Most people’s response to this article’s title would be, “Let’s not”, but all of us need to have insurance as part of our risk management program.
It is interesting to take a look at the relationship between those things that many of us insure against loss and the probability of such an actual loss. The following illustration is taken from data provided by Manulife Financial:
| Type of Insurance | Probability
Of Coverage* |
Probability of
Loss by age 65** |
| Home | 100% | 1 in 2766 |
| Car | 100% | 1 in 1683 |
| Life | 60% | 1 in 146 |
| Disability | 50% | 1 in 14 |
| Critical Illness | 20% | 1 in 3 |
* Percentage of Canadians who are insured against loss in each category
** Actual numbers of Canadians who experience a loss in each category
It is evident from these data that we insure assets, like our homes and our cars, automatically, in large part because they are required by either provincial laws (cars) or our mortgage lenders (homes). The likelihood of having to claim reimbursement for a loss before age 65, on the other hand, is quite low on average for those assets.
When it comes to life, disability and critical illness insurance, where the probability of lost income and financial loss is high, we are much less prone to take proactive steps to replace those losses for ourselves and our families.
One of the objections most often heard to insuring ourselves and our families against loss of life or income is cost, yet a properly structured program of insurance can prove to be a very efficient investment. Policies for disability and critical illness coverage can include return of premium options, so that, if we do not incur a loss prior to a certain age, all or part of the premiums paid over the life of the policy will be refunded.
Life insurance coverage should be structured so that temporary needs, i.e. those needs that will eventually disappear (mortgage repayment, education costs for children, etc.) are covered by less expensive term insurance, while permanent needs (taxes on death, estate preservation, etc.) are covered by permanent insurance.
Another frequent objection is that we may already have group coverage through our employers for life, disability and critical illness. However, there are several issues with group insurance that may lead us to consider private coverage:
- Group insurance rates can and usually do increase with age
- Group insurance may terminate at a certain age
- Group insurance is not portable from employer to employer, so that if a person changes jobs, new coverage must be arranged.
- Group insurance for disability is quite restrictive in its definition of what types of disability will be covered
Private coverage for life, disability and critical illness can avoid all of these issues. Even when group insurance is in force, it may be advantageous to supplement it with private coverage for some or all of these risks of loss.
In any case, a comprehensive needs analysis is an essential first step in the assessment of a proper risk management program. An experienced advisor will take the time to perform the analysis, free of charge, and then the client will be able to make an informed decision regarding a suitable course of action.
***
Gary Robertson, CFP has been a Financial Advisor for the past 13 years, helping families to achieve their financial goals in various areas, including Retirement Planning, Education Planning, Estate Planning and Risk Management (insurance). Gary has been a Certified Financial Planner since 2004, and works with clients to formulate comprehensive financial plans that form roadmaps to success. Gary is married with two adult children, and his office is in North York, Ontario.
Gary can be contacted at (416) 640-7996, or by email at [email protected]. You can also visit his website at www.robertsonteam.ca.