Financial Focus In Your 20s – Part 3
Posted by Gail | Filed under Insurance, Money Management
You’ve got a budget, you’re saving something for an emergency and for the long term, and you’ve got a debt repayment plan that’ll see you out of the hole in a reasonable amount of time. See what you can do with a plan? Speaking of which, we come to…
4. Plan ahead. Getting through life without some goals is like driving through unknown territory without a map. While you may not know quite yet how you’d like your life to turn out, it makes sense to at least be thinking about it. Will you want to own your own car? A home? A tent to go camping? Will you want to do the job you’re doing now forever? What other things might you like to do in your life? Travel? Go skiing in the winter? Live abroad?
You can have anything you want in your life providing you’re prepared to work hard to get it. But knowing what “it” is, and figuring out how to get from here to there takes a plan.
Live your life with your eyes open. Know that just about everything you may want to do or have or see will require some financial resources. Make a plan so that the money doesn’t get in the way of living the life you want.
5. Build your credit history. To get the lowest interest rates when it comes time to borrow for a good reason, you need to establish a solid credit history. If you don’t yet have a credit card, you may have to apply for a secured card to get into the credit card game. With a secured card, you make a deposit — usually $500 to $1000 — as collateral and you get a credit card with a limit that’s half what you put on deposit. After about one year of using the card responsibly, you can apply for a regular card and do away with the secured card.
When you get your credit card, make sure you never put anything on it you can’t afford to pay back in full come the end of the month. While credit card companies will settle for the minimum payment – they revel in morons who only pay the minimum because they make so much money off those dopes – you should not. As long as you repay the card in full every month, you’ll be using the credit card to your advantage, not to theirs.
6. Buy some insurance. Nobody, regardless of age, likes to talk about insurance except insurance salespeople. Most people feel that the whole thing is yucky: it’s expensive, confusing, and mostly about sickness and death. But the single best way to ensure you can get insurance when you need it, is to buy it when you don’t. The added benefit is that the earlier you buy your insurance – be it disability, illness or life insurance – the cheaper it will be.
If you work for a company that offers insurance benefits, don’t get complacent. If you change jobs down the road and have become uninsurable in the interim you won’t qualify for new insurance. Make sure you have a basic private policy to cover your butt.
Tomorrow: Financial Focus In Your 20s – Part 4: the end!
March 17, 2010 at 7:53 am
Very good advice! Planning ahead is essential; the earlier you start saving for retirement, the better. It is so much less expensive to buy life insurance while you’re young.
March 17, 2010 at 7:58 am
Did anyone hear of the 38 yr old in South Carolina that was joggin on the beach and was hit my a plane making an emergency landing? He was killed and left behind a wife and 2 kids……Gails right, get insurance, especially if you have dependants and are the main income. Im 32 with 2 kids and purchased enough insurance to cover all liabilities and monthy expenses until the kids are adults.
March 17, 2010 at 8:04 am
I can’t stress enough the importance of insurance. If anything, critical illness insurance so that you have something should you become ill. More and more young people have been diagnosed with Cancer, heart problems etc.
I hate paying that bill every month, but I’ll be grateful I have should I become ill.
Just don’t get trapped into a whole life polict – term is all you need! IMO.
March 17, 2010 at 8:16 am
For those who havent shopped around, you can get critical illness for about $30 for 25,000. (tax free, lump sum payment) and you can get riders that pay back premiums every so many years (usually 8 yrs you get back more then 50%).
March 17, 2010 at 8:42 am
I’m one of those negligent people without insurance, I have home insurance (protecting the “stuff”) — but with no dependents, and insurance through work, and net balance that would cover expenses + when I die, I have definately been complacent.
I looked at critical illness, but there were soooo many exclusions on the policy, and it seemed expensive for what you got – but I was looking later in life, when I sadly am considered morbidly obese – so it would be higher premiums at this point.
So let me echo Gail’s advice — get it in your 20’s it’s cheaper then and covers more.
March 17, 2010 at 8:47 am
Gail, your point about getting insurance is only relevent for people with partners/dependents. If a person is single, there’s no point…well, disability perhaps. But if you have children or involved with someone and have bills (i.e. mortgage payments), then it’s a must to get insurance to make sure all liabilities are taken care of in case some random event causes complications for your family.
And stop using insurance when dependents are no longer that – i.e. children with their own careers, a partner who could be self-sufficient when you’re gone.
March 17, 2010 at 8:59 am
E: so you dont have dependendts, but you get cancer and cant work for a year, who pays the mortgage/rent, loan payments, and other fixed costs? I agree a single with no dependants only needs enough coverage to put them in the ground and usually work coverage will get you in the ground in a box. Hey, why is it called life insurance, isnt death insurance more suitable.
March 17, 2010 at 9:00 am
I agree will having a life plan (setting aside money to buy a house etc.) and buying life, critical care and disability insurance to cover all circumstances which might occur in the future.
Buying term insurance is okay when you can’t afford whole life insurance. Many people prefer not to pay for whole life insurance or have been told that they are fools to pay for it.
In my own opinion, whole life is a good investment as it is a permanent product and will serve you better in about 15-18 years when you will have earned enough dividends over those years to pay for the premium payments in the future (for every month and every year from then on) without expending your own capital to do so. It’s like having money in the bank which keeps growing until you do die. Don’t ever reject whole life without finding out the truth about this product. It’s worth every penny that you pay for it (especially when you’re young).
With term, you get to pay for every year until you die. Along the way, that price increases with each new term (or every 5 years). Using some math table you may be able to see how the two policy types compare over a period of 30 – 60 years (because you don’t know when you will die). If money alone is the basis for the purchase of term over whole life, then it is better to have insurance than to not have insurance.
However, permanent insurance is permanent based on your insurability when you apply. It won’t ever be changed based on worsening health conditions as you age. That’s one reason why you buy whole life insurance when you are young. That’s why it’s wise to insure your children before those situations show themselves as well as it is so cheap to buy the insurance when the children are very young. Best to be prepared for all scenarios in life!
Gail, I really like this series!! Thank you!! Hope your holiday is going well!!
March 17, 2010 at 9:03 am
I’m single with no dependants but I still have insurance. One because it’s very cheap through the company I have and two because I don’t want to burden my family if something happens to me. I have enough coverage to pay off all my debts, fly all my family to one location, bury me and some left over that my mom will probably put in accounts for my nieces and nephew.
I don’t know alot about insurance but isn’t it cheaper the younger you get it and better to get it when you are young and healthy? Who’s saying I’ll be young and healthy when I have dependants….. just a thought. I remember going to a seminar by the guy who wrote “The Wealthy Barber” and he also said that singles with no dependants didn’t need insurance and when someone asked about reasons I have listed that I do have it, his answer was basically a who cares type answer.
I wouldn’t do that to my family and I choose to have a plan in place to take care of my responsibilities for when something should happen to me. That is just MHO.
March 17, 2010 at 9:11 am
@ John – re: “$25000 for critical illness insurance” – Wouldn’t the average person just be better off not taking it, and just have $25000 available on a line of credit? You’re paying $30/month for a product you might not need. I tend to think of insurance as being for something truly catastrophic, and to the average dualincome family I think $25 grand isn’t nearly enough. Better to pay more and get $250,000 at least.
@ Gemini – a few comments. Yes you can get 5 year term insurance which means it renews in 5 years, but you can also get 20 or 25 year term. My wife and I did a 20 year term when we were about 31. Whole life is much more expensive than term, and considerably so. Now the counter-argument goes that ‘yes its more expensive when you’re younger, but when you’re older it won’t be.” Which is true — so when my term coverage ends at age 51, it’s going to be very expensive for me to get life insurance. But hopefully by then the house will be paid off, and my son’s education paid for, etc so expenses should be down too while assets are way up. In a way when people say ‘get life insurance when you’re young’ they’re also saying ‘pay more when you’re young, so you can pay less when you’re older.” But when you’re young you need more money than when you’re older and have fewer expenses and more assets. YMMV.
@ Kat – +1 – critical illness insurance has a slew of exceptions.
March 17, 2010 at 9:44 am
Geoff. in that $30 is a return of premium rider, so I get a good chunk of the money back every so many years, so Im not throwing money away. Plus, isnt avoiding debt the whole premise of everything Gail…and I live by Gails rules, some were in place before TDDUP arrived. 250 g in CI, my god, the premium would be insane. I have a young family and yes its money spent on risk, but to think of me not being able to provide (sick or dead) and my family losing our lifestyle and future opportunities makes me sick. I just look at my dad, his father died when he was 8, no insurance, no house, no assests all on the tail end of WWII, Dad and my Uncle started jobs as soon as someone would employ them to help their mom with groceries and rent.
March 17, 2010 at 9:59 am
I have life insurance and disability insurance, and was about to sign up for critical illness too, but when I read the policy and all the exceptions (even though I was young and healthy) I just couldn’t fathom dealing with being sick and then fighting an insurance company for money due to me on top of that stress. (Unfortunately I fight with insurers on behalf of my patients all the time-they’re interest is to pay out as little as possible so they will fight tooth and nail to avoid paying benefits). It was quite expensive too-if memory serves about $170/month for about $100,000 lump sum payment (the only option I was given). On top of all my other insurance payments, it was getting out of hand (between life, disability, car, house and liability/malpractice for work, I pay over $600/month in insurance for DH and I). I decided to throw that $170 into the emergency fund instead. Plus, I found a clause on my disability insurance that in the case of a catastrophic illness, I could apply for a loan against my benefits where they would front me a lump sum to pay for out of pocket expenses etc. The terms are probably crummy, but at least that’s an option if my EF is not built up high enough by the time I ever got sick.
March 17, 2010 at 10:33 am
A couple of months ago I sat with an insurance broker. My work disability and life insurance wasn’t enough to cover expenses and my mortgage. I had mortgage life insurance but it was pricey compared to what I could get elsewhere.
I am single too. I want my mortgages covered in case of my death so my family doesn’t have to think about it for a long time if they choose.
Disability insurance has a lot of rules – the main one being that all your payouts (work di, ei and personal di) can’t exceed 85% of your current salary. The broker was helpful in making sure I didn’t pay extra premiums for benefits I would never be entitled to receive.
I got both di and life for the same monthly cost as the mortgage life insurance through the bank.
I’ve heard the rule for life planning is: insure for the things that have a low probability of happening but will cause great distress if they do. Save for the events that have a high likelyhood of happening since insurance for those things will be very expensive and rule-ridden and you probably won’t receive a payout anyways.
March 17, 2010 at 10:37 am
@AnnaV – love that rule for life planning!
March 17, 2010 at 10:42 am
@ John – so you’re saying that $25,000 will really help you, if you became ill with cancer, needed fulltime care, couldn’t work, etc? (I’m not trying to be insenstive, just we’re talking about insurance, and insurance is all about the benjamins). In my situation, we would blow through that $25,000 so fast it wouldn’t matter, even if I did qualify for it. I’d rather keep my $360 a year + interest. Although I agree Gail says to avoid debt, I don’t think she means to waste money either which is what I’d be doing. In a similar vein, I pay for homeowner’s insurance as a fire would be catastrophic loss and might happen but don’t pay for pet insurance, because the loss of our cats wouldn’t provoke massive loss (financially). I think insurance is one of those things that depends on the person’s risk tolerance/benefits awareness. In my case, I choose to accept the risks involved. Others do not, which is a fine choice for them. I do think, however, that most people view insurance from an emotional point of view, and not from a financial point of view.
March 17, 2010 at 10:54 am
My husband and I are in the process of buying our first home. When we went to the bank to apply for a mortgage, we decided to purchase mortage life and critical illness insurance. In total, we will be paying about $80/month for this, but our 230000 mortgage will be paid in the event of a heart attack, cancer diagnosis or stroke – or death. Kind of yucky to think about those things while we are still in our 20’s, but better than keeping our heads in the sand. My dad was diagnosed with cancer at 47 and died at 50. I know of 3 people in my close community who are currently coping with this in their early 30’s. That is certainly not the time to be having regrets and stressing about finances.
Years from now, when our mortgage principle is lower, we may not feel the need to keep the policy – but for now, it’s not negotiable for us.
March 17, 2010 at 11:00 am
Thanks for harping on my financial decision, but I have 2 little kids that I want to ensure arent left homeless and hungry.
IF I put away that 360 a year, it would take 60 years (not considering return) to have 25g as a EF. Apparently you are mssing the return of premium part, therefore not throwing money away. Maybe Geoff you have a higher standard of living, but 25g would be quite beneficial to my family to pay the bills. Its also not something I am going to carry for 25 years, maybe 10, maybe less……on the flip side how many people have loan insurance that only covers their loan that costs 20-30 a month as AnnaV talks about.
March 17, 2010 at 11:21 am
John,
Is $25,000 enough?
It may be ok, if you have a really good drug & medical devices benefits plan AND you have disability. And your partner is working. However, in the big city where I am, parking at a hospital is $25. A monthly pass for family members is $150-200. And that is just parking. Canadian health care is comprehensive, but out of hospital expenses are generally not covered if you are under 65. My sense is that critical illness is to cover you until your disability can kick in, which is probably about 3 months after you qualify. That is, if you have a 90 day waiting period, your cheques start sometime afterwards, depending on how obvious your illness is.
Geoff, I normally agree with you but a line of credit is not a good idea as a back up for an illness or injury. Anything serious enough to stop you from working usually stops you for awhile, and sometimes you can’t go back full time. So illness + debt is pretty bad.
March 17, 2010 at 11:26 am
Jann, you may want to look into the insurance product you purchased for your mortgage if it was with the bank. We got suckered into buying this when we bought our first home a few months ago, on the very basis of what you just argued. However, after doing some research when I got home I learned many things about the insurance many of the banks sell, most importantly of which it is not sold by a liscenced broker who knows anything about insurance products.
Our insurance was ridiculously high (I only learned this after talking to others our age and health). The main things to look into are these:
a) is your insurance post-claim underwritten? (TD does this, which is where they make their big bucks). If you did not undergo any physical screenings prior to being approved (ie blood taken, a nurse would usually come to your home to check your health status) then it most certainly is post-claim underwritten. This means they don’t actually qualify you for the insurance until you make a claim. Then they will look at all your medical files. They can actually deny you a payout if you’ve ever had a physical and you claimed on your application that you’ve never had a “cancer screening”. Most women have these yearly (paps). Have you ever had a high blood pressure test? (of course, who hasn’t had their blood pressure checked?!)
b) the other main problem I realized (after many people pointed it out to me) is that over time your mortgage size decreases… so your payout will decrease over time as well, even though you continue to pay those same premiums. Why not buy a third party life insurance policy that would cover the entire mortgage TODAY? That way if your partner has to cash in on it in 10 years, he/she will be able to pay off what is still owing on the mortgage and have extra left over. OR he/she may choose to use it for something different at that point. Mortgage insurance is not transferrable and cannot be paid to you as cash. It goes directly to the bank.
Just some things to think about. I found our whole process extremely emotional and the TD guy managed to convince us by throwing out the word cancer to us a gazillion times and not once truly explaining the product to us.
March 17, 2010 at 11:28 am
oh, btw we promply cancelled the mortgage insurance upon learning more and purchased a separate life policy which will cover the mortgage (for much less of a monthly premium as well!)
March 17, 2010 at 11:30 am
I have LTD after 119 days and my wife works part time. I havent signed up for CI yet, just weighing my options. I havent had a chance to read through the exclusions, but I have lost one grandfather to cancer and one to heart disease. My dad grew up without a Dad and that scares me for my childrens sake.
March 17, 2010 at 11:33 am
Jennifer, you nailed it, we have a insurance broker and when we were doing home insurance we got to talking about bank insurance vs. individual policy and like you said, in 25 yrs your still paying the same premium but you now owe say 20g.
March 17, 2010 at 11:35 am
This is slightly off topic but does deal with a type of insurance – travel. Over the years I have often opted out of cancellation/interuption insurance. Just a couple of weeks ago we were scheduled to go to Florida and take the 7 day Disney Cruise. We booked this last August. At the time I chose to take the cancel/interup insurance on the cruise because the trip cost a big chunk of change (insurance cost about 10% of cost of trip for 3 people). However, the flights were separate and the cost for insurance on them was $350+ on flights/rental car that cost $1192 (almost 30% of cost of trip). I made a choice to decline this insurance since the net loss would be approx $850. Well as fate would have it my husband had an emergency appendectimy the week before we were scheduled to leave and we had to cancel. We are getting full refund on the cruise but not one penny for the flights. I still do not regret the decision because over the last 30 years we have never had this situation happen and I have more than saved by not paying the insurances over the years. It is about risk tolerance. I decided I could not tolerate losing $2500+ but I would take a chance on $850. We have sinced re-booked a trip to Scotland in July and I did take the insurance on that trip (far more reasonable cost however).
March 17, 2010 at 11:48 am
Jennifer, you make some very good points. Thank you for sharing your experience. I’m not married to the idea of insurance through the bank, but to the necessity of life and critical illness insurance – especially while our mortgage is so large. Would you recommend consulting a broker and how should I go about finding a reputable one?
On another note, since getting married earlier this year, my husband and I still have separate car insurance policies with two different companies. Everyone we talk to has recommended that we get car insurance jointly, but whenever I call for a quote it seems that no one can offer us a better rate than what we are already paying. Does this seem right? I would love to work with a single broker who could take care of all forms of insurance, but I hear that it can be hard to find someone trustworthy. I don’t know where to start.
Thanks everyone for your input.
And thanks Gail for this series… this is great!
March 17, 2010 at 11:56 am
I think that disputing between the USA and Canadian health care and insurance systems is confusing everyone. If you break a nail it costs $25,000 to have it fixed in a US hospital. Canadians are very lucky they don’t need to sell an organ to afford care.
March 17, 2010 at 12:00 pm
I have one bit of advice. I was diagnosed with two rare forms of conditions and had insurance through wwork. Well I got laid off and lost my benefits and now no one will insure me for health benefits. Before you expect a diagnosis from a doctor make sure you have benefits in place privately before he gives you the results.
March 17, 2010 at 12:06 pm
Question for you all about Mortgage/LOC life and disability insurance.. I have heard all the arguements regarding the cost of “bank” insurance vs seperate insurance however .. i can’t seem to get a disability policy for cheaper than what the “bank” offers.. the life insurance isn’t an issue ..it’s the disability.. while it wouldn’t cover all of our expenses it takes care of our two largest.. mortgage payment and car payment..
ini this instance is the “bank” insurance the very worst option??
March 17, 2010 at 12:22 pm
Amy, I have been searching for quotes online, and I have to agree. I see the reasons why it would be smarter to seek this insurance from an independent company, however I have not found a better rate than the one offered by my bank.
March 17, 2010 at 12:30 pm
@ John – RE: “You write “Thanks for harping on my financial decision, but I have 2 little kids that I want to ensure arent left homeless and hungry.” ”
I apologize if you feel I was harping on your financial decision. I never intended to do so, it’s your life and your money. I’m just a faceless web guy. But I still don’t quite your logic. But we’re talking about $25,000. I have a son and a wife and though we live in the big city with the big income and the massive expenses that come with it, I can’t imagine $25,000 will really keep your 2 kids from being homeless and hungry for long. Chloe did a nice job articulating just how quickly that may go. YMMV. As an aside, emotion shouldn’t enter into insurance and risk analysis. It’s always got to be about the benjamins.
@ Chloe
RE: “Geoff, I normally agree with you but a line of credit is not a good idea as a back up for an illness or injury. Anything serious enough to stop you from working usually stops you for awhile, and sometimes you can’t go back full time. So illness + debt is pretty bad.”
First, thank you for normally agreeing with me. That’s very nice of you to say.
I was speaking specifically about how I’d rather have access to a $25,000 line of credit than pay a monthly premium of $30 to get $25,000 Critical illness coverage (Yes John I know you will get some of that $30 back but you also suffer the opportunity cost of not earning a return on that $30). My main points being that (a) $25000 doesn’t go far and (b) that’s a hefty cost, when you consider that I have a $250,000 life insurance policy that costs $300 a year.
However, I am NOT against the concept of insurance in general and do not consider a line of credit as a good line of defense agaisnt all illness and injury. I have disability insurance through work, a term life policy, homeowner’s insurance, car insurance, etc. These are what I call heavy-duty policies (in the hundreds of thousands).
What I don’t have, or believe in, is what I consider light-duty policies – no credit card balance insurance, no pet insurance, no life insurance on my son as I think the cost/benefit is just not there for me. I know a lot of people for instance think you should put life insurance on your children, but for me the loss of my son would be a benefit financially speaking to my family, daycare alone is $1000 a month. I know this sounds cold but that’s what insurance is, it’s got to be all about the benjamins. Otherwise I’d go and buy cootie-insurance to protect my kid.
g
March 17, 2010 at 2:30 pm
You get out of a hole not a whole…….
March 17, 2010 at 2:32 pm
@ Gummy – I disagree. In my lifetime I’ve gotten out of a whole whack of trouble every now and then.
(Seriously I think we should all forgive Gail the occasional spelling/typo error on her free blog).
March 17, 2010 at 2:37 pm
I’ve got this nailed!
I have goals, a great credit history and insurance (through work)
March 17, 2010 at 2:58 pm
I agree.. loosen up on correcting mistakes. We all make them.
March 17, 2010 at 5:19 pm
While our mortgage is high (still over $200,000), we have opted to carry mortgage life insurance. We will re-evaluate it when our mortgage terms comes due and as our mortgage goes down, we will eventually drop the mortgage insurance entirely. Our mortgage insurance currently costs us $700/yr through an independent insurance company (not the bank). We are in our mid-40’s and an equivilant term life insurance policy on both of us, which would cover the cost of our mortgage, would be more costly.
We both also carry private term life insurance and life insurance through work, as well as my husband carrying disability insurance through work. Unfortunately, I do not carry disability insurance, and now that I have a diagnosed medical issue that could become a permanent disability down the road, I’m sure disability insurance that would cover that condition would be out of financial reach.
Critical illness insurance is one I’m now considering that I had never thought of before – we will look into this this year.
March 17, 2010 at 6:32 pm
But should we forgive those who consistently misspell ‘dependents’ and ‘definitely’? Mr. Webster created that dictionary for a purpose, folks!
March 17, 2010 at 7:18 pm
This has been a riveting topic for me. Clearly insurance needs should be evaluated at all stages of life. I was so fascinated that I went to Manulife’s website and looked at their Critical illness insurance.. They show you their pricing for $25 000 -no medical- coverage.
I think I can see both John’s and Geoff’s point of view. Chloe, I think you’ve hit the mark.
I looked at the detailed exclusions. From what I can tell, if you do get the payout – you are seriously ill. You might need to relocate to be near a hospital or retrofit your home for home care. The payout is designed to cover the sudden and immediate expense – like an emergency fund. It’s not income replacement, nor is it meant to be a windfall. Chances are you’ll need it to deal with the illness. Mortgages and bills will have to be paid from other money (hopefully disability insurance).
John, I think you’ve done the right thing to consider it- particularly if your emergency fund couldn’t handle – say – a six month family relocation to a hospital in another city. At 5% interest per year for 10 years (and no premium increase) your $3600 investment would have yielded $4800. And for piece of mind for your family it may be worth it.
Perhaps you could have it for a few years while you build an emergency fund to cover $25 000 (more in line with Geoff’s thinking perhaps?). Then use the premiums to get extra disability (to the max permitted by the insurer) and drop the CI.
Just my two cents.
March 17, 2010 at 7:31 pm
Sorry I shouldn’t have written “yielded $4800″. I should have written “grown to $4800″.
March 17, 2010 at 9:21 pm
Very interesting topic…although I’ve been out of 20’s for a few years already.
We have independent life insurance and when we received our mortgage we declined bank insurance stating we already had it covered. I will admit we couldn’t afford a huge plan so we share our payout (joint first to die) and are young enough that we can get more fairly affordably in the next year or so. That is the plan anyways…but in the meantime a payout to either one of us would cover bills and could pay part of the mortgage or go into a savings account for unexpected expenses. It’s nice to have the choice of where the money goes instead of all on the mortgage with nothing for personal expenses should a partner be lost.
Maybe this is a naive viewpoint but this is why I enjoy reading these blogs and comments. There are so many people here with insight and knowledge to share…not to mention another perspective.
March 17, 2010 at 9:48 pm
This might be off topic, but I have a small problem.
My cousin has asked my husband and I to take care of her children should anything happen to her. She wants us to be the Godparent’s and seriously thought that the baptism was enough to warrant custody of the children. She is on welfare and says that she can’t afford insurance, plus I don’t think she has followed through on a will. Does anyone know of any social programs in Ontario to help her along this process? I feel caught in the middle and have expressed via email my views so she has it documented what she needs in place for her children. My husband and I love her children but cannot fathom putting our own financial life at risk to fight for the children even though I know that we would raise them with higher standards than her extended family. We would not be able to deprive her children of the activities that we save for our’s, along with education and a bigger house to accomodate. It would be horrible to have to drastically change our children’s way of life or to treat the two groups differently.
Anyways any help is appreciated. Our family knows a negative experience can change lives and we don’t need any more financial burdens.
March 17, 2010 at 10:38 pm
I have thought of whole life insurance all my adult life as the best investment that a person could make for themselves and their family. It is permanent insurance and it can’t be downgraded because of a change in your health status.
As an aside, hopefully, when you apply for insurance you have a sufficiently sizable amount which can allow for the inflation factor at sometime in the future time when your beneficiary needs to replace your income or pension. Inflation is a terrible thing which can make life less kindly for those who are left. When old, you can’t or shouldn’t be expected to start to work again to make live more pleasant financially. Most women are living at or below the poverty line in old age. I would encourage all people to consider this point when they buy insurance. How can you prevent your loved one from just hanging on at the end of their life?
Now, if you felt that you needed more insurance at one point in your life (inflation, new mortgage, divorce costs and remarriage with young children from a second marriage and so many more reasons) this could be a problem for you especially if your health has changed or deteriorated. Anyone who is obese will attest to the fact that you can pay 200, 300, 400 percent more for new insurance than a person who is in the normal range for weight. Of course, if there is a serious ailment presenting itself, then insurance could be totally denied to you at a time when you need it most to be in place for the future.
This is the reason why I would spend money on whole life insurance when young and especially for my children. No one can predict the future. You have children for various reasons. I hope one would be to give them a better start toward their future than what you had. You would be providing them with the wisdom of your experience – that it is best to buy whole life when young and when it is so easy to afford. I’m not familiar with present day costs but my two children had $50,000. whole life insurance purchased for each of them when under 12 years of age. It has cost me approximately $33.00 per month for the two policies and that is all that I or my children will ever pay for those policies. I can’t say that $33.00 is too much to afford for my children and since my income has increased each and every year since I started these policies, they are now such a minimal part of my budget.
Another reason why whole life insurance is so important to me would include the fact that it can be used as collateral (if ever needed and if there is a large enough amount built up in the plan at that time). In addition, money paid into a whole life insurance plan will grow over the life of the plan (up to age 100) when it will be worth at least the full amount but will likely include additional dividends too. By the way, you can withdraw some of those built up funds while still maintaining the basic coverage ($100,000) during the life of the plan. It’s like an extra savings account similar to a TFSA. You can withdraw a certain amount without affecting your income tax with a T5.
If you pay into something which doesn’t bring a reward I sometimes think why would I throw that money away? Term insurance is only as good as it covers your needs up to that time in your life when the risk is minimized substantially (mortgage insurance). When term insurance ends (and it does end permanently at a certain age) there is nothing left to show for it. Now, some people are happy to pay less for a product like that. They feel that they can manage the risk.
I could not say for myself that it would be a wise choice but rather a financial choice. In my own experience, I paid for one term policy for my husband because I couldn’t afford a large whole life plan since he was considerably older when he was insured. I did buy a smaller whole life plan as well as a matching term plan. At a later time, I converted that policy when I could afford a whole life product. Yes, it was expensive, but the security of having insurance after a certain age was well worth it. If you know that you are likely to die young, then term insurance would suit your needs. If your family is long lived, then term insurance will end before you die. Will your family be able to survive for a long period of time without that coverage? You need to know how to manage your risk factors. For that reason, I prefer whole life insurance.
Disability and critical care insurance are also very important to plan for when young. Of course, it isn’t that important to many people when they are young because they can’t see what the future has in store for them. Will they be permanently disabled? Will they have cancer? Will they need care for a long period of time? I’ve chosen to pay for critical care policies for my children because they are young and it is cheap to pay for at their ages now – approximately $32.00 a month for each plan of $100,000. Do I know they will need this insurance? No, but I know that there is diabetes, heart disease and prostate cancer in the family. I’m trying to manage the risk that something might happen and I’m trying to give my children the advantage that they will be able to care for themselves in the future if anything does occur. I did invest in a plan which does cover cancer as I heard from my insurance broker that in England they now have two separate plans – one which includes cancer and one which doesn’t. The more expensive plan covers cancer, so it’s best to have it in place before this change comes to Canada.
My final thought about buying insurance is that I wish that the products available today were there for me a long time ago and that I had had the sense to investigate them thoroughly. Age does bring with it some rewards and some negative thoughts. I will never be able to pay for critical care insurance easily. It would be very expensive even if I were eligible for it. Think about it. You have youth on your side. Take advantage of it. I’ve chosen to care for my children.
I appreciate that everyone has a different opinion. I think that both whole life and term insurance need to be thought out and researched better by most people because they aren’t that knowledgeable of these products. Call the various insurance brokers and speak with the people on site. There are many insurance brokers who would be very happy to answer your questions.
Good luck!
March 18, 2010 at 1:14 am
Amen on the life insurance! I’m so glad I bought mine in my 20s, because I know now in my 30s with a couple of babies under my belt I would not get the same rate. Really, thinking ahead paid off in this case big-time.
March 18, 2010 at 9:16 am
@ Gemini – re “I have thought of whole life insurance all my adult life as the best investment that a person could make for themselves and their family. ”
An investment is by definition the expenditure of money with a reasonable expection of making a profit. Insurance is not an investment, as it is much more likely that you won’t be paid out, than be paid out. That said, as I said earlier, insurance is not something that you should go without but I do have two other talking points:
You talk about getting your kids insured while they’re young, so they’re always covered. That’s true, but the coverage amounts are usually fixed. So when I was 13, $100,000 was a lot of money. But now at 35 and married with a son, $100,000 won’t go that far.And also, if you get a term insurance, your rates also don’t change if your health does for the length fo the term. So get a 20 – 30 year term and you’re probably covered.
And finally, whole life insurance is usually ‘invested’ in heavy MER, heavy fee bond funds that return after inflation give a 0% return. I’d rather just pay the insurance company to insure me, and let me worry about my own investments then do a combo deal. That’s just me though.
March 18, 2010 at 10:00 am
@E: Just because you don’t have a spouse/dependants doesn’t mean you don’t need life insurance! What if something were to happen to you? Would you want your parents or family members to have to come up with $10,000 + to cover your funeral costs? I absolutely would not want my parents to be in a position where they can’t pay their bills because they had to cover my funeral costs and debts.
March 18, 2010 at 11:17 am
@ Ashley – debt cannot be inherited. So a person with no dependents is not leaving debt. They may not leave assets, but they won’t leave debt.
Ideally a person with no dependents should have enough assets to cover their burial. However, for those inclined, someone with no dependents and no assets who also wants to let their family avoid a burial cost could ask that their body be donated to science. that would cost nothing and usually the people accepting the body cover the cost of the eventual cremation (ie university of toronto med school). Not for everyone, I agree
March 18, 2010 at 11:31 am
Yes Geoff, insurance may not be a true investment like GICs or bonds but it is a way to plan for your family’s financial future and there are tangible rewards along the way through life with whole life insurance because it’s not exactly the same as term insurance (i.e. used as a death policy or a policy to cover your risk over a set number of years such as for mortgage insurance). I look at it as an investment while managing your risk. If you wish to be more precise – so be it.
As to returns – risk takers don’t think in the same way as non-risk takers. Most people are not risk takers. They are happy when things work to their advantage. I feel that if the insurance industry has found a way to give a 1-2% return on inusrance somehow over the life of the product, they have managed their risk to the point of guaranteeing a return on investment to the buyer – similar to a GIC offered by a bank etc. That’s enough for some people and me in particular. I’m buying into a form of a financial product.
There is a guarantee of a payout with some dividend growth over the term of the policy which they can access if necessary. Otherwise, the growth helps to eventually cover the costs of the premiums which will mean that the insurance policy becomes a permanent paid up policy which you don’t have to pay for out of your budget after the appropriate number of years. To me that is a good use of my money and although not a true investment product, it is a good product to have. My own interpretation.
As to the length of time that you have chosen for a term insurance plan, I hope it works for you. I hope that you will be wealthy enough to survive financially for the rest of your life if there is a death of your spouse after she reaches the age when her term insurance ends. You are unique and as for all the others who read these blogs, they will have to come to some conclusion as to how they will manage their fortunes.
Being too precise may turn people off a good product and that is where I think that research to the level of your own risk and to your own advantage is necessary for all people. To each their own!
I’ve given only a few examples as to why whole life is of advantage to me. I hope others are not rejecting whole life because it is something that is regarded by others as a waste of money since everyone will have lots of money saved when their term insurance ends.
No one knows how others will be financially later on in life as we do have setbacks along the way. I’m not a risk taker in this regard. If I happen to be rich – hurrah! However, if I can’t afford a burial, or doing without an income of a partner, then I’d better plan on having some other way to pay the bills if the term insurance ends. Of course, at that time, insurance becomes very expensive espeically, if there are health problems. Planning for one’s future has lots of risks and mitigating those risks is what insurance is all about. I’m for a safer and known outcome and that is why I protected my children when young (mitigating risks in their future to their advantage). Hindsight is so clear when you can’t go back and do things over again.
Please research your options before buying a product recommended by others. My experiences have shown me that whole like is well worth it. Let others make up their own minds.
March 19, 2010 at 2:19 pm
Mrs. T,
As a person with a disability, I wanted to warn you that with your newly diagnosed condition, you may be ineligible for disability insurance. If you already have any type of disability (say, blindness), then insurance companies won’t look at you for insurance against other disabilities (like hearing loss or paraplegia.)
If that’s the case, I’m sorry, but you’re in the same boat I’m in. It’ll have to be critical illness insurance or nothing.