When advisor Simon Tanner talks to clients about insurance, he usually starts with a simple question: “What is your greatest asset?”
Clients often talk about their homes or their investment portfolios, but Tanner is looking for a different response.
“The reality is, your greatest asset is your ability to earn an income,” says Tanner, of Vancouver-based Dynamic Planning Partners. “When you’re looking at insurance, what you’re really looking at is protecting that asset.”
Insurance is an important tool that can help investors protect and build what they have worked for.
For many investors, the challenge is figuring out what types of insurance to buy from among the various available products in the categories of life, living benefits and segregated fund contracts.
Some investors, including affluent individuals, don’t believe they need additional insurance until they understand the benefits such as efficient tax planning and ease of asset transfer to their estate.
“Insurance isn’t designed to be an investment, but it’s often applauded as one,” says Mark Arruda, Associate Vice-President of Strategic Business Development and marketing actuary at Sun Life Financial in Waterloo, Ont.
There are 3 key areas of insurance to consider for protecting and building your wealth: life, living benefits and segregated fund products. Here is a brief outline of the benefits of each type.
There are 2 main types of life insurance: term and permanent.
Term insurance, as the name suggests, is temporary. It often ranges from about 10 to 30 years, with an option for renewal or conversion at the end of the term. Arruda says a business owner might buy a 20-year term insurance if she plans to retire in 2 decades, or a homeowner might choose a 10-year term if he has 10 years left on a mortgage and is looking to protect his family’s home if he should die before then.
Permanent insurance, as the name suggests, is for a lifetime and, in addition to providing a death benefit, is often used for tax planning or to clear up any remaining liabilities at death, says Arruda. “As long as you pay your premium, that death benefit is in force until you die,” he says.
Living benefits include disability insurance, critical illness insurance and long-term care insurance – which provide you with a benefit while you’re still living.
Disability insurance covers you if an illness or injury leaves you unable to work. It replaces a portion of your lost income while you recover. Critical illness insurance covers a range of illnesses, depending on the policy, such as cancer, heart attack or stroke. After a prescribed waiting period, you can receive a lump-sum payment that can give you more financial flexibility so you can focus on recovery. Long-term care insurance is particularly helpful later in life when you may become physically or mentally dependent on others for care. You can use the regular benefit payments to pay for care in your home or in a care facility of your choice.
Arruda recommends you not wait until you’re retired to consider how you’ll fund the rising costs of health care. It’s important to consider health-care needs in an overall plan so that all options are available if you develop a chronic health condition.
“If you don’t have long-term care insurance to cover those extra costs, it will whittle down that financial capital you have built up,” he says.
Arruda also recommends buying life insurance and living benefits coverage beyond what you may receive from an employer, to reduce the risk of not having enough or losing coverage.
“The biggest risk of just relying on your employer-provided benefits is that if you no longer work for that employer, those benefits disappear,” he says.
This is particularly important since we tend to change jobs more often today than in the past, and may either go to an employer providing less coverage or decide to become self-employed.
At that point, “you might be at an age where it becomes more difficult to get the coverage that you need,” Arruda says.
Segregated fund products
Segregated fund products are similar to mutual funds, including the potential for growth with exposure to different asset classes, but they also provide the benefits of an insurance contract. Segregated fund products are available only through insurance companies.
Depending on the product, segregated fund contracts offer maturity and death benefit guarantees of 75 or 100% of a deposit.
Arruda says these products are a good choice if you’re concerned about growth, protection and flexibility.
“Like many insurance products, segregated fund contracts can help you protect the assets you have worked so hard for,” he says.
Another benefit is that you if you purchased your segregated fund contract with non-registered money (outside an RRSP), you can name a beneficiary on the contract, allowing it to bypass probate. Because it’s an insurance contract, the benefit payment would go straight to the beneficiary. Segregated fund contracts are also good for business owners because they offer the potential for creditor protection in the event a business fails or faces legal action, Arruda says.
While segregated funds have been criticized in the past for having high fees, they are more competitive today.
“I think the insurance industry has done a great job of bringing those costs down,” says Tanner. “[For investors] it might be worth it to bypass probate, and the costs associated with it, or to have the peace of mind of the guarantees.”
Insurance is a ‘values-based’ proposition
Tanner says it’s an advisor’s role to educate clients about what insurance products are available and which ones best suit their personal and investment goals.
“I believe insurance is a values-based proposition,” he says. “What are your personal values? What do you want this money to do? How do you want to distribute it to charities or to the next generation?”
He says investors buying insurance need to figure out the right type of insurance to buy, over what period they want protection and how much they’re willing to pay for it.
“I have never delivered a claim cheque where someone has asked what type of insurance it was,” Tanner says. “The questions at the time of death, illness or disability are: Is this enough money? Did we have enough coverage? Is my family going to be okay?”
Ultimately, he adds, you need to figure out your priorities, and “you’ll have a really good idea of the type of insurance that fits your needs.”