Building Blocks is a special personal finance web series geared towards educating families on money-related topics. A collection of stories, videos and discussions, Building Blocks will run online until the end of December.
* Editor's Note: A paragraph in this article, which first appeared on globeandmail.com's personal finance site on Nov. 11th, has been edited. Andy Hall said a group insurance policy is two times an individual's take-home pay and that benefits paid through a work policy are taxable. In reality, group benefits are paid on gross salary and are non-taxable to the named beneficiary. The incorrect information has since been removed.
When it comes to insurance, there are three almost universal truths: Canadians hate thinking about it, begrudge paying for it and the majority of us don't have anywhere near enough of it.
The first two attitudes are easy to understand. Insurance is a downer. Besides that whole "death or dismemberment thing," you are betting against the future health of yourself and your loved ones. And then you have to pay for it, when that cash flow could be put to "better" use paying down the mortgage, starting an education fund for the kids or replacing the rattling family beater.
"Nobody likes insurance. Generally when you mention insurance, people want to grab the waste paper basket and throw up into it," said Brian Poncelet, who is an insurance specialist and independent certified financial planner based in Mississauga.
Like others in the field, Mr. Poncelet starts with the assumption that young families are seriously underinsured when it comes to covering the earnings of the breadwinners, even if they had group insurance through their employers. He also takes the approach that most twenty and thirtysomething families have limited ability - or desire - to buy additional insurance.
Because of that reality, he finds ways to pay for additional coverage within the family budget. One surprising source: existing insurance policies. A good example is raising the deductible on home insurance, as Mr. Poncelet did on his own policy, bumping it from $500 to $5,000 and freeing up $500 annually which can be put towards insurance against the loss of income. "Same thing with auto insurance," he said, noting people generally carry a pricey low deductible on an aging vehicle that in many cases would not be worth committing to expensive repairs.
When sitting down with a "typical" young family with two kids and a house, insurance adviser Andy Hall of Mitchell Sandham looks first at the home. "First and foremost is protection of their biggest investment, which is their home." Besides contents and property insurance, he is a big believer in mortgage insurance (more on that later).
* Mr. Hall, like other experts, finds most people he sees do not carry enough life insurance to cover the loss of income of a family breadwinner. In his opinion, "two times salary is not sufficient" to support a household in the case of a breadwinner dying. As well, he notes that group insurance can quickly disappear in the event of a job loss.
While mortgage insurance is a valuable component of a family's financial plan, where to buy it from is at least as important as the terms of the policies, says Mr. Poncelet. "A lot of people buy mortgage insurance through a bank which is a big No No." While it may be convenient to obtain mortgage insurance from the same place that you obtain your mortgage, families can inadvertently cancel their insurance when they move their mortgages to a different lender. As well, the bank-offered policies are a bad deal because the payments stay the same even through the principal being insured falls shrinks over time. "If the person is healthy, it will be cheaper and they can get more coverage" with a non-bank insurer, Mr. Poncelet concluded.
When it comes to life insurance, Mr. Poncelet advises that not all policy types are created equal. He believes people should only buy Term policies which offer the option to convert to Permanent policies and that people should look to convert Term policies to Permanent insurance whenever possible because the incidence of chronic or serious conditions will make it harder to obtain insurance in a more-infirm future. "They may not be able to get any more insurance anywhere."
While people may approach insurance as a commodity, prices vary widely so buyers are encouraged to either shop around themselves or use a broker who can quote rates from a number of insurers. "When it comes to life insurance, critical illness, long-term disability and long-term care insurance, there are more providers than most people know," said Frank Wiginton, a certified financial planner with TriDelta Financial Partners. "If you are not dealing with an independent financial broker you may not be given the option or you may not be shown the other companies' options."
As a financial planner first and foremost, he believes insurance needs have to be looked at as part of an overall family financial plan that includes retirement goals, investments and education needs for children.
How much is enough?
While insurance professionals say most of us are under-insured, the reality of tight budgets and resistance to insurance makes it tough to convince families to buy more.
Mr. Poncelet gives the example of a married couple in their mid-30s with two young children as a representative example. The couple approached him about mortgage insurance for their $200,000 mortgage. Both the husband and wife, with a combined income of about $140,000, have two-times salary insurance through their employers but he convinced them to both take out 20-year Term policies with a death payout of $500,000 each. "It is still not enough," he said, estimating that both should have taken out million-dollar policies each to maintain their current standard of living for a 15-year period if one of the main breadwinners were to die, effectively doubling their premiums to $100 monthly per person.
"For a lousy $50, if something happened [they]would have another half million dollars," Mr. Poncelet said.
Special to The Globe and Mail