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.
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.
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:
- It ensures you are insurable… you get the insurance approved while you’re still young and healthy, and
- 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