Insurance is an important element of financial planning, so it’s important to get the right balance of whether you have too much or too little.
Insurance has been going on in one form or another for thousands of years. Quite simply, the idea behind insuring means minimizing risk.
Merchants seized on the concept early on, using the idea of spreading valuable cargo among a number of ships so that if one went down, the whole commercial enterprise wouldn’t follow suit.
It was the European merchants in the 17th century who made it a more sophisticated product amid increased demand for maritime insurance. Famed insurer Lloyd’s of London had its genesis in the coffee house of the same name in the British capital, where merchants and ship owners would congregate to discuss the latest shipping news and underwrite cargoes and ships.
Fast forward to the 21st century and consumers have a vast array of insurance products to choose from, whether it’s to protect against a house fire or damage to a body part.
But insurance can be tricky for many people.
It’s easy to buy too much, partly because there’s an emotional component that can make people think their home is worth much more than it really is. Or they purchase too much life insurance in the hope of leaving “something behind for the kids.” Or, just as bad, they underestimate what is needed.
But knowing what is out there and how much you need is a vital part of your financial planning and something that should be discussed with your financial advisor.
“I bring it up if they don’t,” said Heather Franklin, a fee for service financial planner Toronto.
“Insurance should be an important component (of financial planning). And when I write out a plan for people, that insurance is always sort of front and centre.”
There’s no one-size-fits-all sort of profile for insurance needs so it’s important to know what is out there.
Manulife Financial and SunLife Financial are typical of big insurers that not only offer life insurance but also critical care insurance, long term disability insurance and long-term care, among others.
Take life insurance. It’s something that may seem straightforward but isn’t as you can buy various types. Term insurance is just that – you buy it for various lengths of time or to a particular age. Whole life covers you until you die.
A third option, Universal Life, also has an investing component.
Such a policy offers a guaranteed rate of return and means the policyholder overfunds the policy, “which means you’re putting in more than the premium but the additional amount you’re putting in is going into an investment account,” explained Jennifer Black, an advisor with Manulife Securities.
“Those investments are then tax sheltered so you’re really improving the rates of return because even if you’re just getting the, for example, three per cent guaranteed rate, you’re able to have that tax sheltered as well so it actually goes much further than if somebody just held the money outside in a non-registered account.”
Critical care insurance is offered to those worried that a serious illness could throw a massive wrench into retirement plans.
And long-term care covers you by supplying money for out-of-pocket expenses for care at home or in a facility.
Of course, these policies aren’t cheap. For example, long-term disability insurance offers the policyholder a percentage of income, typically about two thirds of income to a maximum of age 65. A male around 45-years-old would pay a premium of about $1,500 a year to get coverage of $5,000 a month. That’s why it’s important to buy these policies early in life.
“Absolutely, you want to do this when you’re younger and healthier,” Black said.
Even so, it’s a tough balancing act since younger people are more apt to be more in debt so it’s important to take a hard look at what you really need.
Franklin finds a lot of people she deals with are over-insured.
For example, she counsels couples to pass on life insurance until the time comes when kids are part of the equation.
Having a million-dollar life insurance policy as well as critical care isn’t likely to be necessary, for instance, if both partners are in their 30s and working, given that there are two people contributing to the household income, and that serves as a back up if one of them were to get sick.
In such cases, a term insurance plan may work just fine. And when it comes to other policies such as long-term disability, perhaps a cheaper route would be going to your human resources department.
Since many companies offer some sort of benefits, Franklin says, they have a relationship with an insurance provider, so you may be able to get extra insurance through the employer “because it’s group insurance, which always offers better rates than people who just go to market rates.”
Home and auto insurance should be more straightforward for people, but Franklin says there are also ways to make those two common types of coverage a lot more affordable.
For example, if you’re driving an older model car, consider dropping the collision coverage. And also look at having a higher deductible on your plan. Even putting snow tires on your car can save money.
“Same thing with house insurance. If you have an alarm and you’re a non-smoker, in some cases you can save 10 or 15 per cent of your insurance costs.”