Today’s guest post by Steve Kiziak. Life and health insurance advisor.
Insurance 101
We are extremely fortunate as Canadians to have universal health care through the Canadian Health Act. Some of us also have additional health coverage and protection of income through a group insurance plan through our employer or unions. But as more Canadians are becoming self-employed and as our government seems to cover fewer services due to rising health care costs, we need to be more self-reliant and establish our OWN financial safety net.
Here are some the different ways we can protect our financial security.
Life Insurance
Life insurance is fairly straight forward; in the event of your death a lump sum amount of money will be paid out tax-free to a named beneficiary (or your estate). The main reasons for having life insurance are…
- So your surviving loved ones will be able to sustain their current lifestyle without your income.
- To pay off a mortgage or any outstanding debt.
- To pay off taxes and final expenses.
- As an estate preservation strategy. Death can trigger taxation of certain assets in your estate that you may want to pass on to your loved ones without the tax burden.
There are two main types of life insurance contracts; “Term Life” or “Whole Life”. Term life is a policy that covers you for a set term, usually 10, 20 or 30 years. You pay the premium (monthly payment) for the duration of the term and at the end of the term the coverage ends.
“Whole Life” is (you guessed it!) coverage that is in place for your whole life. You chose an amount of coverage and that insurance will be in place for the rest of your life. And based on how the contract is set up, it can also be a “paid-up” policy meaning that after 10 or 20 years of payments, the contract will be fully paid for and no more premiums will be required.
Your premium will be higher with a whole life policy but you may only have to pay for a set time (10 or 20 years) depending on the contract. A cash value will also start to accumulate based on a portion of your premium and an investment component that is built into the contract. You can borrow from the cash value that’s accumulated and still not lose your coverage. Or if you surrender the policy (cancel the insurance) you will receive the full cash value you have built up.
Disability Insurance
Disability coverage is based on your monthly income and is usually paid out as a monthly tax-free benefit. Disability contracts can be quite complex and have a lot of features. The contract can be set up to protect you for your entire working life (to age 65) or for a shorter time period usually 10 years. The premium is based on your age, health, and your occupation.
People that need disability protection.
- Self-employed with no group disability insurance from an employer or WCB (workers compensation) coverage.
- Employees with no employer disability insurance or not enough coverage from employer plan to cover all expenses.
- A sole income earner in a family.
The main thing to remember is that disability insurance is something that replaces your income if you are unable to work. It allows you to sustain your current financial obligations and life style in the event of illness or injury.
Critical Illness Insurance
Critical illness coverage pays you a lump sum tax-free amount in the event of you being diagnosed with a major illness. Cancer, heart disease, and stroke are the big three killers of Canadians and make up around 90% of all claims. There are no restrictions on the money you receive. It could be used to cover expenses while you fight your illness, medication not covered by the Canada Health Act, or to spend on a once in a lifetime vacation. It’s your money.
Extended Health Care
An extended health care plan is something that will fill in some of the gaps of our provincial health coverage. It includes things like dental care, prescription drugs, vision care, some diagnostic services, chiropractic, physiotherapy, ambulance, private hospital rooms, optometry, and family counseling. All insurance companies have their own version of this type of insurance so benefits can vary a bit depending on the company.
Long Term Care
Long term care is a fairly new innovation in the Canadian insurance market. It is designed to pay a benefit to someone when they reach the point of not being able to take care of themselves anymore. It’s insurance to help people deal with risk usually associated with old age. It will cover costs such as long-term care facilities, palliative care, and in-home care; it could also provide an income similar to a disability policy so a family member or care giver could use the funds for your needs.
This should provide you with a general overview of some of the different ways we can protect ourselves and our families from unforeseen events in life that can affect our finances. I think of insurance as the foundation of any financial plan. I know it’s not as sexy as the world of investing and wealth accumulation, but it’s the platform used to protect your wealth and income.
Thanks for reading and if you ever have any questions please send me an email. Stephen.kiziak@dfsin.ca
Hi,
As a start I’ve simply got Term Life Insurance and that’s about it at the moment. I have asked about critical injury insurance but have never followed through. I’m always so skeptical when it comes to insurance because when something happens there’s always a missed clause or someone did something wrong and no one gets paid. There has to be a trust with your broker. I have heard of the long-term care as well but not too familiar with costs etc. It would interesting to know what people pay in my age range for these 2 insurances and how often they are purchased. Mr.CBB
Thanks for the comment Mr CBB! Term is a great place to start and is quite a bit more affordable than whole life. The important thing to think about is your overall financial situation. What and who do you want to protect? A good broker will go over your entire financial plan and put insurance in place that fits your budget and your present and future needs. Also, policy’s through a Canadian insurance companys are properly underwritten. Depending on your coverage it could include a full medical exam therefore the insurance company knows you health in detail before they give you a policy. Outright fraud can get a policy claim
denied (lying about smoking is the biggie!). And I would look into Critical Illness again ! It’s so important to have I feel. I’m 42 and healthy, 20 year term coverage for $130k is $106 per month. hope that helps .
Oh and Critical Illness is a very popular type of coverage. I’ve also heard from some insurance insiders that it may be priced out of the market one day due to increased cost to insurance companies. Long-term care is not as commonly sold, but that could change in coming years due to an aging population.
That should have read critical illness… not injury. Cheers
Steve, I have heard debate before about the investment portion of whole life. If I just want insurance, why am I forced to buy an investment too? Wouldn’t it be better to buy term life and invest the difference myself? If I borrow from the cash portion am I charged interest on it?
Thanks for sharing all this advice!
The buy term, invest the rest debate has been going on for a while now. I think it all boils down to needs. What is the insurance for? My dad bought me a whole life policy when I was 12 years old and made me the policy owner. It had only a $15k face value but over the years it built up a nice cash value and dividend that I was able to borrow from when I needed it.
If you borrow from the cash value there will be interest charged, and any gains on the investment portion it taxable as interest.