insurance advice

[demann]

My wife and I are 52 yrs old . both self employed without much in the way of benefits. 2 kids (17yr , 13 yr old) we have no debts. what type of insurance do we need ????? life ( term vs permanent) ??? disablity?? critical illness???
also are there guidelines on how much insurance to have ??

[marty123]

My wife and I are 52 yrs old . both self employed without much in the way of benefits. 2 kids (17yr , 13 yr old) we have no debts. what type of insurance do we need ????? life ( term vs permanent) ??? disablity?? critical illness???
also are there guidelines on how much insurance to have ??

We lack details about your level of financial independence and the loss incurred if one spouse dies (for life insurance). In a child-less situation, I would personally proceed as follows (this is kind of our plan, adjust to suit your needs with professional help as required):

- While retired or when financially independent: no insurance, assuming that income won't decline upon death of the first spouse.
- Until retirement and assuming that you have a nest-egg that will allow retirement within 10-13 years: enough term insurance to allow the surviving spouse to meet existing household financial goals without changing his/her lifestyle. In other words, if you're planning to both work about 30-40 hrs per week and retire at 60, then I'd get enough term insurance to cover:
* funeral expenses;
* a few extra months of emergency fund
* if the surviving spouse won't cover lifestyle expenses, enough to produce an income stream sufficient for them not to need to work more hours (example: spouse won't need to work 50 hours to make ends meet)
* whatever retirement saving boost necessary so that the surviving spouse can still retire at the planned age (example: if you planned retirement at 60, spouse shouldn't need to work until 65-70 because saving for retirement is more difficult)
* a bit more money if the spouse has a less secure income

Adding the children to the mix:
* a bit more money for the spouse that may need to work less hours to deal with potential issues with the children
* money to help with education, assuming that the surviving spouse won't be able to save as much after being widowed

I'd stay away from CI, as it definitely would be nice to have if you get hit by the right disease/condition, but I don't see it as an insurance play. IMHO, there is no room in a financial plan for "insurance" that only pays for a specific disaster. Being afflicted by Lou Gerig disease is just as costly as dealing with a heart condition, or MS. You don't want to be in a situation where your ability to financially deal with a disease is related to a lottery factor that caused you to have the right or wrong affliction.

As far as disability is concerned, you'd need to evaluate your needs for income in much the same way as for life insurance, reducing the amounts by other available policies (CPP disability, tax credits, etc.) and increasing it by an amount that would allow assistance with the disease.

[brucecohen]

I agree with Marty about ignoring CI.

Normally disability is the first insurance need since it provides income when the insured is still alive but can't. Basically, you're insuring your income -- not yourself. Disability coverage is however very expensive to buy on your own. See if you and your spouse can access a group plan by joining a business, professional or alumni association. Disability policies are complex. The Canadian Life & Health Insurance Association -- which speaks for the industry -- has consumer books that explain the basics of this and other coverage. Click here.

This site is run by Bob Barney, an insurance industry veteran and consumer advocate who has long championed term life insurance. It offers quotes from most if not all issuers. The FAQ section explains the concept. And there's a link to an insurance needs calculator.

One wrinkle for you and spouse. You said you're both self-employed. Do you work together in the same business? If so, how would the survivor replace the disabled/dead spouse in order to keep the business going? Depending on your answer, this might create need for more coverage than indicated by a need calculator. One related wrinkle: is it the kind of business where the 17-year-old could step in after graduating high school, and would he/she want to?
NOTE: if you pay the premiums yourself, disability payouts are tax-free. So you don't have to insure your full income. Indeed, disability plans typically replace no more than 70% IIRC of earnings. The CLHIA booklet explains this. Here is a very basic disability insurance needs calculator.

Since you and spouse are both self-employed, it might be a good idea to research the issue yourselves so you understand the mechanics and lingo, and then discuss it with an insurance agent to see if there are any gaps. Equipped with the cost of an association disability plan, if accessible, and term life you can then evaluate the cost of the package the agent proposes. Consult a "broker" who represents several insurers rather than a "captive agent" who sells just one issuer's coverage.

If your business is incorporated and you've retained earnings as a tax shelter, remember that this stash serves as a self-insurance fund.

[adrian2]

NOTE: if you pay the premiums yourself, disability payouts are tax-free. So you don't have to insure your full income. Indeed, disability plans typically replace no more than 70% IIRC of earnings.

Unless your insurance needs are near the maximum allowed and you have no choice because that's the only way to get the amount desired, IMO it's a poor tax strategy to pay the premiums yourself.

If your company pays the premiums, they are tax deductible, so overall for [you and your company together] they cost less.
In the future, there are two outcomes:
(i) you never make a claim -- you end up ahead if your premiums were tax deductible for the whole time;
(ii) you do make a claim and have to pay tax on monthly policy payouts -- it's very likely that you'll be in a low tax bracket then, possibly even non-taxable with all the extra credits for low income, disability etc. So it's kind of like an RRSP contribution which gets deducted in a high marginal tax bracket and becomes taxable in a low (possibly 0%) tax bracket.

[marty123]

Adrian makes sense to me. The idea of paying the premium with after-tax money may stem from employers trying to pass the bill onto the employees. That doesn't apply when one is both. I even wonder if the same policies could name the corporation as the beneficiary (as in "key-man" insurance). That way, the corporate tax rate is lower, the payment options still remain (dividends, etc.) and income deferral can be used to maximize the employee's tax situation.

In regards to:

(ii) you do make a claim and have to pay tax on monthly policy payouts -- it's very likely that you'll be in a low tax bracket then, possibly even non-taxable with all the extra credits for low income, disability etc.

a disabled person getting non-taxable payouts could even get into a situation where the various credits (basic, disability & medical expense) can not fully be utilized because he/she won't have sufficient income, and the spouse (if any) won't be able to absorb them all.

Presumably, the situation will create medical expenses. Shifting them from the no-income disabled person to the higher income spouse would also reduce or even eliminate the credit (as opposed to letting a low-income disabled person claim them).

[marcharry]

I have someone trying to sell me Critical Illness insurance, I am 48 have disability insurance and no debt and money in the bank - there is a lot of mumbo jumbo - but I cannot figure out what the purpose of this insurance actually is. To cover the 90 day elimination period on Disability - not needed; to travel to the US for care? - unlikely - our system works pretty well for critical illnesses - it is the not so critical stuff that seems to suffer; to put a ramp in my home???

If I have a critical illness - chances are that I can spend some of that retirement capital that I wont be around to use between 75 and 85.

PLEASE EXPLAIN WHAT THIS INSURANCE IS ACTUALLY FOR.

Adrian makes a great point downthread as well - not sure why all these years I was paying Dis premiums personally - its that conventional wisdom thing again

[izzy]

I have someone trying to sell me Critical Illness insurance, I am 48 have disability insurance and no debt and money in the bank - there is a lot of mumbo jumbo - but I cannot figure out what the purpose of this insurance actually is. To cover the 90 day elimination period on Disability - not needed; to travel to the US for care? - unlikely - our system works pretty well for critical illnesses - it is the not so critical stuff that seems to suffer; to put a ramp in my home???

If I have a critical illness - chances are that I can spend some of that retirement capital that I wont be around to use between 75 and 85.

PLEASE EXPLAIN WHAT THIS INSURANCE IS ACTUALLY FOR.

Adrian makes a great point downthread as well - not sure why all these years I was paying Dis premiums personally - its that conventional wisdom thing again

The main problem with deducting the premium is that if you have group insurance the payout may be limited to 70% of your salary/income as a member of the group,and/or may be subject to a maximum.If your income is above that maximum ,or you have other source income ,say from a separate business on the side, you may need separate coverage for which you may not be able to access group rates,also at a later date your salary may increase at a time when you are no longer able to qualify for increased coverage.Paying the premium personally at such a time(without deduction) means that you will receive 70% of the insured income tax free which may then be an advantage as it effectively increases your net payout .
Critical illness insurance is only really useful if you have good reason to fear a particular illness because of family history etc.Of course if the insurer finds that out the policy will likely be nullified anyway-not a good deal for that reason alone IMHO.

[brucecohen]

PLEASE EXPLAIN WHAT THIS INSURANCE IS ACTUALLY FOR.

To generate profits for insurers and commissions for agents.

It's often sold as "poor man's disability insurance" though even then the coverage is lacking. The best (worst) case is that someone who has no savings buys it and then suffers one of the covered ailments -- a limited list -- and gets a cheque that he can use to cover expenses while recovering.

If you have adequate disability coverage* and enough savings to cover the 90-day waiting period, it's very doubtful that you need any CI.

CI is especially problematic if "underwriting" is not done until a claim is filed. That means the insurer doesn't really consider whether you're really insurable until after you're sick and counting on the cheque. At that point their people will go over your file with a fine-toothed comb, looking for any reason -- no matter how petty -- to deny coverage.

* If you want to pursue this, ask your disability insurer if a CI payout would reduce your disability benefits and by how much.

From a medical trade article in 2000:

Most experts we spoke with said you don't need critical-illness insurance. "You wouldn't insure your car piece by piece, so why insure yourself illness by illness?" asks James H. Hunt, a former commissioner of Vermont's state insurance department who's now an independent insurance consultant in Concord, NH.

[shmenge]

Any comments on the merits of Long Term Care Insurance? Thanks in advance

[Brix]

Any comments on the merits of Long Term Care Insurance?

One potential problem (there are no doubt others): the insured may no longer have the mental/moral energy and competence to pursue their claims if/when they become burdensome to the insurer. Some 'long term advocacy insurance' in the form of an assertive and supportive relative or friend likely to be around at the time should be another part of -- and is likely the more crucial part of -- the package.

[ghariton]

Any comments on the merits of Long Term Care Insurance?

One potential problem (there are no doubt others): the insured may no longer have the mental/moral energy and competence to pursue their claims if/when they become burdensome to the insurer. Some 'long term advocacy insurance' in the form of an assertive and supportive relative or friend likely to be around at the time should be another part of -- and is likely the more crucial part of -- the package.

A power of attorney would be needed.

George

[marcharry]

Thanks that's great. Insurance is really not that complicated until they make it complicated. Insure catastrophic loss and self insure the rest if you have the ability.

[brucecohen]

Here is a 2008 booklet by the Aging Council of Ottawa that explains LTC insurance and what to look for in a policy. I see that the insurance industry has addressed the flaw that kept me from buying coverage years ago: lack of inflation indexing. But I'd have to see how much more that costs. My preliminary hunch is that LTC is not worthwhile for me because I place no value on leaving an estate and have no family history of chronic conditions such as Alzheimer. Of course, an insurer might well reject any applicant with such a family history or exclude care for that known condition from the coverage.

Note: Nursing/retirement home costs look steep at first glance but beg deeper analysis. My 93-year-old MIL is blind and confined to a wheelchair. She lives in a comfortable Toronto retirement home where staff help her dress, bathe (I think) and take her to/from the dining room and maybe elsewhere. She pays somewhere between $3,500 and $4,000/month. But:
-- She has no other expenses aside from gifts to family members
-- The portion of the bill that covers staff assistance qualifies for a tax credit
-- I don't know if the amount she pays is gross or net of the provincial govt subsidy
I believe her retirement home bill is being covered by proceeds from the sale of her condo. Obviously, that would be harder if her husband was still alive and had to live somewhere. IIRC, the Ontario govt recently announced a big policy change that will see much more money budgeted for home care. I think that will be the trend for the federal and all provincial govts going forward: giving people the option of staying in their (or relatives') homes much longer than they can/do today.

Also, I've only quickly skimmed the linked paper and don't know if LTC insurance would pay the cost of an unlicensed live-in caregiver (aka young Filipino woman) that seems to be the home care option of choice among advanced elderly in my region. If the insurance pays only for a licensed caregiver, you could probably buy only a few hours per week before exceeding the policy's limit.