Life Insurance

[brucecohen]

can you guys suggest a few insurance companies I should look at for term insurance. I would imagine banks charge more than other places.

There are (at least) two web services that show quotes from a vast array of Canadian insurers, maybe the whole market. One is term4sale. It's run by Bob Barney, who has spent years trying to improve/increase consumer understanding of insurance. He used to be a regular contributor to CanadianMoneySaver magazine and might still be. The other service is winquote. I believe it's run by Ami Maislish, who has spent years encouraging more professionalism among insurance agents. You might be interested in the consumer-focused Tips and Traps page of his corporate website.

[knotley]

With mortgage life insurance through banks, does the premium decrease over the life of the term?

No. Insurers say they build the declining death benefit into the fixed premium calculation so they're somewhat offside on mortality cost in the early years but then make up for it. An interesting wrinkle is whether their calcs range over the normal 25-year am or whether they're statistically adjusted to reflect the fact that a large number of Canadians pay off their mortgages early. I recall an old stat that, on average, Canadians clear their mortgages in 10-12 years. I don't know if that's still true.

I know mortgage insurance offered by banks is a very bad deal for the consumer - it is cheaper to by normal term from a Life Insurance company.

Normally but not always. Smokers and those with serious medical conditions or bad family histories might find the bank-sold insurance is cheaper. You have to check the numbers.

Thanks for that info. Interesting fact about smokers and mortgages.
I don't think that 10-12 year pay off would be true these days. That is my sense from speaking to friends and co-workers

[HardWorker]

Here's another wrinkle for you to consider. Though not widely marketed*, there are term insurance policies whose death benefits automatically goes up or down over time. Consider increasing term to cover inflation and/or rising level of lifestyle. Consider decreasing term if pretty sure personal wealth will grow so need to shed mortality risk declines. I have no idea how these compare in price to the widely sold policies with coverage and rates fixed for a set period.

* With one big exception. The mortgage life insurance offered through banks is decreasing term.

Interesting. Is there a special term for these kinds of policies, or do I just find out who offers term policies with flexible coverage periods?

And Good lord, I don't know how anyone falls for that mortgage life insurance. Buying a homeless person a lunch so is much more rewarding.

[HardWorker]

Be careful with with company-provided life insurance - there is a risk that you may not be able to continue it without a health check - it's worth checking this before cutting back on personally-held insurance.

I agree, and you're also running the risk of finding yourself with no insurance if you quit or lose your job. I'm keeping my company insurance in mind for the short term only, as it'll be enough to cover the short term needs of my wife should I pass on, but I certainly won't rely on it once we have kids.

[izzy]

Interesting article on page 16 "When fraud isn'tb really fraud"

http://www.canadianmoneysaver.ca/articl ... ion_id=125

Any truth to this?

[HardWorker]

Bank mortgage insurance is not underwritten when the policy is taken out, but only when a claim is made. If you are a smoker or have a serious health condition, you may have your claim for mortgage life insurance denied. Here's an on-point article.

CBC's Marketplace did a pretty good show on this as well. http://www.cbc.ca/marketplace/in_denial/

[Bylo Selhi]

Milevsky with The lowdown on insurance salesmen and warranty peddlers among other insurance/annuity-related topics. (From his new book, Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life.)

If the event you are insuring against could cause an enormous disruption to your standard of living, go ahead and insure. So, ultimately, you have to consider two aspects of every potential catastrophe. First, what is the probability this event will take place (very small, average, or very high), and second, if the catastrophe occurs, what is the magnitude of the disruption (very large, substantial, small, miniscule) to your smooth standard of living? My proposition is that you should insure only events that have a potentially disruptive impact on your lifestyle, and only if they have a relatively low probability of occurring... remember the following rule for insurance coverage: Buy it for events that are both catastrophic and unlikely...

The point of insurance is to smooth your lifestyle over alternative universes. Insurance isn’t an investment or a form of protective magic. It is important to understand that the investment return from buying insurance is always negative. That is, you can’t make money “on average,” and the insurance company make money “on average” at the same time. Instead, they charge you–and everyone else–more than the amount they expect to pay out. Otherwise the company would go bankrupt, and you wouldn’t get paid either. So, take advantage of this risk pooling mechanism–but don’t go there for a leisurely swim.

[marty123]

Milevsky with The lowdown on insurance salesmen and warranty peddlers among other insurance/annuity-related topics. (From his new book, Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life.)

I know this is getting off-topic, but he has one of the best articulated article I've ever read on self-insurance.

It's a view that most of us repeatedly express here (including myself): don't insure against losses you can afford to cover, and don't insure against losses that are 100% certain to happen. He pushes the concept further, by actually saving the premium values into a separate reserve account. His thinking, which makes sense, is that he eliminates the psychological hit of having to dip into general household funds in order to cover a loss.

Where I hit a block, is with the idea that if a $60 premium paid to an insurance company against a loss on a $200 item is not worth my money, then how would a $60 premium paid to my alter ego for the same coverage be justifiable? I understand that eventually, the profit will return to me, but I get the same psychological block with that idea as the one he gets about dipping in general household to cover his losses. Maybe the concept is best applied to those individuals that feel absolutely compelled to buy all extended warranties and insurance plans offered to them.

[MaxFax]

I think that kind of article showing 'how to think about' something is always valuable. I agreed with most ... but not the self-insurance stuff.

I feel it failed to make the distinction between being exposed to ONE person's outcomes vs being exposed to a group's outcomes. It takes a lot more money for one person to fund the possible downsides of one person's outcomes, than it take for a group to fund the group's possible downsides. E.g. annuities. A single person must fund a portfolio to last til age 100, but a group only need to fund for an average death of 85.

[brucecohen]

It takes a lot more money for one person to fund the possible downsides of one person's outcomes, than it take for a group to fund the group's possible downsides. E.g. annuities. A single person must fund a portfolio to last til age 100, but a group only need to fund for an average death of 85.

That's true. But an individual's risk exposure can easily vary widely from that of the group. For example, employers commonly make life insurance of 2x or 3x salary a mandatory component of their group benefits. But:
-- That's likely way too much for a person in his/her early 20s with no family obligations and no great debts
-- It's likely way too little for a mid-30s worker with two young children
-- And quite possibly totally unnecessary for a pre-retiree whose kids are gone, house is paid off and has no other major financial obligations.

Similarly, the 23 year-old employee needs long-term disability insurance more than the fellow who's within a year of retirement. But under today's conventional designs, both are required to have employer-sponsored LTD.

In the individual market, consider auto insurance. It makes sense for the owner of a brand new BMW to buy collision coverage. The group can cover the cost of repair more easily than he/she can. But it probably doesn't make sense for the owner of a battered 12 year-old BMW to buy collision coverage.

[Bylo Selhi]

In the individual market, consider auto insurance. It makes sense for the owner of a brand new BMW to buy collision coverage. The group can cover the cost of repair more easily than he/she can. But it probably doesn't make sense for the owner of a battered 12 year-old BMW to buy collision coverage.

A multi-millionaire who buys a BMW can probably self-insure. Even if they total the car they can afford to buy a new one without financial strain. The same applies for cheaper cars purchased by those with lower (but still substantial) net worths. ISTM that's Milevsky's point. If you can afford to repair/replace an item without causing financial strain, then it's not worth insuring it. Use that principle throughout your life and you effectively create your own "group" and DIY "smoothing."

[Pickles]

Milevsky: "remember the following rule for insurance coverage: Buy it for events that are both catastrophic and unlikely." Otherwise he recommends self-insuring. The chapter Bylo linked to doesn't explain why one shouldn't insure for an event that is both catastrophic and likely. High cost of premiums, perhaps?

Clearly Manulife's D'Alessandro was following Milevsky's advice when he "self-insured" Manulife income plus products. He knew a market meltdown was entirely possible in the early years of the plan. In fact, one purpose of the product was to protect individual investors from a market meltdown by insuring against the risk. So he followed his advisor's rule of thumb: "self-insure" if the risk is both catastophic and likely.

Unfortunately, he didn't tell his shareholders that they were the "Personal Insurance Reserve Fund" until it was time to pay out claims.

[Flights of Fancy]

You can't insure for events that are catastrophic AND likely because the premiums are uneconomic.

The example Milevsky gives in the chapter (but not, I don't think, in the linked segment) is an extended warranty on a phone. The phone costs $110; the extended warranty is $40. It isn't that you can't afford the $40 - it's that it makes no sense to buy "insurance" against this likely outcome (your $110 phone dying) due to the relative cost of the insurance.

The same logic holds when the outcome has bigger stakes but is equally likely to occur. If the event poses a catastrophic loss, but is very likely to take place, the premiums will be similar to the $110/40 example just given.

Edited to add that Milevsky has been on the record since at least 2007 expressing concern that sellers of VAs were undercharging for their products.

[Pickles]

You can't insure for events that are catastrophic AND likely because the premiums are uneconomic.

That was my guess.

Edited to add that Milevsky has been on the record since at least 2007 expressing concern that sellers of VAs were undercharging for their products.

Interesting to know. Makes the case against D'Alessandro all the more damning.

[marty123]

The chapter Bylo linked to doesn't explain why one shouldn't insure for an event that is both catastrophic and likely. High cost of premiums, perhaps?

Insurance for an event that is catastrophic AND likely AND has a predictable timeframe is really just a forced saving plan. You basically save the entire cost of replacement (or damage) over the life of the product. Intuitively, you should see 2 ways to save for that eventuality:
1. Save the entire replacement (damage) cost over the duration of the product (i.e. assuming a 0% return on savings: if the catastrophy will cost $100,000 in 10 years, then set aside $10,000/yr)
2. Hire a 3rd party (insurance company) to manage the saving plan (i.e. assuming a 0% return on savings: pay the insurance company $11,000/yr for 10 years).

However, if the even is catastrophic AND likely AND without a predictable timeframe, you'd want to pool your savings with other people. You'd then be willing to pay a small management fee (to the administrator of the plan) and/or a premium over the cost of savings. That's what a life insurance policy is, and that's what MaxFax's post above describes: hire an insurance company to manage the saving plan, pay them a profit, and they'll average your risk over a pool of multiple savers. That's what a life insurance policy is.

[Pickles]

Thanks, Marty123.

What you describe is really what a lot of extended health care plans have become. The insurer calculates you will get a pr. of glasses every two years, have some dental work, get some drugs and perhaps physio/massage up to the limit. You pay all year for capped benefits that -- if your life is a mess and you use every medical device and drug permitted -- cost a bit more than you paid. The wild card is the hospital coverage which is thrown in by the insurance company. This type of policy benefits people who don't yet have reserves of money for health emergencies (because they just started their self-insurance savings fund) but, for many, self-insurance and good health would save you money.