Tuesday, July 31, 2012

Why Critical Illness Insurance Should Be Considered As a Key Piece in Your Financial Plan

It can't happen to me, or can it? The truth is from the age of 18 you have a about a 1 in 4 chance of being diagnosed with a critical illness prior to the age of 65. A critical illness is basically any disease or illness that will severely impact you in a negative way to the point that you may or may not die. Regardless, you will need to focus on recovery for an extended period of time and this can have a significant impact on your financial well being.

Most people don't want to consider these scenarios but they have major impacts on you, and your family's financial security. Imagine not being able to work for 2 years while you are undergoing cancer treatments. Who's going to pay for the mortgage, the car payment, daycare, groceries, drugs, etc? It's a scary scenario. Fortunately, we have free health care in this country (for the most part), but it's simply not enough.

Let's consider the following scenario:

Bill is married with two kids. He is 40 years old, has a mortgage, a car payment, child care payments, etc. His wife works too, but the family relies on dual incomes as most of us do. What happens if Bill is diagnosed with life threatening cancer. He basically has to drop everything and seek treatment. While he's seeking treatment his income will stop. The bills will go unpaid, and the family risks declaring bankruptcy after a certain amount of time. They may have to sell the house, the car, etc. This is not an added worry that anyone battling cancer would want to have hanging over their head.

What if Bill had funds to make sure everything was taken care of during his recovery? What if it was $100,000? Would that make life easier for him and his family?

It's very difficult for many of us to amass savings of $100,000 in liquid cash solely for an emergency situation that may or may not come. What should we do?

Critical Illness insurance is probably the most viable option for everyone. For a small amount of money you can transfer a large amount of risk to an insurance company. In the event of a diagnosis of a critical illness the insurance company will pay out a lump sum of money tax free to help with everything that cannot wait while you are seeking treatments. There's your piece of mind.

$100,000 was used for example purposes in this article, and it may or may not be the level of coverage that you would need. Discussing these needs with a qualified professional is always the best place to start.

Critical illness insurance is something that many people have never considered. Working with a professional like myself will help you to determine whether or not it's truly right for your situation.

Friday, July 13, 2012

The Term Insurance Trap

I think that term insurance has it's place in everyone's financial plan. I myself own $500,000 of term insurance on top of my permanent insurance policy. It's a great way to protect ourselves when we are young. It's an excellent way to create an immediate cash surplus in the event that we pass away too soon, and our families need the money to continue to live. But, I find that most people don't completely understand what term insurance is.

The best way to look at it is "rented insurance". It is a finite thing with a definitive start and a definitive ending. The two most popular policies sold in Canada are 10 year term and 20 year term. Essentially these are insurance policies that allow people to rent their insurance for a period (term) of 10 or 20 years. What happens during these terms?

Think of a staircase. The insurance starts out as very affordable, and at the end of the period it jumps significantly higher. And, it does for for a set amount of time until the life insurance company will not insure you any longer due to accumulated age. At this point they get all of your premiums paid for the life of the policy, and they don't even send a thank you letter. Most people are shocked to learn that this what they originally bought.

Here is an example of what it would cost to insure me, a 30 year old male, for $500,000 comparing both policies:


1-10 - $30.45 - $37.66 
11-20 - $97.95 - $37.66 
21-30 - $235.58 - $288.09 
31-40 - $594.76 - $288.09 
41-49 - $1745.23 - $1750.33 
50- Expired - Expired

I think the term insurance trap comes into play when people do not regularly review their insurance policies. Not understanding when the policy is renewing can be quite an expensive mistake for many people. Luckily, the majority of term products sold are guaranteed renewable which means they will reset to these higher rates unless canceled to prevent you from going with out insurance. They are also guaranteed convertible which means they can be converted to permanent insurance with out medical evidence at any time.

So, what is the right solution? For most people it's ideal to buy permanent insurance layered with term insurance when they are young. Our needs for life insurance evolve as we get older, but they almost never disappear. The only time some one wouldn't need life insurance is if their nest egg is so significant that it can cover all of their cash needs at death. Even at this point life insurance is a great tool to cover the tax liability that arises in this case.

If you can't afford permanent insurance, then definitely go for 100% term but make sure you understand the renewal dates. Also, review your situation often to see when the opportunities to buy permanent insurance come up. Don't get trapped by higher rates.

*Note: The rates used in this article are for illustration purposes only. They can and will be different based on a person's individual circumstances.

Life insurance is the greatest gift you can give your loved ones. It's also a great gift to give yourself for your own personal wealth and satisfaction. Many people don't know where to start which is where I come in.