Insurance who’s who

Life insurance is like going to the dentist, without the physical discomfort.

It raises uncomfortable thoughts; it’s costly, and yet most people are much better off with it than without.

Certainly, life insurance (and disability and even critical illness) is a “lifesaver” for families when the unthinkable happens, says Jason Evans, fee-for-service certified financial planner at Evans Retirement Planning.

The Winnipeg adviser (who does not sell insurance) speaks from experience. His father died when Evans was young and life insurance kept the family solvent.

Life, disability and critical insurance, however, can be confusing for consumers to work through because so many different product types exist. To help, let this who’s who of the insurance hinterland as your guide.

Mortgage protection insurance

This is the life insurance coverage Evans’s parents had. Many young families opt for this type of coverage when purchasing their first home because lenders typically offer it as an add-on. The upside of mortgage protection insurance is easy, quick and convenient.

“Most policies don’t really have much of an underwriting process,” says Fernando Heleno, senior director of creditor products at RBC in Toronto.

Another benefit is it is coverage often offers life and disability in one fell swoop.

The “light underwriting” allows families to have coverage in place immediately when they get a mortgage, Heleno says. “For example, with our mortgage life insurance product, there’s one health question at the time of application.”

Basically, if you have no major health issues, you’re approved. Coverage has limits, including the size of the mortgage. For instance, RBC insures up to $750,000.

One issue with this type of coverage is its higher cost relative to other insurance options.

“It becomes less valuable over time,” Evans says, noting premiums remain level even as the outstanding mortgage balance shrinks.

Permanent life insurance

Permanent insurance comes in many permutations — like universal life, whole life and term-to-100 life — which can make it confusing for average folks to grasp.

The upside of permanent coverage is it is in place for life. The downside is the premium costs are expensive.

Permanent coverage is available to everyone, but it’s best suited to wealthy individuals whose fortunes are subject to substantial taxation upon death. Life insurance’s tax-free death benefit can help pay taxes owing on other assets like a family cabin.

Permanent insurance “can also be a very tax-efficient way to grow wealth because the policy value can grow over time,” says Sarah Willock, senior director at RBC Insurance in London, Ont.

One type, universal life, has an investment component whereby some premiums are invested in the market, for example and can grow in value over time.

The most popular permanent coverage, called participating whole life, also has growth potential. As the insurance company earns profits, it pays dividends to the policy adding to its value.

“It’s tax-deferred as long as those dividends stay in the participating whole life policy,” Willock says, noting many policies allow the insured to withdraw taxable amounts while alive to help fund retirement, for example.

Many insurers also allow the insured to borrow from the policy, providing tax-free income — though the loan value and accrued interest will reduce the death benefit commensurately.

Permanent coverage is not a good fit for most consumers even though it has been widely marketed in the past, says Darren Coleman, certified financial planner with Portage Cross Border Wealth Management in the Greater Toronto Area. “It’s commission-heavy and that has led to some bad behaviour in the industry.”

He further points to instances of salespeople signing up young families on tight budgets for high-cost permanent coverage.

These individuals are at risk of being unable to afford paying the premiums long-term, and in turn, letting their policy lapse, Evans adds. “At a minimum, permanent insurance often leads to individuals getting less coverage than they could afford otherwise, leaving them less protected.”

Term life insurance

The most life affordable coverage is term insurance, often in place for 10- and 20-year spans.

“Term life is the most cost-effective for those who really need it,” Coleman says.

Term coverage replaces lost income if a family breadwinner dies. Premiums are generally a 10th of the cost of similar permanent coverage, meaning young families can afford a larger death benefit, receiving superior protection, he adds.

Many employed individuals may have term coverage through their employer, but it is likely insufficient (i.e. a benefit that is two times annual salary).

Evans advises individuals to get additional term coverage for a larger benefit. As well, the policy remains in place and is affordable in the event of job loss.

Disability and critical life

Many workers have disability insurance through their employer, too. Again, consider the cost of getting private coverage in the event of job loss. As well, workplace plans have limitations, including only partially replacing your salary, Coleman says.

“Don’t assume workplace disability insurance is going to make you financially whole.”

Critical illness is less comprehensive. It pays a one-time, tax-free benefit if you are afflicted with a qualifying illness (i.e. stroke, heart attack or cancer). Generally it is more affordable than disability insurance, but it is less protective, Evans says.

More expensive with age

No matter the insurance product, coverage will become more costly the longer you wait to apply. “When you’re young and healthy is the best time to get insurance,” Heleno says.

Premiums are lower, and you’re less likely to have a health problem (i.e. Type 2 diabetes).

“Really, the time to get insurance is as soon as you start thinking about it, especially if you’re taking on a big financial burden like a mortgage.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com