ABCs of Life Insurance – Part Two

ABCs of Life Insurance – Part Two

Based on the vigorous comment and debate brought on by the Part 1 post, it’s pretty obvious the people are clamoring for more…life insurance, so here goes with round two. The aim of this post is to assist in sourcing a life insurance policy.

A quick recap of Part 1 to set the stage: life insurance is a must, generally required no earlier than marriage and no later than arrival of that first bundle of joy; use it to top up any coverage through work; start with term policies rather than permanent (permanent polices may be of benefit after some wealth accumulation); and wind down the coverage amount as your financially secure retirement nears.

So you’ve decided it’s time to put a life insurance policy in place (good on ya). Let’s hit on some basics to help set the stage. An insurance provider is the company cashing your premium cheques and paying out the insurance proceeds on death. An insurance broker assists the sales process by connecting the to-be-insured with a provider. Broadly speaking brokers can be thought of as salesmen (hint: this should get your ire up). To be fair, many brokers put customer service first (right policy for the right family at a fair price), but many others think commission cheque first (and country side villa second), which is how they are typically compensated. The majority of life insurance policies in Canada are sold through independent brokers (i.e. the broker isn’t employed by the insurance provider). However, a sizable number are sold by brokers working for providers, often referred to as insurance advisors (including for the duration of this post).

Life insurance is essentially purchased through three channels: an independent broker, an in-house advisor or via an online tool (which is really just a subset of one of the first two). Try starting your sourcing process with an online tool. This will give you a rough idea on price and kick-start the self-education process. Researching this piece, I found these two websites useful: Insurecan.com, https://tools.insureye.com/pct/pricing, but there are plenty others out there to glean from. Don’t worry about finding the perfect site because a proper sourcing process shouldn’t end with just the online tool.

On the whole, more value (cost, range of policy options) is to be had working with an independent broker over an in-house advisor. This is because brokers can shop policies between providers whereas advisors are only offering their single in-house product. Let’s not kid ourselves though, a broker’s mandate, which is indeed noble, is to sell you a financial product you wouldn’t otherwise have, to protect loved ones – not to price shop policies for days on end. The onus to ensure a market price is paid is on the consumer by shopping around and doing their homework.

How do you know if you’re seated across from an independent broker or an in-house advisor? It’s simple…you ask them! On the basis that a better outcome is more likely with a broker, this is a no-brainer to clarify before you make the trip for a face-to-face. To oversimplify somewhat, if you go to a big bank, you’re speaking to an advisor, if you go to the no-name shop on Main Street; you’re speaking to a broker.

Don’t worry about having to price shop between different brokers and advisors in terms of their fee. Much like mortgage brokers and certain investment advisors, their sales commissions are paid by the provider, which of course we all pay for indirectly in the form of higher premiums.

So how do we go about finding a good broker or a good advisor? Acknowledging there is no cookie cutter solution, I’ll offer two tips: 1) check out online testimonials, in the age of Airbnb, Uber and the-like, these are becoming increasingly effective in weeding out the “bad guys;” and 2) ask someone you know and trust (read: has their shit together) and leverage their network. I suppose both of these points could be applied to a lot of situations. In particular I like the second mention as (in theory) the person can be trusted and it may allow you to skip over some of the independent education. This of course hinges on you asking the right person for advice, so come to think of it, considering asking two or three trusted and (seemingly) knowledgeable sources.

Before wrapping up, a few ideas to keep policy costs down:

  • Recognizing that the higher the insurance payout, the higher the policy cost, only put in place enough coverage to maintain the current standard of life. Most people aren’t looking for their death to be the equivalent of a lotto 649 payout to their family. Work with your financial advisor to determine what coverage level is appropriate.
  • If you’re in good or even relative health, insist on a full medical exam to be incorporated into the pricing. Some providers offering simplified policies skip over this step to the detriment of the healthy policy holder. Go elsewhere if needed.
  • Ask your existing provider of auto, home and other insurance policies if a bundling discount is available
  • There are over thirty life insurance providers in Canada, so shop around
  • Explore pricing discount options for annual rather than monthly premium payments. Consider in connection with your excess cash levels and/or your internal borrowing rate.

So there we have it – with this introduction and a little self-education, protecting loved ones by putting an appropriate life insurance policy in place is within reach.

The author, Pat Kenney, is a Certified Professional Accountant. He has worked in public practice at a local boutique CPA firm in Mississauga for 9 years. He currently holds a senior management position.

 

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7 comments

  1. If broker costs are included in premiums, does it even matter if I go direct vs through a broker in pricing?

  2. My man!! I didn’t know you were expecting!! Are you bumping up the wedding date? Ty Jr. is being well cared for!

    The right broker is knowledgeable, willing to do the heavy lifting for you and when comparing premiums is doing after any commissions (the insured’s premiums and broker’s commissions and kept very distinct). For most people I think working with a broker makes sense.

  3. Jonny

    Hey Pat,

    My work offers me life insurance and accidental death and dismemberment (quite graphic!). It’s fairly basic coverage but I’m wondering if it makes sense to opt out altogether given my limited exposure (no kids, no debt)?
    Also do workplaces typically provide competitive policies? Or do younger guys like myself get screwed over on premiums because we’re grouped in with some old geezer fellow employees?

  4. Hi Jon,

    Given your circumstance, some consideration to opting out is certainly warranted. I suppose it would hinge on how much cash comes your way on opt-out. A suggestion: take the opt-out money on the life policy and purchase a disability policy. Someone your age is much more likely to become disabled than pass away.

    When I say buy additional life insurance to “top-up your work policy” I’m assuming your employer pays for the work policy. The broader point you raise is valid though, I’m always wary of the pricing for group anything (RESP plans come to mind). Never hurts to research but I suspect better deals are to be had on individual (or joint-spouse) policies.

  5. If one has placed money into whole life, and wishes to close out and pursue term/ etc, how is the payout structured? If one is taking out “loans” from cash value, paying interest on these “loans”, how does the insurance company treat this if an account is closed?

  6. Ramonita, you hit on a complex topic. I’m happy to respond but encourage you to reach out to an insurance expert if you are contemplating a purchase of whole life.

    Generally whole life policies can be collapsed at any time for the cash surrender value of the policy (CSV). The CSV essentially represents the accumulated investment component of the policy (the other component being the life insurance). However, collapsing a policy is rarely advisable and even more-so in the earlier years of the policy. The growth profile of these policies are typically structure such that grown is modest in the early years and then accelerates (i.e. you need to hang in for awhile to realize a decent return). In addition, the accrued investment gains are fully taxable (i.e. no 1/2 capital gains treatment).

    Looked at another way, a better outcome (more cash flow) is almost always achieved when the policy remains until death and pays out the death benefit. Under this scenario, the payout is tax free and assuming no premature death, the investment component will have had sufficient time to grow (to hopefully be worth something close to what was projected by the insurance broker back on day 1 on those pretty charts and graphs they wow’d you with).

    You’re quite right in that in most cases one can take out an interest bearing policy loan (in a business setting talk to you tax advisor about the tax deductibility of the interest). Policy loans are always secured by the CSV/death-benefit. To answer you question, if an account (policy) is closed (collapsed for the CSV), the loan is repaid with the proceeds and the beneficiary only receives the residual balance (and as mentioned a tax bill is likely waiting as well).

  7. There are some really great points on here and I’m really chuffed that I’m doing some of them!

    Additional tips on the top of my mind;

    1. Give out testimonials and ask for a backlink. However, make sure that you truly believe or are passionate about the business you’re endorsing.

    2. Offer to give out free insurance advice to newbies.

    Good info, I’ll definately be back for another look. Thanks!
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