Your premiums will also go down if you choose a higher deductible. The standard deductible is $500. Since you’re unlikely to make an insurance claim for such a piddly amount, raise the deductible on your policy and add a little extra to your emergency fund to cover the difference.

Bundling home and vehicle insurance together could save you over $300. Hey, that’s worth the call to consolidate, isn’t it?

If you install a home security system, reducing the likelihood of theft or vandalism, you’ll likely get another discount on your premium. It could be as much as 15%, saving you about $200 a year.  Of course, if the monitoring costs are more than $15 a month, you won’t save a thing.

If you and everyone else who lives in your home are non-smokers, that could save you money.  Being claims free for five years or more can save you money. So can having a mortgage-free home or a home that’s less than 10 years old. And if you’re a retiree, that could mean even more savings.

Ask for a discount if you pay your annual premium all at once instead of monthly. With a little planning you can accumulate next year’s premium and grab even more savings.

If you have extra coverage on your policy to cover stuff that’s depreciated, make sure you adjust your coverage to reflect the depreciated value of the item(s) you’ve insured.

If you work for a company that offers life insurance as part of your benefits package, 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.

Here are 8 other don’ts to avoid:

#1 Don’t think of insurance as an investment. It’s not. It’s risk mitigation and it’s a necessary part of a sound financial plan. While certain types of insurance do build up money over time — products like whole or universal life insurance — that’s not the first reason for buying insurance. Insurance is about taking care of the “what ifs”. So the amount it will pay out to help your family cope should be your primary consideration, not the potential return on investment.

#2 Don’t let the premiums make the decision for you. If you start from the premise that you can only afford to pay $x, and let that decide how much insurance you buy, then you’re going about it all wrong. You must first figure out how much insurance you need and then choose the type of insurance that will give you the level of coverage you’re looking for.

#3 Don’t buy term because you think it’s the only game in town. The “term vs. permanent insurance” debate has ranged since Moses was a lad. Term insurance, for which you pay only for the death benefit, may be the best fit for some people, particularly those who are older or who need a whopping amount of insurance. However, other types of policies, such as universal life or second-to-die policies, may be a better choice in certain situations. Choose the insurance that’s right for you. Don’t pick something just because you’ve heard it’s what everyone should buy. Speaking of which…

4. Don’t confuse illustrations with reality. Life insurance illustrations are designed to show much a cash-value a policy will build over time. Insurance representatives got their wrists slapped because many of those illustrations implied consumers could count on their policies to be self-funding within a specific — often too short — period of time. But if you haven’t yet heard the news, illustrations are only projections of what may happen. They are not guarantees. If the company’s rates of return decline, earnings may not be sufficient to cover the premiums in the future. So don’t count your chickens.

5. Don’t just forgetaboutit. At least every year or two, re-examine your policies to be sure they are still doing the job. If you got married, divorced, had a baby, or had a big jump in income, the amount of coverage may no longer be adequate. Or you might need to add a second, different type of policy, to meet new needs. You don’t have to buy from the same insurance company. Shop around.

6. Don’t forget to change beneficiaries. If you get a divorce, remarry, have a new baby, or if your partner dies, you need to review your insurance to make sure you’re not leaving a stash of cash to nobody — or worse, someone you hate! Imagine seeing the death benefits from a policy on your recently deceased spouse go to that person’s former spouse instead of you. Heads up. This is a far more common mistake than it should be when you consider the consequences.

7. Don’t needlessly replace a policy. Sometimes it is appropriate to drop one type of life insurance policy and replace it with another, especially if your life circumstances have changed. But be careful about dropping a policy just to get a “better-performing” policy or for a cheaper premium. The flip side of this is people who automatically renew their term coverage, even when the reason for having insurance has grown up and left home.

8. Don’t name your estate as beneficiary of your insurance. Insurance benefits are free of income tax when left directly to beneficiaries, but they face probate if the benefits become part of the insured’s estate. So make sure you’ve named a person (or people) as beneficiary — and not your estate — on your policies.

Most people don’t know what their credit score is.  And according to a poll conducted by MRP Market Research Professionals in November 2010, 75% of insurance consumers are unaware that credit score is used to determine how much premium a person pays for home insurance.

How does the use of credit scoring affect premiums?  Well, the Insurance Broker’s Association of Ontario (IBAO) recently sampled 54 property renewal policies from one insurance company known to use credit scoring aggressively.  Of those 54 policies, the average premium increase was 73%, the largest premium increase was 155% or $762 annually, the smallest increase was 11% (interesting that they noted no premium decreases) and 7 policies included claims related increases and were excluded from the sampling.

The use of credit scoring as a factor for determining premium adversely affects those who use lines of credit such as single income families, seniors, newcomers to Canada, the unemployed and small business owners.

In 2005, the Ontario government banned the use of credit scoring in auto insurance and further strengthened that position in 2010 by banning the practice entirely at every stage of the auto insurance transaction.

Additionally, the provinces of New Brunswick & Newfoundland have announced that they intend to ban the use of credit scoring from personal property insurance.

Considering all of this, one would think that if the Ontario government feels it is not right to use credit scoring in auto insurance then it should not be allowed in personal property insurance.  Thinking about the number of people who take advantage of package policies and extra discounts for combining home and auto insurance together, the question becomes: if the use of credit scoring is allowed on personal property insurance, is it even possible to prevent that information from being available or used on auto insurance when both lines are with the same insurance company?  Personally, I don’t think it is possible.  To have the use of credit scoring prohibited in auto insurance makes it necessary to be prohibited in personal property insurance.

This past November 2010, Liberal Member of Provincial Parliament, Mike Colle, introduced his private member’s Bill 130: The Homeowners Insurance Credit Scoring Ban Act, 2010.  This bill bans the use of credit scoring on personal property insurance, something a growing number of insurance companies are already doing.

In an effort to support Bill 130, the Insurance Brokers Association of Ontario launched a new website: www.soaringinsurancerates.ca on May 16, 2011.  Through this website, insurance brokers across Ontario are encouraging members of the public to contact their local MPP’s by using an online form to get the message to all MPP’s that the use of credit score on personal property insurance needs to be banned just as it already is on auto insurance.

The use of credit scoring in insurance has nothing to do with the insured risk.  This is something the government has already recognized in auto insurance because a person’s credit score is not related to accident records or tickets.  The government recognized that the use of credit score in auto insurance was unfair and not in the public’s interest.  It’s now time for the government to support the precedent that was set with auto insurance by extending the ban for the use of credit scoring to personal property insurance.

For more information on Bill 130, the use of credit score in personal property insurance and to contact your MPP regarding this issue, visit www.soaringinsurancerates.ca.

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Kat, you won yesterday and I’ve sent you email to MrsJanuary.

Today is Day Two of the giveaway of Casssie Howard’s (MrsJanuary.com) Money In Your Pocket, which focuses on saving money on your grocery bills. To enter, answer the question of the day in the comments. Today’s question: What really ticks you off when it comes to the financial companies you deal with?

But those aren’t the only illness CI covers. Depending on the policy you choose, you could be covered for up to 20 sicknesses from brain tumour to MS, from Alzheimer’s to blindness, deafness to paralysis. Look for a plan that covers the highest number of variables. And watch the definitions used for critical illness conditions, which also tend to vary from plan to plan. Don’t let the medical terminology baffle you into buying something you don’t understand. Be clear on when you’ll be covered and for what.

Critical Illness insurance pays a lump sum on either diagnosis of the conditions you’ve bought coverage on, or their progress to an agreed state. While a heart attack is a heart attack and requires no further definition, multiple sclerosis might not actually impair your lifestyle for many years.

CI pays out a lump sum of cash that you can use to supplement you cash flow while you’re off work, pay for treatment, or simply get you to and from the hospital. Of course, you have to survive your diagnosis by at least 30 days to get your CI benefit. (If you don’t the policy refunds all the premiums paid.) You could use the money to hire a nanny or a housekeeper. You could use it to provide special equipment or modify your home. There are no limits. As long as you’re diagnosed with a covered condition, you’re in the money.

I often recommend people who don’t qualify for disability insurance look into CI as an option. Since there’s an income requirement for disability insurance that doesn’t exist for CI, it’s a good option for those who choose to stay home with the kids.

As with life insurance, CI premiums are based on the amount of coverage you’re buying. Choose the amount you wished to be covered for, which can range from about $25,000 to the millions. Then provide medical evidence of your good health. (Be warned: a strong emphasis is placed on your family’s health history and a tendency toward a heredity disease such as cancer could result in its omission from your coverage.) The insurer will asses that info along with your age, your gender and whether or not you smoke to figure out your annual premium.

If you think CI is too expensive and you’d rather have the money for your savings account, keep in mind that a unique option available with CI policies is the Return of Premium when the policy expires. Usually expiry happens at age 65 or 75, depending on your policy. If you haven’t had a claim (in which case you would have been very glad to have the policy), the insurance company will refund the full amount of the premiums you paid. This is sometimes referred to as the “no regrets” clause.

If you can’t get disability insurance, or the premiums are just too high to be affordable, consider a CI policy to provide you with some protection against a future health crisis. Remember, however, that your CI policy only covers the conditions listed in the policy. If you develop a serious health condition not covered, you won’t be eligible for a payout.

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Casssie Howard of MrsJanuary.com has written a new e-book called Money In Your Pocket, which focuses on saving money on your grocery bills. I’ve had a look at her book and liked what I saw. Cassie is giving away copies of her ebook to five lucky people here. I’ll be awarding one copy a day this week. To enter answer the question of the day. Today’s question: What one money lesson do you wish you had learned earlier in your life?

1. 1 in 10
2. 1 in 5
3. 1 in 3
4. 1 in 2

Answer: 1 in 3

And if you become disabled, how long will you likely remained disabled?

1. 6 months
2. 14 months
3. 28 months
4. 32 months

Answer: 32 months

One of the biggest myths about disability is, “It won’t happen to me.” Really? Because you’re very special? Or because bad things don’t happen to good people? Or maybe you’re thinking to yourself, “I’m covered at work. That’s good enough.”

Since work-related plans seldom have the kind of coverage available on individual disability insurance policies, you could be in for a shock.

Imagine the horror of being diagnosed with a progressively debilitating disease. Imagine the relief of knowing that while you have to stop working, you have a group disability plan that will help to make ends meet. Imagine your disbelief when your claim is declined by the insurance company because you just aren’t disabled enough in their eyes.

Want to avoid a nasty surprise just when you can least afford it financially and emotionally. Take these questions to your benefits administrator at work and make sure you understand the answers you’re given:

What’s the policy’s definition of “disabled” and how long will benefits be paid? If you can’t do the job you were hired to do, will you be paid regardless of what other work you may be able to find? Will partial benefits be paid if you can only work for a few hours a day? A weak definition of disabled can be one of the biggest holes in a plan. If your policy has an ‘any occupation’ clause, which is pretty typical of a group plan, the only way you’ll collect is if you’re unable to do any work at all. If the insurance company deems you could be a parking lot attendant, they won’t pay.

How much am I covered for, and how will it be taxed? Most group policies cover employees for a certain percentage of their salaries  – often 60 to 75 percent. Some also have a cumulative maximum. But many people have no idea how much they’re covered for or even if their disability income will be taxed. If you pay the premiums directly from your after-tax income, or if your premium is a taxable benefit, then the money you receive on a claim are tax-free.  If you find that the income you receive from your disability coverage is taxed, the next question is this: Will the money be enough once tax is taken?

Does my policy have a residual disability feature? In the case of a slow recovery or a slow deterioration from a progressive disease, this feature becomes very important. Without it, years may pass before your claim can begin because you must meet the insurance company’s definition of “totally disabled”. Since most group plans have limited benefits for residual disabilities, the seams of your safety net may not be as strong as you think they are.

What are the exclusions on my policy? An exclusion is something you aren’t covered for and typical exclusions include travel outside Canada, pre-existing conditions, mental, nervous disclosure, and alcoholism. The list can be wide and varied. And if your malady falls within the list, you’ve got a hole in your safety net.

If you don’t think you’ve got an iron-clad disability policy at work, or you have no disability insurance at all, it’s time to wake up and smell the coffee! Disability causes nearly 50% of all mortgage foreclosures. And close to 90% of disabling accidents aren’t work related. Still not convinced?

Write your name on a piece of paper. Now write the name of two of your best friends on separate pieces of paper. Now, drop ‘em in a hat? Pick a name. Are you praying it isn’t yours?

Smart people who want to make sure that they and their families are well protected don’t ask for trouble by relying on the off-the-shelf disability coverage available through most group policies. And they don’t stick their heads in the sand and hope for the best. They look to an individual policy to make sure their butts are covered.

Buying private coverage that kicks in after your group coverage expired may not be as expensive as you imagine. Since the wait period – the time before benefits on your individual policy must kick in – is long because of your group plan, you could have peace of mind for a lot less money than you think. If you’re buying individual insurance because you have no other coverage, getting it young – under 30 – will be the key to an affordable premium.

The other important issue in favor of an individual policy is that you may not always have your group plan.  A change in jobs, the decision to stay home to raise a family, self-employment could all leave you with no coverage.

Since buying disability coverage can be complicated you’ll need the help of a qualified insurance advisor when you go shopping. With so many sizes and styles out there, it’s very easy to buy one that looks good on the hanger but just doesn’t fit. Using a generalist will get you in trouble. The good fit comes with a fine tailor who can custom make a disability plan just for you.

You know how much life insurance you need. You know what type of insurance you need. Now we need to figure out what policy and company is best for us, while doing so at the lowest premium. Here’s some do’s and don’ts as part of that process:

Do’s:

• Do use a broker that shops many companies. Individual brokers and agents don’t set the rates, the insurance companies do. What a broker brings to the table isn’t the ability to get you better rates from a specific company, it’s the ability to get you the least expensive company by shopping widely.
• Do take your medical exam first thing in the morning before you exercise or have anything to eat or drink. Your blood pressure is generally low in the mornings. And by waiting to eat until after the blood test you don’t force the underwriter to figure out if the floaters in your blood are some horrible wasting disease or just the greasy McBreakfastburger you just ate.
• Do make sure your term policy is convertible (to permanent). This ‘conversion’ feature in many term policies guarantees you the right to trade in your term policy and get a permanent life insurance policy, at healthy rates – with no medical exam. If you bought term insurance and later become uninsurable, conversion means you can still switch to permanent insurance and get it at healthy rates without any medical questions. It’s like locking in your health status. It’s also a vital fallback if you buy term insurance and later become uninsurable. Converting to permanent insurance (and at healthy rates too!) means you won’t lose your coverage as the result of your term policy expiring.
• Do assume your health is regular if you are in fact in good health, and even if you think your health is better than regular. Insurance companies offer ‘regular’ health class premiums, and then they have some super-elite yet only slightly lower premiums they call ‘preferred’. Unfortunately few people actually qualify for those preferred rates. Worse, your general health and fitness level isn’t always a very good indicator of whether you’ll get those better rates. If you’re in good health and assume when you apply that you’ll get the ‘regular’ healthy rates you’ll almost always be correct. If you’re wrong and you qualify for the better rates, the company will give them to you automatically anyway. However if you assume that you’ll qualify for the super-elite preferred health class, chances are that you won’t actually get them and when the policy is issued you’ll be facing higher premiums than you’d planned for. So when you’re running quotes, run them with your health class set to ‘regular’.

Don’ts:

• Don’t buy less life insurance to make it cheaper! Instead, buy a policy with a shorter term. When people find premiums unaffordable the tendency is to buy less life insurance. The downside of approach is that if you die, your beneficiaries don’t get enough life insurance. You’ve deliberately planned to not leave enough behind. If however you need a 30 year term and instead buy a 20 year term you’ll be covered properly for 20 years (the same is true if you need permanent insurance but purchase term to lower your premiums). The downside of this approach is that you have to do something in 20 years – buy a new policy if you’re healthy or use conversion if you’re not healthy. And because you’ll be older then, premiums will be higher. Effectively you’re deferring higher premiums until later (though realistically, we hope that you’ll be better able to pay those higher premiums later anyway). The downside of buying the wrong term (deferring higher premiums until later) is better than the downside of buying the wrong amount (if you die, your beneficiaries don’t get enough money).
• Don’t worry about ‘renewability’ on term policies. Instead make sure that your initial term is as long as you think you’ll need the insurance for without having to renew. Renewals used to make sense on term insurance. You could buy a 5 year term policy and just automatically renew it every 5 years at great rates. Those were the good old days. Today’s term policies have crazy high renewal premiums. Making sure you have a term that’s long enough so that when your renewal comes about (at the end of the term), you’re expecting to cancel the policy anyway.
• Don’t withhold information during the medical questionnaire/application. Instead, be verbose. Bore them to tears with the level of detail in your answers. Firstly misinformation or withholding information is one of the few ways that an insurance company could potentially deny a life insurance claim. And secondly by being verbose you give the underwriter the ability to make a firm decision on the best possible rates they can give you. If they’re teetering on the edge of better or worse rates, don’t leave them having to err on the side of caution. Leave them thinking ‘no problem with the better rates. I’ve got this client down cold’.
• Don’t mix life insurance and investments. Buy insurance because you need a specific amount of money when you die. Lose sight of that goal and you run the risk of buying either the wrong type or wrong amount of insurance. Yes there are some instances where life insurance policies can seem attractive as an investment. Most of the time those investments are not guaranteed and can go very, very wrong. And most of the time you’ll actually have better investment options like paying down your debt!
• Don’t worry about company size. Size. Doesn’t. Matter. Neither you nor I can tell if a company, large or small, is going to be in business 20 years from now, and current size is no indication of whether they will be or not. In addition, the life insurance companies have minimum guarantees should a company fail. These guarantees are detailed further at the industry association’s website Assuris.
• Don’t smoke! As a former pack a day’er myself, I don’t have any thing to say about smoking as part of your lifestyle – smoke or not, it’s up to you. But I have plenty to say about smoking as a financial choice. It’ll double your premiums. (and I can only imagine what Gail’s take is on spending budget money on cigarettes ). Conversely, quitting smoking will probably cut your life insurance premiums in half. Insurance companies will consider you for nonsmoking rates after you’ve been free for 1 full year. That doesn’t mean you should defer your life insurance purchase for a year – that’s another don’t! Buy it now. Just buy a shorter term (rather than locking in smoker rates for a longer period) then get started quitting today. Once you’ve quit smoking for a year, then reapply at nonsmoker rates and get the proper term.

Now you’re still wondering, how much is all this actually going to cost? Well, let’s put some numbers to this. Below is a life insurance quote form with live quoting capability. This is the same software that many brokers and insurance companies use inhouse, it’s the same software I use if you call my office for a quote. Armed with competitive pricing information ensures that you’ll have a good idea of how much you should expect to pay when it comes time for you to finalize your purchase.

Glenn Cooke is an independent life insurance broker and president of InsureCan Inc. He can be reached at (866) 662-5433.

Life Insurance Quotes

In our last post we looked at ‘How much life insurance do I need?‘. The basis for estimating how much life insurance was needed was based on replacing a paycheque over a period of time.

In discussing the different types of life insurance we’re going to take the same back to basics approach. Most of the confusion that arises between the different types of life insurance are created by marketing initiatives by the insurance industry so let’s ignore that right from the start. Forget everything you know about what type is best and how it works.

Life insurance has three attributes:

1. The death benefit
2. The premiums
3. The span of years over which you pay the premiums.

In terms of the death benefit, if you are handed a cheque for $500,000 can you tell what type of life insurance the insured had? Of course not. For the same amount of death benefit all life insurance types are identical. The variations amongst the different types of life insurance are based on the premiums and how they are paid over time.

And let’s take one step further back and generalize again. All insurance works like this; you pay your premium and you have your coverage. If you have an accident (die/house burns down/crash your car), the insurance company pays the claim. If you don’t have an accident the insurance company takes your premium, pools it inside the company with everyone else who paid their premiums and pays out whoever did have a claim. And the insurance companies know pretty much exactly how many claims they are going to see in a year. They don’t know who is going to claim (that’s why we buy the insurance) but they know how many. And that’s how the set the premiums. The more claims that are expected, the higher the premiums.

That’s why we all know what happens to bad drivers‚ their rates go up. In life insurance terms what makes us a bad driver is mostly our age. Every year we’re a year older, we’re all a year closer to dying. So every year that we’re a slightly poorer risk our rates need to go up. Or from the company’s viewpoint, their costs are cheap on younger people (not very many claims on 30 year olds) but expensive on older people (lots of claims on 80 year olds).

Here’s what that means. From a ‘pure’ life insurance perspective your rates would look like this; you pay your premium for the year and have your coverage. Next year you’re a year older so your rates go up a bit, and so on, getting higher every year. To compound this increase though, the older we get, the faster it gets more expensive. So this ‘pure’ life insurance premium doesn’t go up in a straight line, it goes up in a steadily increasing curve that looks something like this:

So that’s one variation on paying premiums over time. We can select a time period that we need the insurance for, and pay premiums that go up every year as we get older.

Sound good?

For most people it doesn’t (sound good that is). The older we are, the faster our premiums would become more expensive. Yes, that means cheap premiums now when we’re young. It also means crazy expensive premiums later when we get older, to the point of being unaffordable. This kind of insurance would be called ‘1 year term’.

Term Life Insurance

So here’s what we can do to fix the ‘unaffordable’ problem. Let’s block off the first 5 years of those premiums and take the average. Now instead of paying rates that go up every year, you’re going to pay the average premium each year for the next 5 years‚ your rates have levelled out over that time. In year 6 your premiums will go up because now you’re 5 years older, and you’re going to pay the average rate again over the next 5 year block. This type of insurance is called 5 year term.

What we’ve done is levelled out the costs from going up every year to going up every 5 years. We’re paying pretty much the same total, we’re just paying it differently over time.

And that’s term insurance in a nutshell. Pretty much any time period is available, 5,10,20, even 30 year term is available today. And what you’re doing is simply leveling the costs out over that time period.

Permanent Insurance

Now let’s say we need insurance forever. No matter how old we get, we want the insurance. Even if we had 30 year term we know right now we are going to have a problem in 30 years – our rates are going to become unaffordable in year 31. So term insurance won’t do.

What the companies do is take this ‘averaging’ of the premiums out past 20 years, past 30 years, and stretch it out over your entire life expectancy. Think of it as taking the average of the life insurance premiums over your entire life. This gives us one premium we’re going to pay, level, for the rest of our life. This type of life insurance is called permanent insurance.

If you look at the following chart, you’ll see that with permanent insurance you’ll be paying higher premiums than term insurance initially, but lower premiums later. But that raises a problem from the company’s perspective. Let’s say your premium for permanent insurance is $100 per month. And let’s say that your costs for insurance are $25 a month now, and $400 per month when you’re 70. Today, the company’s making good money. But fast forward until you’re 70 and there’s a problem. They’re paying out $400 a month in claims but you’re only paying $100 a month – same as you were many years ago. Paying $300 a month in claims while taking in $100 a month in premiums is a recipe for disaster for the company.

So how to fix that problem? Remember in the early years you were paying $100 when the company is only paying $25 in costs? Rather than spending that $75 or treating it as profit for that year, they saved it up or reserved it inside your policy. Now when you’re way old the company has a pot of money to apply to the risk of the death benefits they’re paying out. They use the money you overpaid in the early years to cover the higher costs for life insurance later. In short, you pay more now to pay less later.

Whole Life Insurance

Now you’re going along through the years paying higher initial premiums and building up a reserve. Then you change your mind and cancel your policy. The insurance company will refund you back a percentage of that overpayment in premium they were saving. That refund is called a ‘cash value’ or a ‘cash surrender value’.

And that kind of insurance‚ level premiums for life with a cash value if you cancel‚ is called whole life insurance.

Now we need to have a short history lesson. In the 80’s the insurance companies were marketing those cash values as some kind of saving vehicle. Buy a permanent life insurance policy, pay higher premiums then cash out that money for retirement later. But eventually some consumer advocates ran the numbers and discovered that doing so wasn’t a very good investment. Of course not! It’s not an investment at all, it’s a refund of overpayment in premiums. But word got out‚ don’t buy whole life insurance, it’s bad. Is it? Of course not again. It’s a life insurance product with a premium and a death benefit, there’s nothing evil about that. It’s just that it was marketed poorly.

Term to 100

So the insurance industry said ‘you got a problem with cash values? Fine, no more cash values.’ And in the early 90’s or so they took whole life insurance and stripped out the cash values. Doing so let them lower the premiums and gave us our second kind of permanent insurance. This product is called Term to 100 and is quite simply level premiums for life, nothing else. No cash values, no bells and whistles.

Universal Life Insurance

After Term to 100 was launched it took off like a rocket. It was inexpensive, easy to understand, and an all around great product. But it doesn’t offer any opportunity to discuss investments‚ and the life insurance industry loves to talk about investments.

Enter Universal Life. Basically what the companies did was take a Term to 100 insurance cost and tack on an investment account onto the side of it. And unlike whole life insurance in this case it’s a real honest to goodness investment.

Let’s say your universal life insurance premiums are $100, level for life. If you pay the insurance company $100, the insurance company uses that to pay the insurance costs, and your policy remains in force. Your investments? You didn’t put any money into it so your balance is $0. However with Universal Life Insurance you could modify your premiums to pay $150 per month. The first $100 goes to cover your life insurance costs, the extra $50 gets deposited into your investments where it grows and earns interest……or like in 2008, crashes and burns by -40% like everyone else’s investments. But you don’t have to put any money into the investments, you can just pay the minimum level premiums.

Be very careful with Universal Life. It’s a great product if used correctly, however some companies offer an insurance cost that is annually increasing instead of level for life. That means that you’ll get cheaper rates now, but extremely expensive premiums later. This increase is sometimes masked by using future investment return to pay for those expensive premiums but as we noted above, those investment returns are not guaranteed . In the future when the investments crash you may find there’s not enough money in the investments to pay those high premiums.

Summary of types of life insurance

Now lets summarize. We have different kinds of term insurance‚ 5,10,20,30 and so on. And we have 3 kinds of permanent insurance; whole life insurance, term to 100, and universal life.

What’s the best type?

Now that we’re up to speed on all our options, the answer is deceptively easy. We should buy insurance for as long as we need it. If we need insurance for 10 years the least expensive type over 10 years will be 10 year term. If we need insurance for 20 years, 20 year term is going to level our premiums out over that 20 year period and be the least expensive over 20 years. If we want life insurance for the rest of our lives and don’t plan on cancelling it in the future, then over the long term one of the three types of permanent insurance will be the way to go.

Now let’s look at the example from last time; Mom and Dad in their 30’s, two young kids. How long are they likely to want insurance? Remember we were buying this to replace our paycheque. Now, our paycheque doesn’t last forever‚ eventually we retire. So do we need paycheque insurance past that point? Probably not‚ and by extension we don’t need life insurance past then either. We’re young now with a large need, kids,mortgages and bills. When we’re older the mortgage is gone, the kids are moved out and on their own, so we no longer have a need for that $750,000 we saw last time. Add all that up and what Mom and Dad would be looking at is either 20 year term or 30 year term.

It’s important to note that while our available options as to types of insurance are crystal clear, what type works best for you is much more subjective. The example we’ve been discussing (paycheque protection) says we should get 20 or 30 year term. But your needs may change. Or you may just be of the attitude that you want insurance for your kids no matter how when you die‚ even if you don’t ‘need’ it, that’s what you want. It’s impossible to generalize as to what’s the best type‚ just remember that what you do need to do is determine how long you expect to need the insurance and then buy the type that best matches that timeframe.

We’ve now answered the first two questions; How much life insurance do I need, and what type of life insurance do I need. In our last post we’re going to look further at some of the differences between products available in the marketplace as well as how to get the cheapest rates. All that and more next time in ‘Do’s and Don’ts of Buying Life Insurance’.

Glenn Cooke is an independent life insurance broker and president of InsureCan Inc. He can be reached at (866) 662-5433.

For most of us, getting life insurance seems to be even more complicated than finding the right cell phone plan. Different types, cash values, did I get the cheapest rates, it’s a very confusing process.

But it doesn’t have to be that way. If we break it down into small steps things become a lot less complicated. In fact, getting the right life insurance is a simple three step process.

1. How much life insurance do you need?
2. What type of life insurance do I need?
3. Shop and review companies and products, with specific do’s and don’ts.

We’re going to address these three steps individually. Let’s start off with answering the question ‘how much life insurance do I need?’.

Before we determine how much insurance you need we need to determine ‘intent’, or what you’re trying to get done with life insurance. For our example let’s use an old-school nuclear family of:

• Mom, age 33, income $50,000
• Dad, age 36, income $50,000
• Two kids aged 4 and 6

Should Mom or Dad die, what they want is for things to stay mostly the same at home. They want the kids to live in the same house, eat the same brand of peanut butter, and Mom or Dad to drive the same car. They don’t want anyone getting rich off their death but they don’t want anyone going broke either.

Let’s examine that intent a bit more closely. What they’re attempting to do here is maintain their family’s standard of living should they die.
That raises the question where does the money come from right now to maintain their standard of living? Where does the money come from to pay the mortgage, put gas in the car, buy the peanut butter?

The answer to that question for most of us is our paycheque. It’s our paycheque that provides our standard of living. And that’s the cold hard fact of the matter; from a financial perspective, all that most of us are is our paycheque. And should we die what we lose from a financial perspective (not from an emotional perspective, that’s a different matter) is our paycheque.

So if we use life insurance to provide a ‘new’ paycheque should we die, then our family can maintain our current standard of living. In fact, what we’re really insuring here is not our ‘life’, it’s our paycheque.

Aside: This let’s us focus on the actual financial loss when a wage earner dies. We die, we lose our paycheque. If we die, do we lose our mortgage? Nope, there it is, due every month just like before. Because the mortgage doesn’t change upon our death, it’s not something we should be tying insurance directly to. What changed on our death was how we pay for the mortgage, and once again that’s our paycheque.

Let’s use Mom as an example to determine how much life insurance we need. Mom’s making $50,000 per year. We expect Mom is going to live a long and healthy life and she’s going to earn an income until she’s about age 65, or for another 32 years. That’s what we’re protecting with life insurance – $50,000 of income for 32 years.

At the bottom of this article is a calculator that determines the present value of a paycheque. Let’s use the calculator below to see how much life insurance she may need.

1. her income is $50,000
2. we’ve gone from 4 people to 3 so we don’t need the full $50,000. Let’s assume 60% of the $50,000 will be enough to maintain the family’s standard of living.
3. Years will be 32 since for complete coverage we want to use same timeframe that we expect she’ll actually earn the income.
4. Let’s assume inflation at 3% and interest at 5%. Use whatever numbers you feel comfortable with.

Put those numbers into the calculator and we get $723,834.17. Let’s look at what this means. The insurance company gave Mom’s family $723,834.17. Dad didn’t run out and spend all that, he put it in a savings account at 5%. Dad then withdraws $30,000 from that and puts it in their chequing account (that’s the 60% of Mom’s $50,000 paycheque). They live on that $30,000 plus Dad’s paycheque for the year.

Did anyone get rich here? Not at all. Dad and kids have maintained the family’s standard of living and that’s it. They simply used $30,000 for that year to maintain their standard of living.

Dad continues on, withdrawing $30,000 every year to live on for the next 32 years. Nobody gets rich, everything stays the same financially. We’ve increased the paycheque by inflation each year, which is what we would expect Mom’s paycheque to do over time as well.

Now look at year 32. The final paycheque is withdrawn and spent on maintaining our standard of living. And how much is left? $0 Almost $750,000 of life insurance has been spent on doing nothing other than giving us a $30,000 paycheque over a period of time. $750,000 of life insurance, and nobody got rich.

So let’s look at a second scenario. Rather than providing an income to age 65, let’s just get the kids out of the house. Once the kids are gone, Dad’s on his own. The youngest child is 4 so lets say we need a replacement paycheque for 20 years – that’ll be long enough for the youngest to be through school and into the workforce.

Same calculator, with inputs of $50,000 income, 60% needed, 3% inflation and 5% interest, and we end up with an amount of $502,890.68. Again, $502,890.68 will provide an income of $30,000 per year for 20 years and then there’s no money left.

So how much insurance does Mom need? Somewhere between $500,000 and $750,000 would be where Mom should be looking. That seems like a lot – and it is. The real underlying reason Mom needs that level of coverage is because we’re duplicating a paycheque over a long period of time. For younger families, it’s the length of time that drives a big part of how much insurance we need.

(note that the insurance company will still pay any death benefit as one lump sum, not in a series of paycheques. Dad would determine how best to split the money after the fact. The calculator doesn’t tell us how to spend or invest, it let’s us estimate how much insurance would be reasonable.)

Now let’s recap. What we’ve done is refocused our life insurance needs onto the actual financial loss we suffer should Mom or Dad die – our paycheque. And we’ve determined that Mom should have between $500,000 to $750,000. And while that seems a lot when you look at it that way, when you stretch that out over the years the kids are growing up the reality is it’s barely enough to keep things where they are now.

In the next article, we’ll be discussing the best type of life insurance for you and your family.

Glenn Cooke is an independent life insurance broker and president of InsureCan Inc. He can be reached at (866) 662-5433.

How much life insurance do I need? calculator

One of the biggest arguments against buying mutual funds is just how expensive they can be. A fund’s MER or management expense ratio refers to the management fees, administration charges, taxes, and trailer fees paid to the guy who sold you the fund. The MER is reported as a percentage of assets under management for the previous financial year and can vary from one year to the next.

The returns you see advertised already account for the MER but you should still pay attention to how much you are paying since higher fees do not always translate into better returns. In fact, some studies have shown that the lower a fund’s fee, the more likely it is to post better-than-average future returns. So at least with mutual funds it’s not a case of “you get what you pay for.”

Another downside to MFs is that they must distribute their capital gains at the end of each year even if a fund has declined in value. If you’re holding the fund outside of a tax-deferred plan you’ll have to pay tax on any capital gains distributions made. This lack of control makes some investors wary.

And mutual funds have the option to merge. When Mutual Fund Company A buys Mutual Fund Company B, and then proceeds to amalgamate, integrate, consolidate the funds, investors who bought one fund can end up holding quite a different fund.  Two mid-sized funds that become a large fund can force the investment manager to stick with large cap funds, changing the very nature of the fund. With wheelbarrowfuls of money to invest, buying what amounts to itty-bitty pieces of teeny-weeny companies is too much work. A mega-fund can’t really afford to divert efforts to a lot of small companies since they’ll have little impact on the portfolio. Changes in management style may not be immediately apparent. But watch your fund move from having a wonderful performance because it is nimble, to the just-average performance of a well-managed monolith and you’ll become painfully aware that bigger is not always better.

And heaven forbid that a fund fall from consumers’ graces. When a fund fails to meet investor expectations, investors who were attracted by those flashy ads are apt to cash out. Now the manager is forced to commit a larger portion of investment dollars to cash as a cushion against redemptions. Or, worse, they must sell securities to meet redemptions at exactly the wrong time in a market cycle, selling high when they should be buying low. Transaction costs go up and remaining mutual fund holders have to eat the costs.

Of no small concern to some investors is the movement of managers in the industry. While a change in managers does not signal the demise of a fund, it can be pretty frustrating to buy into a fund manager’s philosophy, plunk down your money, and then have the manager leave with nary a good luck sucker! It feels like bait and switch. Having analyzed the fund manager’s track record, a management change means you’ll now need look at the performance history of the guys who are taking over in deciding if this fund should remain in your portfolio.

Regardless of the distractions and the detractors, mutual funds have allowed investors the opportunity to enter the investment marketplace in order to earn potentially higher returns than those available on traditional investments such as GICs. This is particularly true during periods of declining interest rates when consumers become less and less interested in the secure investments they’d held in the past because they just didn’t pay. But knowing the downsides is part of understanding what you’re buying. Do your homework, get smart about investing, and then you can buy whatever you choose with confidence.

Next week: The Many Styles of Mutual Funds

Last week: All About Mutual Funds

So, do you want to know what The Big News is? It seems that all you people who wrote to Slice to say you desperately wanted more episodes of Til Debt Do Us Part will have your way! Congrats of making the world turn in your direction. Yes, this summer, I’ll start shooting 15 new episodes of TDDUP. They likely won’t air until 2011, but they’re on their way. Stay tuned and I’ll let you know what Slice and Frantic are looking for when it comes to the families we choose, and how you can apply.

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!

Don’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 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!

From The Wealthy Barber:

“Disability insurance is the most neglected of all forms of insurance, yet for many people, it’s the most critical insurance need…. A thirty year old has a one in four chance of becoming disabled for one year or more at some point in his or her life…When people are disabled, they don’t just cease to be an asset to their families…they become a liability.”

When I review benefit handbooks, many of my clients are surprised to learn the details of the actual coverage that they carry. Most disability benefits only cover 60% of the employee’s salary and exclude bonuses. Many plans will only cover the first five years of disability and most plans are not indexed to inflation. Many clients are unaware that their disability benefits are not portable and a move to a new company results in a different benefit plan.

As the working population ages and companies are more cognizant of expenses, there is a growing trend for employers to offer “flex dollars” benefits. With this plan the employee is given an allotted sum of dollars from which he must choose from a shopping list of benefits (health, dental, life, short term disability, long term disability, critical illness insurance). While the employee can top up each element of coverage, in general, as the employee gets older, the same dollar allotment buys fewer benefit

The Disability Contract
When you pay for the premium out of pocket there is no tax-deduction, but you receive the benefits tax free. This compares to a company paid policy where you are taxed on the benefits.

A personally owned non-cancellable disability insurance policy is a contract between the individual and the insurance company. As long as the premiums are paid, the policy cannot be cancelled or altered in any way without the individual’s consent.

There are three common clauses used to determine the criteria and length of time for which an insurance company is obliged to pay a claim if you become disabled. This determines whether you can be forced to work, even in some other field at a reduced level of income. These clauses are known as:

• “Any occupation” requires that you must be unable to work in any occupation, regardless of the change in duties or income.
• “Regular Occupation” clause states you must be unable to perform the important duties of your own occupation and not working in any other gainful occupation.
• “Own Occupation” is the most complete yet most expensive clause as it permits you to receive full benefits if you are totally disabled not working in your field but choose to work in another field.

Ask yourself “How likely is it that I could be totally disabled out of my specialty and still be able to work in another?”

Additional contract terms to know
Elimination Period (waiting period) – This is the length of time that must elapse after the onset of the accident or sickness before the insured becomes eligible to receive disability benefits. The typical elimination period for private coverage is 90 days.

Non-Cancelable Contract – Under the provisions of this contract, as long as the premiums are paid, the insurance carrier cannot:

• Cancel the policy
• Change any provisions or add restrictions
• Increase the premiums or add any changes to the existing policies

Features of Disability Insurance
Waiver of Premium: It is important to continue premium payments even after you become disabled especially since you may not receive benefits for 90 days. Many insurers take over paying future premiums while the insured is receiving a disability benefit and some will refund the premiums that were paid during the elimination period.

Future Increase Option: This benefit allows one to increase the benefit by a certain amount at specified intervals without providing evidence of health. You only need to prove earnings. This may be of interest to those who want a robust policy now but to keep premiums low, they take the lowest coverage and enhance the coverage at later time. A chartered accountant, who buys disability insurance and later becomes a roofer, would be an extreme example.

Cost-of-Living Benefit: This benefit ensures that while on claim, the purchasing power of your benefit dollar is increased at specific periods (every 6 or 12 months). There are two formulas which can generally be utilized when applying for coverage:

• CPI index (with or without minimums and maximums)
• Simple interest

Portability: As a general rule, you want the plan to remain as unrestrictive as possible so that future changes in your status or location can be accommodated. An example would be an oil engineer who moves to Saudi Arabia but owns disability insurance purchased 10 years before. Only private plans offer this feature without restriction.

Like all insurance, disability insurance is not well understood by most people. The old adage is true “you get what you pay for”, so do your research.

Level of Benefit

Residual Benefit: A residual benefit is payable if the person is able to work on a limited or reduced basis. For example, an individual with back pain may only be able to tolerate sitting at a desk for 2 hours per day. The level of payout is based on the proportion of lost income relative to the time lost. This provision is essential since most individuals make claims for partial rather than full disability.

Partial Benefit: A partial benefit is also payable if you are working at a reduce level. However, the payout is based on the amount of lost time and duties and there is no requirement to show a loss of income. This is an attractive clause for those who are newly employed and show limited prior earnings (e.g. a new graduate doctor).

Paying for the policy
Why should I pay for a policy when I can just contribute to my RRSPs or savings and hope that I will have enough money should I become disabled? Consider this: If you are forced to withdraw from your RRSPs you will have to pay taxes. A withdrawal of $5,000 could be as little as $2,600 in the end depending on your tax bracket. Additionally, if you are forced to withdraw during a bear market, such as we are currently experiencing, you will be forced to withdraw more units from your mutual funds and potentially at a loss.

If you own an individual disability insurance policy paid from your cash, any claims payment come to you tax free once you have satisfied the waiting period or other contract requirements. This will apply even if you are currently unemployed.

In summary, disability insurance is only one element in the “Risk Management Strategy”. Is it worth spending less than 3% of your gross income to protect your greatest asset, the ability to earn a steady income? Other coverage’s to consider include Life insurance, Critical Illness insurance and Long Term Care insurance.

I recently received a mighty big question from  NM and thought I’d share it and my answer here since she is asking a lot of the same things many other people are asking and I can kill many birds with this one stone.  NM writes:

I recently bought your book and in it, you suggest Disability Insurance, Critical Illness Insurance and Life Insurance. I’ve made a spending plan and am trying to figure out how/when/where these insurance products would fit in. Now that you’ve convinced me insurance isn’t evil, I’m wondering… I’m 24 (about to turn 25), single, and I just started a new job in June grossing $33,000/year. I have about $6,500 owing on a line of credit at 8.5% interest and $2,000 on a credit card at 19.97% interest. My question is: do I need all three types of insurance? Should I get them now or wait until I pay off my debt? And how do I figure out how much disability or critical insurance I would need? I’m assuming that once I move out on my own or collect any assets I would need to look in to getting Critical Illness or Disability insurance?

NM, since you are single and young, you’re most important insurance step is to get disability insurance. Not any old disability insurance, but the very best disability insurance you can afford. (Tomorrow I will post a guest blog on disability insurance from a Guy In The Know, so read it.)  Life insurance is important when you have assets and dependants, and since you have neither, and are still very young, this doesn’t have to be a priority. Critical Illness insurance is also useful, but I often recommend it for those who can’t get disability insurance because they are old, and that’s not you. So, the best DI you can find, m’girl, that’s what you’re after.

NM went on to say:

Speaking of debt, I plan to pay off the 19.97% interest credit card debt and then start an emergency fund (meaning I will have a very small emergency fund until I pay off that high interest credit card). I was then going to put away about $300 per month for emergencies. 5% of my income goes in to my company’s pension plan; I was also thinking about increasing those contributions once I pay off the credit card. Should I save less and continue making huge debt repayments? Or should I work on boosting my savings even though it would take me longer to get out of debt?

Also, my company’s pension plan acts like an RRSP in that my income is taxed after the contributions are deducted. My company also matches my contributions. The plan is locked, meaning I can’t get to the money until I retire. Is there any downside to having this type of a pension plan (for ex. I can’t borrow against it to get a house, etc.)? I want to contribute the maximum to this plan, but I’m wondering if I should also get an RRSP?

Thank you for this book–I can hear your voice talking to me through the pages! I plan to use it to guide me in to being a Woman of Independent Means.

Good questions all, NM. Focusing on getting your debt repaid is the right thing to do, particularly since you are not ignoring either your long-term or emergency savings. When I work with my fams, I often start them off saving only $100 a month for each, just to get the habit established. You’re already doing this so go nuts on the debt repayment.

Since 5% of your income goes toward your company pension plan (which is fine, by the way) and they match your contributions, that means you’re saving 10% long term. Perfect. And $300 a month for emergencies until you get to the months’ worth of Essential Emergency Expenses is terrific. As for not being able to borrow against your retirement savings for a home, I’m not a huge fan of this strategy. Once you have all your consumer debt paid off, take the money you were using for debt repayment and start building a Home Downpayment Fund.

I’m glad you’re enjoying A Woman of Independent Means.  It’s always good to hear when people are using the book to make more sense of their money. I’m working on an outline for a new book, but if you stay this course you’re on, you won’t need it! Ha!

This is my final blog of the year, so I want to wish you all a very healthy and happy 2009. Last year I made a resolution that kept me sane through all my ups and downs. Being the stone in the river was one of the things that got me through the tough changes at the end of the year. (All your hugs and my emergency fund were the other two.)

We have been in our new home now for almost a month and things are settling down and developing a rhythm. I want to thank you all from the bottom of my heart for all your good wishes and kind words. I believe that it was being wrapped in your positive energy that made the last couple of months bearable. Now I can hardly wait to see what 2009 has in store for me!

The best to you all. I am so proud of so many of you for seeing the light and taking control of your money and your lives.

Hey, I’m almost out of success posts, so if any of you want to share your stories, please send them along so everyone else can be inspired by you, or can share their wisdom with you to help you along.

One more thing: Since we’ve covered a lot of ground in the past year, is there anything in particular you’d like more information about? I already know you want more on investing, so I’m going to work up some stuff on that. Anything else?

Cheers, with heaps of love, and great big hugs.

I friend of mine recently got a letter from his term insurance provider offering additional coverage for accidental death. This is one of the latest “pushes” from the insurance world. Of course, what they don’t tell you is that under 3% of all insurance claims are paid out because of accidental death. This makes accidental death premiums one of the most profitable for companies. Buyer Beware!

The other “push” I’ve been hearing a lot about recently is the push to replace existing life insurance policies with new and improved. Be careful. Some unscrupulous brokers encourage clients to switch policies to pad their own wallets. While term costs have decreased in the last few years, you shouldn’t be swapping an existing permanent plan for a term policy, particularly if you’ve had it for any length of time.

Speaking for insurance agents, watch out for those who are allowed to sell only one company’s products. Insurance companies employing agents generally charge higher premiums than do insurance carriers employing independent brokers.  Since an employee of an insurance company cannot shop for the best value for you, they may not offer the product best suited to your needs.

Remember, too, that the cheapest isn’t always the best, particularly over the long-term. So while a term insurance premium may look really cheap now, if you have to renew it a couple of times, you may be surprise at how much the premium increases over time. Look at the overall cost rather than just at the initial premium.

And watch for policy exclusions.  All life insurance policies have a two-year suicide exclusion. Some also carry travel or recreational activity exclusions if the applicant was engaged in these activities at the time of application. So if you’re an avid mountain climber, the policy probably won’t pay out if you fall off the mountain.

Each insurance company has its own underwriting guidelines and having a broker who works with multiple carriers and is up to date on the different underwriting protocols is the single best way to guard against buying something that doesn’t serve you well.

Before buying insurance, answer these three questions:

1. What do you want your life insurance to do for you?

• Pay for your funeral?
• Pay off your outstanding mortgage balance or other debts?
• Offset the loss of your income? For how long?
• Fund your kids’ education?

2. Who do you want to insure?

• You can get a life insurance policy on your own life, or you can get one policy for both you and your spouse (referred to as a joint life policy), which pays when the first partner dies, leaving the life insurance benefit to the survivor.

3. How long will you need insurance?

• When will your mortgage or other debts be paid off? The amortization period of your mortgage will often determine how long your term life insurance policy should be.
• When will your family no longer be dependent on your income? No dependents may mean way less insurance.
• When will your children be finished school? One day they’ll finish their education and having enough coverage to pay their educational expenses won’t be necessary.
• When are you planning to retire? You will have less income to replace at that time.

The more cash that is available from other sources, the less life insurance you may need so you should do a complete net worth before you start looking at how much insurance to buy. People often buy a policy here and a policy there until they have an insurance hodge-podge that can be confusing and over-priced. It makes sense to have Enough insurance. It makes no sense to have too much.

Director Nathalie has a first job; she’s a classical harpist. And boy is she good. So one day I arrive to set and Nats wants to talk about what she should do with her insurance on her harp. It’s costing her almost $500 a year, and after listening to me prattle on about cutting costs, she things this may be a cost she’ll cut. Whoa there Momma.

First I ask what it would cost to replace her harp. About $16,000 she say. Okay, say I, so do you have $16,000 in the bank to buy a new harp right now? No, she shakes her head, a little stunned at the question. Then you definitely SHOULD NOT cancel your insurance.

I explain to her that when she buys insurance on her harp, she shifting the risk for taking care of a disaster from herself to the insurance company, and the $42 premium she’s paying is the cost of the insurance company accepting that risk. Huh?

Well, let’s say you decided to self-insure, which was what she was proposing. If the harp broke in 2 years, she would have $42 x 12 x 2 – $1008 saved in her self-insurance pool.  How would she come up with the other $15K?

Most people would just put it on credit. Credit has made insurance seem like a useless product because people have, to a large extent, had an endless supply of money available to solve any problems. But credit shouldn’t be used as insurance since the cost in interest if far higher that the insurance premium.

So how long would it take Nats to come up with the full $16K if she were banking her $42 a month premiums? 381 months, or almost 32 years! So for 32 years, she’d be at risk, having to cover the cost of the new harp to some degree, when for $42 a month she wouldn’t have to think about it.

Every time she loaded that sucker into the car – which she does fairly often to get her gigs – she would be worried sick about what she was going to do to come up with the money to replace it if the worst happened. Ditto every time she arrived home and had to unload it.

That’s a lot of worrying. And that’s exactly what insurance is designed to do: eliminate the worry.

Insurance has a bad rap. If you make a claim, they raise your premiums. They put you through the ringer because they don’t want to make a payout. There are even stories about life insurance companies not paying out when the body insured actually drops dead. Com’on, do I have to drop the body of at head office to get the money?

Companies sometimes forget that the purpose of their existence is to produce what they’re producing. Car companies make cars. Shoe companies make shoes. Insurance companies create peace of mind by offsetting risk. What we’ve seen since the early 1980, is a shift in companies’ focus from doing their jobs to “meeting shareholders’ expectations” Hey, people who invest shouldn’t have any “expectations,” and shareholder expectations should NEVER stand in the way of dealing with every single customer as valued and respected. So whenever people are badly treated by any company, be it a little thing, or a big thing, they should bray it all over, tell everyone, and stand in the store and shout it at the tops of their voices to warn the other would-be customers.

But you also can’t paint an entire industry by the bad behaviour of a few players. There are reputable insurance companies who take their jobs seriously and make sure their clients receive the services they’ve paid for.

And we should do the math before we decide that insurance is just money down the drain. If Nathalie never has the need to buy another harp because she dropped hers, she should say, “thank you” for not having to deal with that stress.  In the mean time her $42 a month has bought her years of piece of mind and a sense of safety. Money well spent.