This & That: Insurance Edition

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I received a call the other day from someone who wanted to know if I “believe” in insurance. People typically pick one side of the money debate and hold tight to it: there are people who think debt repayment should come before investing, and others who think just the opposite. And there are people who think that permanent insurance trumps term, and other who think just the opposite. Me, I don’t much care what you do, as long as what you do is WORKING for YOU! You know my basic rules:

  • Don’t spend more money than you make,
  • Save something
  • Get that consumer debt paid off, and
  • Offset your risks wherever you can.

So when it comes to the insurance debate I actually don’t have a “side”, but I completely believe in the validity of having insurance as a part of a well-balanced financial plan. Here are some questions I’ve received recently:

Roxanne & Robert wrote:

My husband and I have death and disability insurance on our mortgage. The insurance was purchased through the same bank that holds our mortgage. We read a recent article that warned about buying this kind of insurance from a bank. The article referred to problems with “post-claims underwriting”, and listed some horror stories that have occurred with this type of insurance. One such horror story was chronicled in the Toronto Star on March 21. Gail, what are your thoughts about this sort of insurance? Should we consider different insurance coverage?

I’m not a big fan of the insurance that comes with loans. I have always found that personally purchased life and disability insurance are not only less expensive, but offer more flexibility. However, if you have a whopping debt and cannot qualify for individual insurance, then creditor insurance may be the only option. As for the horror stories, you must make sure that whomever you buy this insurance from is prepared to deal with the insurer too… if they’re selling the policy to cover their own product, they should be willing to go to bat to get the claim paid.

D wrote:

Hi Gail I am married for year and a half, my wife is dental hygenist and she is paying for disability insurence $120 mnt for about 5 years already. I am wondering she is 27 y.o. is it better to stop paying insurance and to contribute this money into RRSP where we can get some returne or just continue to pay insurance? If she stops paying she wont get any money back.

Absolutely NOT. She needs to keep her private disability insurance in place since that’s all that standing between her and poverty if she becomes disabled.

C wrote:

Is insurance that important if I’m single, no kids, etc…? I’m 30 years old and my mortgage is only $700 a month. All other monthly charges total around $400. I’ve been saving around $10000 a year in a regular savings account for the past 3 years, $5000 a year in RRSPs and now hav $5000 in a TFSA. I think i’m “safe” should anything happen, and don’t see the benefits of insurance.

C, the only reason life insurance is important for the young, single person is because if they think they’ll need it when they are older, buying it at a younger age does two things:

  1. It ensures you are insurable… you get the insurance approved while you’re still young and healthy, and
  2. It locks in a lower price, particularly on permanent insurance.

Disability insurance is important for everyone. Critical illness insurance is particularly important for people who can’t get disability insurance.

If you don’t think you’ll ever need life insurance because you won’t have dependents counting on your income or an estate to protect from taxes, don’t buy life insurance.

And now for something totally off-topic. I received this email recently and wanted to pass it on to y’all.

Love your show and your blog. I just wanted to correct you on one little point regarding taxes and student loans. In a couple of your answers I’ve seen you suggest that interest paid on student loans can be deducted or written-off. That isn’t quite right. You can claim a tax-credit for interest paid on government student loans, but that’s only a 15% credit (against federal taxes, and typically another 5-6% against provincial taxes). That’s typically a lot less than ones top marginal tax rate, so it’s far less valuable than a deduction.  Moreover, as I noted, that’s only available for government student loans (OSAP, etc.), you can’t claim it in respect of a student line of credit or a bank student loan. That said, depending on what interest rates you can get from the bank (and I was able to get a very reasonable student line of credit when I was in law school), it may make sense to pay off the government loans first and forego the tax credit rather than pay higher interest just to claimb the tax credit. Anyhow, love your show, but I just wanted to clarify that point. Cheers, Carl

Thanks Carl!

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Gail Vaz-Oxlade

Gail Vaz-Oxlade wants YOU! Join MyMoneyMyChoices.com to get smarter about your money and help others get smarter about theirs. Isn’t it time we eliminated financial illiteracy? Come find me on Google+ and on Twitter.

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42 Responses to “This & That: Insurance Edition”

  1. Ditto to Carl’s comment. The tax credit for my OSAP student loan was a pittance, and didn’t offset the fact that OSAP has a MUCH higher interest rate than my student line of credit through RBC.

    BUT, as of today, my OSAP is GONE GONE GONE!!! I concentrated on paying it off first (for the above reasons and because it really annoyed me) and now she’s gone! Woo!

  2. […] News Sources wrote an interesting post today onHere’s a quick excerptDon’t Forget to Enter your Success Post to Win A Prize! See the end of this blog . This week’s prize is a copy of The Money Tree Myth and you have until Friday to qualify. I received a call the other day from someone who wanted to know if I “believe” in insurance. People typically pick one side of the money debate and hold tight to it: there are people who think debt repayment should come before investing, and others who think just the opposite. And there are people who think that permanent […]

  3. Timely post for me Gail! Since my DH is self employed and without STD/LTD benefits I have just contacted our financial planner to inquire about it. We have life insurance but no disability/critical insurance for him and since he was diagnosed within the past 2 years with type 2 diabetes it might be a bit of a struggle. I have STD/LTD benefits through my employer – actually had to use the STD benefits 7 years ago while pregnant with my twins – it was welcomed since it paid much more than the EI STD benefits.

    Does anyone know if you can have 2 different providers with your life insurance and disability/critical care insurance (just in case we don’t go with our financial planner’s product)? I suppose another option is for my husband’s company (he has a registered company name) to have the disability plan and then him as a contributor of that plan…similiar to what I have with my employer but on a much smaller scale…hmmm…something to look into.

  4. avatar Alexandra Says:
    July 22, 2009 at 8:15 am

    Hi C. The life insurance decision is a personal one especially when you don’t have any dependents. I too didn’t see the need before I gave birth to my son 23 years ago. At the time I took out a very large policy. I kept my premiums up to date. For the cost of a dinner out for 2 once a month, he will have a very nice payday when I die. So much for my 2 cents on life insurance.

    However, please don’t overlook DISABILITY insurance. I have been off work since mid February when I was diagnosed with Cancer (excellent prognosis, feeling great). I won’t be going back until end of November – a long time to be without a paycheque.

    I believe people don’t think this insurance is necessary when they’re young because they still feel a bit invincible. We also overlook its importance because we don’t know just how expensive getting sick or injured can be.

    C. quick calculations based on your info (for the past 3 years) leads me to believe you have approx. 35k saved up and 15k rrsp, for a total of approx 50K. My illness came to 28-30K just for chemo drugs not covered by the hospital/OHIP. In my situation, based on your 1100/month expenses, you would need approx. 13200 for a year + 30K for drugs = $ 43,200.00 and you would have had to pay additional taxes on any money coming out of your RRSP. See how quickly savings can be used up? Nobody needs the stress of financial difficulties in addition to having to make major decisions about health issues.

    Fortunately, I have excellent drug coverage and disability insurance through work (although I have been dipping into my savings and rental income I have coming in every month). Unfortunately, I discovered Gail’s advice too late and don’t have any insurance from an outside source. If I leave my place of employment or the job disappears, I’m out of luck, no coverage whatsoever.

    C and everyone else reading this, please take my example to heart and at least investigate the cost of disability and critical illness insurance.

    C, I also hope that you’re spending a bit of that money on life. Just a suggestion but wiith no dependents, now’s the time to live it up a bit!

  5. avatar Roxanne Says:
    July 22, 2009 at 8:53 am

    Although the last post is right, there is something else to consider. Loans that were secured through the government student loan system after 2000 are no longer negotiated through banks. Everyone gets the same floating interest rate (prime + 2.5% for the federal portion and another rate for the provinicial portion (Ontario is prime + 1%)). You can also lock in your rate at prime + 5%. Those rates are fairly low. So prioritzing them last usually makes sense anyways.

    But the poster is right, the deduction is not worth hanging on to the debt in the long term. It does, however, soften the blow while you pay off your higher interest CCs and LOCs.

  6. […] Original post: This & That: Insurance Edition « gailvazoxlade.com […]

  7. avatar Christie Says:
    July 22, 2009 at 10:06 am

    I agree with what Roxanne said; however, there is one more thing to consider when deciding which loan to pay off…If I lost my job, I can suspend my student loan temporarily, other debts are not as forgiving. In today’s economy, this is a real possibility! While I’m working on eliminating all my debt, and having to choose how to prioritize, this is one of the factors to considered. Plus, while the amount we can claim on income tax is small, it is much larger than what we can claim on taxes from other debts! I guess, once again, each situation is different I wish I could pay it all off today, but I can’t…So, for me, with all things considered, I still think my student loan will be the last loan paid off before my mortgage!

  8. In 2004 we bought a brand new SUV that we borrowed the money for termed out over 7 years…we put full credit protection on it (life and disability)…my husband never had any benefits at work so we always took full credit protection…I only worked very parttime as we have two very high needs children…anyhoo, when my husband became too ill to work any longer in 2007 our disability insurance took over the payments on our loan and will pay it out…also, we always had our own life insurance as well, once my husband became disabled those premiums are now covered by the insurance company…for both of us!…what a savings this insurance was to us…over the years I’ve sometimes begrudged the cost…seemed like throwaway money but thank goodness common sense prevailed and we kept up those premiums!!…and for the record, if my clients need to make an isurance claim on their credit protection I ALWAYS help them to my full capabilities…as long as you are HONEST when applying for the insurance and understand the way it works when you need it it will be there!…:)

  9. When we first got our loan, we took the insurance that came through the bank. We found out later that term insurance (I think that’s the right term?) was better for us–the bank insurance rate wouldn’t change for the life of the loan, but that’s because the amount it pays out goes down as you pay your mortgage down. Plus it can ONLY go toward paying off your mortgage. The term insurance pays out the same amount no matter when, to be used at our discretion. The bank insurance, I think is good if the only thing you’re concerned about is paying off your mortgage; otherwise the term insurance seems to offer a bit more.

  10. When we first got our loan, we took the insurance that came through the bank. We found out later that term insurance (I think that’s the right term?) was better for us–the bank insurance rate wouldn’t change for the life of the loan, but that’s because the amount it pays out goes down as you pay your mortgage down. Plus it can ONLY go toward paying off your mortgage. The term insurance pays out the same amount no matter when, to be used at our discretion. The bank insurance, I think is good if the only thing you’re concerned about is paying off your mortgage; otherwise the term insurance seems to offer a bit more.
    Sorry… forgot to say great post – can’t wait to read your next one!

  11. Mellow, my recommendation is to have BOTH…credit protection insurance to payout debt AND life insurance to help your family with day to day life…at least while your mortgage is still large…don’t forget mortgage insurance also offers critical illness protection that pays OUT the mortgage rather than just making your payments…plus your premiums stay the same for the life of the mortgage…

  12. Thanks for the post about interest on student loans – I was wondering about that. I too am saving student loan debt to be paid last.

  13. avatar Michelle Says:
    July 22, 2009 at 10:30 am

    Don’t skip the disabilty insurance – it takes only a split second for something to happen.
    My husband was hurt in an accident and was off work for 2 months, not as bad as it could have been but as he is the main breadwinner right now we did feel the pinch.
    Never assume that life will always be rosy – plan for the worst and hope for the best!

  14. Medical insurance is definitely important. I have a great policy with work and never really thought about the limitations the base policies such as Blue Cross have….that is, until my sister was diagnosed with MS in June. Her medications cost just under $1400 a month. Her policies were not a more deluxe pack and will not cover her even one cent. She has tried about 4 other venues to no avail. If she could go back 10 years and ‘predict’ her illness she could have upped her package then and she’d be covered now. That’s crazy. She can afford this for maybe a year and then after that………..? very frustrating

  15. […] the rest of this great post here […]

  16. Christie,

    It’s important to note that the rules are changing next month (Aug. 2009), the interest relief program is ending and being changed with another program. I don’t know all the ins and outs of it, but it now focuses on “affordable payments” based on income. So if you’re receiving EI or working a minimum wage job, you still have to pay. Much smaller payments for sure, but not same as interest relief anymore.

  17. Jolie,

    Sorry to hear about your sister’s illness. I was diagnosed with MS almost 6 years ago and am on the expensive injectables myself. Has she tried going through the drug company? They have options for people to help them afford their meds. Mine does (for Copaxone). Thank goodness 90% of my drugs are paid for through my hubby’s plan.

  18. I’m not such a big fan of insurance for the ‘just in case’ theories. Sparky, I’m sorry to hear of your experiences but have to point out that if you need to finance a car for 7 years, that’s way too much car for your budget. 3 – 4 years is a much more reasonable number in most financial expert’s eyes.

    Life insurance for the 30 year old with no dependents makes little sense if he/she has insurance through work and is other wise relatively healthy. The cost of premiums between 30 and 35 for instance when cirumstances might change is relatively small and very small compared to the cost of the premiums paid out for those 5 years. And remember, debt can not be passed “back” to the parents, for instance.

    One thing that cannot be emphasized enough is that with mortgage insurance, yes the payments remain the same… even as the amount of coverage decreases (as the mortgage is paid off).

    Disability and critical illness are different and have their own separate merits however as others have pointed out. Also I’m not saying that life insurance is a good or bad idea depending on the individual, but that each case must be carefully weighed and measured. Sometimes the costs involved make sense, and sometiems not.

  19. Dianna. She is on the drug as you and waiting to hear from the company. I’m so glad you have such great coverage and don’t have to worry. I hope it’s working well for you 🙂 We’re just 10 days in so it’s a brand new experience.

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  21. Insurance is such a depressing subject.

    Me and the hubby have had life insurance since our mid 20s, but — other than through the husband’s work– we don’t have any independent disability insurance. It’s such and expensive option, and with the kids still being young, trying to find the extra dough for a potential worst-case-scenario when the immediate demands are taking the cash (house, life, savings) is just too much!
    It’s not like we are living with our heads in the sand either… my dad suffered with (and was taken by) cancer when I was 17, and he was the sole breadwinner in the household. My mother in law has had MS for over 20 years (incidentally the injections were terrible for her), and is living off the tiny welfare allowance, on her own, in subsidised housing.
    My husband was in a terrible motorcycle accident that had him off work for months and 15 years later he is still got aches and pains from it.

    So why haven’t we lined up to pay for the disability and critical illness coverage?… HOW? We would be robbing our lifestyle significantly to afford it (and our lifestyle though happy, is NOT plush). We cross our fingers and hope that (heaven forbid) if anything happens, it would be cevered by the husbands employment plan.

  22. Geoff, we chose 7 years because that made our monthly commitment smaller…BUT, we always put extra payments on the loan because when things were well and my husband was making more (he worked strictly on commission) we paid more…if things got lean or he had to take time off due to illness (no paid sick time for him )then we could just pay the monthly amount required…so, we were fast tracking the payments but leaving ourselves some room in case of trouble..so although we took it out for 7 years in 2004 it will be paid off in 2010…that’s only 6 years and it would have been done sooner than that if we had continued the extra payments…it was a smart move for us in our situation and it was good planning on our part…AND sometimes it is even the same advice I give out to my clients(and if we hadn’t been smart enough to take the disability insurance and had to keep the payments up ourselves having that smaller committment because of the 7 year term would have helped alot…so again, smart move for us)..:)

  23. oh and p.s., the vehicle we bought was a 30k Santa Fe…not too big but very reliable here in our Northern town where there is ALOT of snow for 6 months of the year and we do alot of driving as our boys need to be driven to and from school each and every day…so it was not “too much” of a vehicle for us…it is the perfect vehicle for us:)

  24. Sparky–
    We reviewed our insurance at one point and decided it would make no sense to have the additional mortgage insurance. We have no dependents, are both in our mid-30’s and healthy, and would both be able to live on one income if the mortgage were paid off. My income is less than his, so he has additional life insurance thru work, to help me out with any extra expenses in the event of his demise. I know I have disability insurance thru my work, though I’m not certain if that covers him or not–so that is something I’d like to look into, given his job can be very physical at times.

    My MIL had excellent disability coverage thru her work–it covered 100% of all her medical, hospitalization, and long-term care for the first 12 months of any long-term disability, then dropped to a lower percentage after that. When she got sick, she used to grimly joke that she’d better ‘go’ before the beginning of December, when the full coverage expired. Sadly, she passed in September.

  25. Mellow, you are exactly on the money!…if you do a needs analysis and see that after the mortgage is paid out of a life insurance policy and the family can then live on the amount left or one income then you are well insured….your banker can help you with a needs analysis to see if you are under insured or even OVER insured….as for disabilty insurance through work they are generally on 100% covered for short term disability…when it turns into long term then the payments are cut to 65% or less…your credit payments remain at 100% that’s where the disability credit protection can be well worth the cost…we never ever expected my husband would not be able to work at all so thank goodness we were prepared!

  26. avatar Cynthia Says:
    July 22, 2009 at 5:33 pm

    I have disability insurance through my health benefits, which are private. I also have critical illness insurance, and the reason for that is, heart, diabetes, cancer, parkinsons and Alzheimer’s are in my family. I had a breast cancer scare last yr at the age of 37.

  27. avatar Cynthia Says:
    July 22, 2009 at 5:33 pm

    Ooops, 36. I am not 37 yet. Next month.

  28. My wife and I paid a couple bucks every paycheck to have the disability insurance offered at work. Then my wife missed work for over 6 months with a series of infections. The disability coverage helped but then we found out the benefits were taxed as regular income. Instead of 60% coverage of her salary, we got more like 42%. Ouch. I found a site at http://www.disability-insurance-update.com/ where I could shop for additional disability coverage. For less that $50/mo, my salary is now 100% covered and the benefits from my personal policy are not subject to taxes.

  29. […] This & That: Insurance Edition « gailvazoxlade.com […]

  30. […] This & That: Insurance Edition « gailvazoxlade.com […]

  31. avatar Christie Says:
    July 23, 2009 at 10:53 am

    Roxanne,

    Thank you for the information! It seems like the rules are always changing, and not for the student’s (or past student’s benefit!)…My student loan is what opened the door to a decent, well paying job; at the same time, it is the most frustrating thing to pay off.

    My daughter is in Grade 11; she is a strait “A” student and is planning to attend university when she leaves high school. I have pointed her in the direction of Gail’s student worksheets… (Unfortunately, I pointed her in that direction so she will not look at it! Teens, ugh!) She and I discussed her going through post secondary school without student loans. If school takes longer, so be it! I have told her the amount I can contribute to her education and we talk openly about money in our household. She works at a part time job as well, so hopefully she can get through without loans, get a good paying job, and be able to use her income for her own goals! We’ll see what happens!

  32. A word about disability insurance.

    If you have some kind of disability insurance through your workplace be careful when purchasing independent disability insurance. I just found out from my broker that there is a cap on the amount you can receive.

    The reason for this cap is that the government does not want you to be on disability forever. You are not allowed to “profit” from a disibility so the amount you get cannot exceed your salary.

    However, this does not mean that an insurance provider will not let you buy it which could potentially lead you to pay into something you will not be able to take from.

    I believe that critical illness insurance is quite separate from this because it is a lump sum.

    Of course, as with everything, do your research and find a reliable and trustworthy broker preferably someone who works independently from large corps i.e. the banks.

  33. Dana,
    Excellent advice on the disability insurance. Coincidentally today I began looking into it (Gail’s post got me moving on something I’ve been considering for a while).

    I learned that my work plan will decrease its payout based on any other benefits I may receive (private insurance, worker’s compensation, EI or Canada Pension disability benefits) and will only allow me to receive total benefits to a maximum of 85% of my employment income.

    As you say, the insurer will over-sell you insurance if you don’t calculate your needs. As it turns out I really only need half of the private insurance I thought I did so my monthly premiums will be very reasonable.

  34. Hi Roxanne – you mentioned above that the OSAP interest relief program is ending next month? I went to the website and there is no information about the changes. I wonder if you could share where you heard about this?
    Thanks!

  35. Disability is by far the most overlooked. People just don’t think about being sick or hurt enough to be out of work for months at a time. When I started by business, I found http://www.disability-insurance-update.com/ and shopped policies from different companies. For less than $45/mo I’m covered up to 70% of my income if I can’t work. It’s a lot cheaper than health insurance.

  36. Jolie, I was diagnosed with MS ten years ago and I am also on the injectable drugs. I was without full coverage at work for about two months due to changing jobs. I called the drug company and they paid for the drugs until I had my own coverage again. I am very fortunate, my work plan and my husband’s cover the cost.

    I never thought about disability insurance until I was diagnosed so of course I can’t get coverage now so I only have coverage through my employer. Hindsight is a wonderful thing.

  37. […] Gail wrote an interesting post today onThis & That: <b>Insurance</b> Edition « gailvazoxlade.comHere’s a quick excerpt […]

  38. […] This & That: Insurance Edition « gailvazoxlade.com […]

  39. […] This & That: Insurance Edition « gailvazoxlade.com […]

  40. […] This & That: Insurance Edition « gailvazoxlade.com […]

  41. […] This & That: Insurance Edition « gailvazoxlade.com […]

  42. Thank you for the information! It seems like the rules are always changing, and not for the student.
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    Kevin
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