had a bit of a bumpy ride in Canada, with no carrier willing to offer guaranteed premiums. Currently no carrier in Canada is selling a standalone Long term care policy, meaning if this coverage is something you are interested in it will need to be incorporated into your
other planning. Perhaps in the future as we address some of the concerns in our long term care facilities from a healthcare perspective we will see this coverage come back into the market, but for now many carriers include a future conversion to LTC option in their other policies (usually critical illness) or as an add-on rider to their policies.
If you have a history of longevity in your family (the number one predictor of whether you will have greater than expected life expectancy is if your parents and grandparents did), or just really want to ensure that your kids do not need to help support you (either with their own funds or by decreasing your estate to leave to them), putting a plan in place to give you an option for this coverage may be worth discussing with your advisor - this may be one of the factors that makes one carrier more competitive than another when selecting your disability or critical illness provider.
In Closing
When we are planning our pathway to retirement we all want to focus on the exciting stuff - building up our investment portfolios, paying off our homes, and seeing our net worth numbers increase. We talk about ‘stress testing’ portfolios to see what a market shock will do to your balances to make sure you are ready for retirement, but how many of us do a stress test to see what a shock will do to our savings plans?
The most common concerns when determining your retirement plans are “what happens if I die too soon?”, “what happens if I live longer than expected?”, and “what happens if I get sick along the way?” Insurance is designed to protect that downside risk, so that even if the worst happens, you and your family can keep working toward your financial goals. If you are not sure if your plan is suitably protected for that stress test, feel free to reach out and we can identify any gaps and solutions.
Elyce Harris is a CFA Charterholder working with Cornerstone Investment Counsel, a registered ICPM in Alberta, Canada. She is also a licensed insurance broker in Alberta, Ontario, and PEI. While every effort is made to ensure the accuracy of statements, errors may occur. If a specific stat or carrier policy is cited, a source will be provided, however this is not done for generalizations. Please note that in all scenarios investment returns are not guaranteed, values change frequently and you could lose money. Any performance data represents past performance and does not predict future performance.