Friday, July 24, 2009

Group Insurance Primer

Group Insurance is usually set up as a Yearly Renewable Term policy. Meaning rates are calculated each year.

For Life Insurance, Accidental Death & Dismemberment Insurance, Critical Illness Insurance and Long Term Disability rates are based on the demographics of the group (age, gender, occupations) and the experience of the insurance company’s pool. If the insurance company has had few claims, rates remain stable of the total number of claims goes up rates tend to rise. Additionally, if demographics of a group change significantly, their rates will be affected accordingly. Pooled rates typically don’t tend to be influenced by the claims in any one group, so a life or disability claims usually doesn’t increase your rates as long as the pool stays healthy.

Health Care and Dental Care premiums are also partially based on the pool and demographics, but are greatly influenced by claims experience. Health Care is far more risky than Dental Care, so while it is experience rates it is also partially pooled. Large Health care claims are paid out of a pool similar to life and disability claims, this removes the risk of a catastrophic claim bankrupting the health plan. All non-catastrophic claims, under $5000 or so, are used to calculate claims experience.

Claims experience is simply a tally of the claims paid, compared to the premium collected by the insurance company. The insurance company sets a “Target” each year for how much claims will cost. They then add in their predicted expenses and together this creates the total premium. If the insurance company expect claims to be $10,000 for the year, and it assumes its expenses are 25% of claims, the total premium will be $12,500 for the year. For $12,500 the insurance company promises to pay any and all claims incurred in that year.

You might be thinking, “why pay an extra $2500 when claims are only $10,000?” Well, we can’t predict the future, claims very well may be $10,000 but they could also be $1,000,000. The insurance company is taking that risk, and they want to be compensated for it. Now you may be wondering, “Well if they might have to pay out a million, how do they make any money?” claims could just as easily be $1000, in fact it is far more likely that claims will be less than $10,000. If this is the case the insurance company keeps the difference. Many groups under claim for each one group that over claims. In the long run the insurance company knows the odds and plays to win.

While paying $12,500 in premiums, and collecting $1,000,000 in claims seems like a great deal, it is far more likely that you will pay $12,500 and only collect $8,000 or so in claims, which is not the best deal.
The systems works because people instinctively fear losing, more than they enjoy winning. When you have overpaid for your insurance, you think to yourself “Oh well, at least I was covered if something did happen” you move on and forget the wasted money. The only drawback is that each year, you overpaid and under claimed, and the insurance company asks for a rate increase. So every year you feel like you lose. As previously stated, people don’t like to lose.

Claiming more and “getting your monies worth” doesn’t work because you just get a bigger increase next year. And not claiming at all means that you are overpaying profusely. Lose-lose. So how do you win?

The answer, like many things, lies in moderation. You need to claim as close to that predicted Target as possible. if you hit it exactly, you receive an increase, but not too much. You got exactly what you paid for and were insured in case of a catastrophe. No one likes to pay more for their benefits each year but the fact of the matter is that if you hit your target, you will probably claim more next year simply because health care costs are escalating at an astonishing 15% per year.

So how do you hit your target and get the best bang for your buck? Each year at renewal your advisor looks at your claims and your premiums paid. We argue on your behalf that you either overpaid this year and are deserving of a break, or that you over claimed this year and that you are very sorry and you promise not to do it again. Either way our goal is to mold your premiums to match your claims over a period of time, sometimes it takes three or four years to get it right but over a long enough period of time we will make the premiums and the claims match. This is the best possible situation; you got exactly what you paid for, and had your protection all the way in case something terrible and expensive happened.

Friday, July 17, 2009

Bank Insurance

I don’t like bank insurance.

Alright, I’m obviously biased since I sell insurance and I don’t work at a bank but I can make a pretty compelling argument. Feel free to debate me in the comments.

A little history

The big banks in Canada have been trying to get into the insurance market for a long time. Until very recently they have had limited success. Currently there are two main banks in the Canadian insurance market, RBC Insurance and BMO Insurance (formerly AIG). While the regulators have not allowed banks to sell insurance directly, they have allowed banks to purchase insurance companies and rebrand them under their parent company name.

Royal Bank of Canada purchased Unum Provident in 2004, changing the name to RBC Insurance. More recently Bank of Montreal purchased AIG Canada and renamed it BMO Insurance. While banks themselves still aren’t allowed to play directly in the insurance pool the waters are getting murky.

I am going to show some of the weaknesses in purchasing insurance from a bank, now I don’t mean RBC Insurance and BMO Insurance, they are real insurance companies, I have happily placed business with RBC. I am talking about walking into your regular bank branch and buying insurance, or at least what the banks call “insurance”. These policies aren’t strictly a contract of insurance, they are an insurance certificate. They typically overwhelmingly favour the banks. The banks retain ownership of the certificate and they are the beneficiary of the certificate. I will make the distinction between an “insurance policy” issued by an insurance company and an “insurance certificate” issued by the banks.


“When you buy insurance from the bank, the bank is the beneficiary not you!”



You may be familiar with bank “insurance certificates” specifically the certificates they try to sell you when you take out a loan, line of credit or mortgage. When you buy Mortgage Insurance from a bank you are actually doing the bank a favour. The bank makes money by charging you interest on your loans, they want that interest payment, not your house. If you died, or became disabled you would be unable to pay your mortgage, the bank would lose its interest payments, and would be forced to go into the costly process of foreclosure. The bank really doesn’t want to own your house, so what do they do? They convince you that it is a good idea to pay for insurance.

If you die, all is forgiven your mortgage is paid off. You get to keep your house, and the bank doesn’t have to foreclose. Sounds fine, where’s the problem? I’ll show you.

First off, the bank owns the insurance even though you pay for it. Why does that matter? Well if you refinance or change lending institutions you don’t get to take the insurance with you, it stays with the bank. If your health has changed, you might not be able to get any more insurance, ever! If you want to keep the insurance you will be tied to that one bank, and may have to give up moving to another bank with a better rate, potentially costing you thousands of dollars. An insurance policy from an insurance company is owned by you, it doesn’t matter who the mortgage is with.

Secondly, the insurance is always decreasing. As you pay down your mortgage, your debt decreases, since the insurance only forgives your debt, not the original value of the mortgage, your insurance declines. One big problem is that your premium doesn’t also decline. Towards the end of your mortgage when little is owed, you are still paying full price for a fraction of the coverage. A real insurance policy can be reduced over time as your debt falls, but the premium decreases.

Third, the bank is the beneficiary. When you die your debt is forgiven, you never receive any cash. Now you own your home outright, which is great except for the fact that if you die or become disabled, what you really need is cash. Your mortgage payment disappears but you still have to pay for taxes, utilities, food etc. Wouldn’t it be infinitely more helpful to be given a cheque for $500,000 tax free, yours to do with as you please, than to just be gifted your house? With the cash you can still pay off the mortgage if you want, or use the interest earned to make your monthly payments, invest it, or just live off it for a time while you or your family recover from this life changing event.

Lastly, it costs too much. You just bought a new house; you are excited and ripping through stacks of paperwork to close the deal. Banks know you will sign just about anything they put in front of you at this time, so they slide in an application for insurance. They will build the premium into your mortgage payment; you will never even know it’s there. They know you probably won’t look for a second opinion or shop around for rates so they can charge you an arm and a leg, and you will pay it. Want proof? Here is a quick comparison of rates that I can get vs. TD Bank, the largest seller of mortgage insurance in Canada. My policies are better for all of the reasons mentioned above yet they are a fraction of the cost of what TD charges.

In an effort to be fair to TD, they do have the absolute cheapest rates I have ever seen on Critical Illness Insurance, they are also the largest seller of CI in Canada, beating every insurance company there is. The downside? You can only get it if you buy their lousy overpriced life insurance first.


Other considerations

Limited benefits, banks tend to have a limit on the amount of insurance they are willing to offer you, typically the value of your mortgage or $500,000 whichever is less. What if you want to provide a years worth of income to your family? Or pay off other bills? Or your mortgage is more than $500,000? With an insurance company, we don’t have arbitrary limits.

Flexibility, bank insurance tends to reset every 5 years with your mortgage rate. You have no choice of the term of your policy. You are also limited in the amount of insurance, you can choose either the entire amount of the mortgage, or half, no other options are available. With an insurance company you can choose terms from 5 to 40 years, and any benefit amount you choose.

Underwriting, banks don’t do any medical underwriting, and this is one of the big reasons they cost more. With a bank you answer a short questionnaire about your health and that’s it, you insured. The fact that you are a smoker or that you are an Olympic athlete don’t have an impact on your premiums. Banks tend to do their medical underwriting at the time of a claim. They will look back at your medical records after you died, and decide if you were healthy enough to insure after the fact. If there was evidence that you were uninsurable, kiss your benefit goodbye. Insurance companies underwrite before a policy is ever issued, this process ensures that if you are approved your benefit is fixed and guaranteed. Sure an insurance company will look back at your application at the time of a claim but it is far less likely that problem will exist since the underwriting process is so much more thorough and complete.

Conversion option, with a bank policy it only lasts as long as you are a client of the bank, once your mortgage is paid off your insurance is gone for good. A real insurance policy has a conversion option which will allow you to convert your term policy into a permanent policy that will last the rest of your life.

As you can see, there are a lot of weaknesses in bank insurance. While convinient, you might just want to put in a little bit extra effort to get a proper insurance policy.


If you want to open a chequing account, go to a bank. If you want an insurance policy, go to an insurance company.

Monday, July 13, 2009

Mortgage Insurance Part 4 - Putting it all together

I have now talked about all three components of mortgage insurance, Life, Disability and Critical Illness Insurance. I have put together two case studies, one a young couple, one an established family. I hope to show that by using the three types of insurance I have talked about that you can protect yourself and your home in the event of almost any situation.


CASE STUDY: DAVID AND JESSICA - First Time Buyers

David and Jessica are in their mid 20s and have just purchased their first condo. David is an engineer and Jessica is a paramedic, combined they earn $80,000 per year, their home is worth $250,000 and their mortgage payment is $1,500 per month.

Jessica helps sick and injured people every day at her job, she is concerned that David or herself could become disabled and unable to work. She worries that without two incomes, they couldn't pay their mortgage. David’s grandfather recently died of Cancer, David’s mother had to take a few months off work to look after her father while he was sick. David knows that if Jessica were to get seriously ill, he would want to be by her side, helping her recover - not at work. David knows they spent most of their savings on their downpayment and they don’t have the funds for him to take time off work if Jessica gets sick. David and Jessica know that Life Insurance is an important part of their planning process, but they also worry about disability and serious illness. They need a comprehensive solution to their problems, one that is affordable so they can focus on paying off their mortgage.

David, Age 27, Non-Smoker
$250,000 Life Insurance $14.85
$1,500 per month Disability Insurance $26.60
$80,000 Critical Illness Insurance $21.82
David’s Total Monthly Premium
$63.27



Jessica, Age 26, Non-Smoker
$250,000 Life Insurance $14.85
$1,500 per month Disability Insurance $35.64
$80,000 Critical Illness Insurance $20.30
Jessica’s Total Monthly Premium $70.79

Joint Total Monthly Premium $134.06

For less than their monthly strata fee, David and Jessica can insure their life, their income, and their health. If either of them dies, their home is paid for; if either of them is disabled and unable to work, their monthly mortgage payment is paid on their behalf; and if either of them becomes seriously ill, they will have a year’s income to help pay the bills and eliminate any financial stress so they can both focus on recovery.


CASE STUDY: RICK AND JOANNE - Established Family

Rick and Joanne are 42 and 40, they live in their family home with their two children. Rick is the primary wage earner in the family, earning $100,000 per year, Joanne is a stay-at-home mom, and has no income. Rick and Joanne recently moved into a bigger home valued at $750,000, they have a mortgage of $400,000 and their monthly mortgage payment is $2,800. If Rick were to die, Joanne would have no source of income. She knows if anything happened to Rick, she would be forced to sell the house and uproot her young children. Insuring Rick’s life for the full amount of the mortgage is Joanne’s biggest concern. Rick isn’t too worried about making the mortgage payments if Joanne died, he has a good income and could support himself and his two kids financially. Rick would like a small amount of life insurance on Joanne, to create a college fund for the kids. Rick estimates that if Joanne became very ill, he would only be able to provide half his income while looking after Joanne and the kids, he knows Joanne would need $50,000 of
Critical Illness Insurance. Rick is healthy and he’s pretty sure he won’t have a heart attack in his 40s like his father did... As such, Rick likes the idea of a Return of Premium (ROP) option attached to his Critical Illness policy. Rick understands that if he never claims on his Critical Illness Insurance, the Return of Premium benefit allows him to cash in the policy and get all of his money back at age 65. Rick and Joanne plan on using the refund to fund their retirement or pay for Long Term Care.


Rick, age 42, Non-Smoker, Primary wage earner
$400,000 Life Insurance $46.08
$2,800 per month Disability Insurance $91.37
$100,000 Critical Illness Insurance
with Return of Premium option $86.04
Rick’s Total Monthly Premium $223.49

Joanne, age 40, Non-Smoker
$100,000 Life Insurance $13.05
$0 per month Disability Insurance $0.00
$50,000 Critical Illness Insurance
with Return of Premium option $41.67
Joanne’s Total Monthly Premium $54.72

Joint Total Monthly Premium $278.21

At age 55, Rick suffers a Heart Attack, he receives $100,000 tax free courtesy of his Critical Illness policy. Rick is off work for six months recovering and receives $14,000 of disability insurance income. Joanne was able to take care of Rick while he was recovering without the stress and burden of worrying about finances. Rick reduces his work hours by half to reduce his stress level, Joanne uses some of the Critical Illness Insurance benefit to go back to school and retrain. Joanne is now working part time earning $30,000 to help make up for Rick’s lower income. At age 65, Rick and Joanne are both healthy and they decide to cash in Joanne’s Critical Illness policy. Joanne receives a tax free cheque for $24,013 which they use as a downpayment
to help their kids buy their first home.



Now these two scenarios are not going to match up with everyone's needs, but I tried to cover a wide swath of the population. I wanted to show that having all the coverage in place isn't ridiculously expensive, the rates are all 100% real by they way. You can also see that it is entirely possible to work around your situation, no cookie cutters here.

Friday, July 10, 2009

Welcome HMR Clients

This blog is intended to be a place of learning and information. All the articles are intended to increase the readers knowledge of insurance and benefits as well as to give some insight into the often murky waters of the insurance industry. To encourage participation in the blog for every HMR Client who post a comment or question you will be entered into a draw to win a $20 Starbucks gift certificate which will be awarded at the end of the month. Post as often as you wish, please remember to post your name to identify you for the prize.

I am planning to post on a weekly schedule covering a broad range of topics, from personal insurance, to employee benefits and executive compensation. Please feel free to subscribe to the RSS feed for real time notifications of new posts.

As always, if you would like more information on any topic, of if you would like to suggest a topic for future issues please feel free to email me or post in the comments.

Thursday, July 9, 2009

Mortgage Insurance Part 3 – Critical Illness Insurance

I have already made the case that if you die or become disabled you are not going to be able to pay your mortgage bills. The same is true if you get seriously ill. Critical Illness Insurance is a new kid on the block as far as insurance goes, it was developed by a doctor, one Dr. Marius Barnard in South Africa in 1983, not an insurance company. Dr. Barnard witnessed many patients, suffering from heart attacks and cancer, losing their homes and life savings while trying to pay medical bills and make ends meet. He thought up the idea of buying insurance to protect from the possibility of getting seriously ill. Critical Illness Insurance pays a lump sum cash benefit, this is not how an insurance company would have designed it, and we are lucky they didn’t. If an insurance company invented the product they would have designed it to reimburse you for your medical expenses as you incur them, not nearly as good as a big old bucket of tax free money.

Critical Illness Insurance historically had covered three main illnesses; recently the number of covered conditions has increase to 25 or so. Definitions for what qualifies have also just recently been standardized across a large number of insurance companies.

The big three

  1. Cancer
  2. Stroke
  3. Heart Attack

About 90% of all claims are due to these three illnesses.

The other illnesses include:

  • Alzheimer's Disease
  • Aortic Surgery
  • Aplastic Anaemia
  • Bacterial Meningitis
  • Benign Brain Tumour
  • Blindness
  • Coma
  • Coronary Artery Bypass Surgery
  • Deafness
  • Heart Valve Replacement
  • Kidney Failure
  • Loss of Independent Existence
  • Loss of Limbs
  • Loss of Speech
  • Major Organ Failure on Waiting List
  • Major Organ Transplant
  • Motor Neuron Disease
  • Multiple Sclerosis
  • Occupational HIV Infection
  • Paralysis
  • Parkinson's Disease
  • Severe Burns

A lot of people think that disability insurance and Critical Illness insurance are redundant, while this can be true there are situations where one would pay a benefit and the other would not.

For example, if you were to suffer from a heart attack, and need to take 3 months off work, which is typical, you would receive your critical illness benefit, however, you would not receive any disability benefits. Most disability policies have a 120 day wait, you have to be off work for at least 4 months before you start to receive any disability income payments. Since you were able to return to work in only 90 days you receive no disability benefits. You still suffered a heart attack, you still had a life threatening experience, your life is very likely changed forever, shouldn’t you be compensated?

Critical Illness Insurance comes with a few options which are worth looking into. First is the term of the policy. Most CI policies are either a fixed term such as a 10 year term. Or provide coverage to a specific age, usually 65 or 75. 10 year term policies are the least expensive, term to 75 are most expensive.

Return of Premium

One of the most interesting options for CI is what is known as Return of Premium or ROP. By purchasing an ROP benefit you are essentially betting that you will not get sick. If you never claim on your Critical Illness policy you can cash it out and receive a cheque for all of your premiums paid to date. This can be tens of thousands of dollars. A good strategy to employ is to purchase a term to 65 policy, with a return of premium option, once you reach age 65 and retirement, your need for the CI policy ends. At this time your need for future retirement income increases, so we cash out the critical illness policy and put the proceeds to use funding retirement or to purchase a Long Term Care policy.

What’s the catch? There is always a catch, say you have been paying into a $100 CI policy for 25 years, you then cash out the policy at age 65, and receive a cheque for $30,000, how can the insurance company make any money when they give you your entire premium back? Two ways, first they have had control of your premium for the last 25 years, and they have been investing it. Assuming the insurance company earned a modest 4% on your premiums they have accumulated $21,000 in interest which they do not pay back to you. Second, there is a cost to purchasing the ROP option; usually it adds another 30% or so to the cost of the policy. The insurance company has already worked out what kind of premium it needs to collect to break even, which is the regular premium of the CI policy. When a claim is paid on an ROP policy the insurance company has received an extra 30% more than that they needed to break even. It essentially boils down to the loss of opportunity cost on your premium dollars, and if you do end up claiming, you have overpaid for your CI premium by the amount of the ROP premium. Either way you have the insurance when you needed it, and a bag of money if you get sick or when the policy ends.

Slightly off topic, but Disability Insurance also has a ROP option, however, I hate them. With disability you get usually 50% of your money back, rather than 100% with CI, if you never claim on the policy. Not only do you not get all your money back, you are put in a place where you can be legitimately disabled, but you do not file a claim because you don’t want to lose the ROP benefit. CI doesn’t put you in this situation, you either have Cancer or you don’t, you either had a stroke or you didn’t, you don’t have to choose between your health and your insurance benefit. For these reasons I rarely if ever recommend an ROP on a disability policy, yet almost always recommend ROP for Critical Illness Insurance.

What kind of insurance?

So now that we know what our options are what is the best setup for mortgage insurance? Term 10 CI policies are the least expensive, which is good when trying to maximize cash flow to pay off a mortgage. You can also add a ROP option, if you no longer need the policy you can cash out the policy and use the ROP benefit to pay off the last of your mortgage, fund retirement or a Long Term Care policy, or even just take a vacation. Benefit amounts should range from one year’s mortgage payments, to one or two years of family income.

For example:

Bob and Carol are married, they each earn $50,000 per year and each contributes half of their monthly mortgage payment of $3000, or $1500 per month each. If Bob is diagnosed with Cancer, and is off work for a year, his income will stop, so will his ability to pay his half of the mortgage, a CI benefit of $1500x12 = $18,000 would be the minimum recommended benefit. A better amount would be equal to Bob’s annual income, $50,000, this way his year off work would be fully funded just like if he was still working full time. Furthermore, if Carol needed to take time off work to care for Bob during his illness her earnings would drop, therefore, a benefit amount equal to the family income of $100,000 is the best choice.

Focusing on affordable protection, we can create a policy to solve the above problem for under $50 a month. A 30 year old Male, Non-smoker looking for $100,000 of term 10 Critical Illness Insurance, with coverage for all 25 conditions listed above and Return of Premium option at age 65 costs $43.92 per month. At age 65, with their mortgage paid off and no more need for the policy, Bob having never gotten sick can cash out the CI policy and receive a cheque for $44,590 tax free.

Robert Reynolds - GBA
Partner / Group Accounts Manager
HMR Employee Benefits Ltd.

Disclosure: The content of this post are provided as general information only and should not be taken as financial advice. I am a licensed life accident and sickness advisor, I am paid partly by salary for servicing my block of business and by commissions on new sales of insurance and financial products. I do not own any interest in any insurance company nor do any insurance company’s own any portion of my business. The opinions expressed are my own, and do not represent the opinions of HMR Employee Benefits Ltd.

Wednesday, July 8, 2009

Term Insurance Rates

Anon in the comments asked to see rates for Term 10 and Term 20 policies.

150 quotes later here are some tables for term rates as of July 8, 2009. All the rates are based on standard health, non-smoker. If you are a smoker you can effectively double the rates. If you are in better than average health see the section on preferred rates below.

click to zoom in

Notice the two yellow highlighted cells, in these two cases it is actually cheaper to get insurance at an older age, wacky!

All of the rates were taken from actual Life Guide quotes. In most cases I have taken the best rate possible, however, occasionally the best rate was not a company I am contracted with or comfortable doing business with, such as AIG (now BMO insurance), in these cases I used the best rate I can get. The shown rates were never more than a few dollars off the best rate available. Rates were from a number of different reputable companies, including but not limited to Axa, Great West Life, IAP, Manulife, RBC, Transamerica, etc.

I started with 10 year age bands for the younger ages and moved to 5 year bands starting at age 55. As you can see rates start to climb exponentially after age 55 so I felt it would be prudent to provide more data points in the older years.
Click to zoom in

Preferred Rates

If you are in better than average health you can qualify for Preferred Rates. Preferred rates give you a discounted premium because you pose less of a risk if you are in good health. There are two levels of preferred rates, Preferred and Super Preferred. Different companies might use different names such as Elite or Healthclass 1 but it all means the same thing, cheaper premium. Getting a preferred rate is based mostly on your medical history and Body Mass Index (BMI) if you fall into a build table and have no personal history of medical problems you can probably get preferred. Getting Super Preferred is a lot harder, as the underwriters start looking at not only your medical history buy the medical history of your immediate family (Father, Mother, Brothers and Sisters). If any of your immediate family have been diagnosed with Cancer, Heart Attack, Stroke or other hereditary conditions before age 65 you can't get Super Preferred rates even if you are incredibly fit.

Preferred rates will save on average 15% over standard rates.
Super Preferred rate will save on average 30% over standard rates.

A common "trick" of the less professional insurance agent is to quote Super Preferred rates all the time. When a client is shopping around for the best rate this makes them choose the unscrupulous agent, the agent has no idea if the client will get a preferred rate and has no control over the decision. Often once underwriting is done the client will get approved at standard rates which are 30% higher than their original quote. Most clients will simply accept the higher rate rather than go through the application process all over again to secure a slightly better standard rate with another agent. Preferred Rates are a sneaky way to show clients lower rates, I personally never use Preferred Rates when quoting, I always use Standard Rates, and let my clients know they might qualify for a better rate if they are in good health.

Robert Reynolds - GBA
Partner / Group Accounts Manager
HMR Employee Benefits Ltd.

Disclosure: The content of this post are provided as general information only and should not be taken as financial advice. I am a licensed life accident and sickness advisor, I am paid partly by salary for servicing my block of business and by commissions on new sales of insurance and financial products. I do not own any interest in any insurance company nor do any insurance company’s own any portion of my business. The opinions expressed are my own, and do not represent the opinions of HMR Employee Benefits Ltd.

Tuesday, July 7, 2009

Mortgage Insurance Part 2 - Disability Insurance

If you are unable to work, you don’t earn a paycheque, without a paycheque you can’t pay your mortgage. While most people have Employment Insurance (EI) in the event of a layoff, or short term disability, most people do not have any form of Long Term Disability (LTD) insurance. Of those with insurance most are covered through the benefits plan with their employer. Unfortunately for the self employed out there we do not have the luxury of an employer sponsors disability plan, we also don’t get EI benefits either. For people without a disability plan at work, or the self employed, disability insurance can be very important for your financial well being.

In terms of mortgage insurance, when you die your income earning ability stops, but so do your ongoing costs like food and shelter. If you are disabled your income stops, but you will have medical bills, grocery bills, and other expenses.

It makes just as much sense to have your mortgage payment covered if are disabled and it does to have life insurance in place in case you die.

Big Scary Statistics
  • The chances of becoming disabled for 90 days or longer, at least once prior to age 65 is 1 in 3.
  • The average length of a disability which lasts over 90 days is 2.9 years. ( Source: 1985 Commissioner’s Disability Table A & CIA 86-92 Aggregate Mortality table)
  • You are also much more likely to be disabled before age 65 than you are to die before age 65.

Because you are more likely to be disabled than to die before age 65, disability insurance is far more expensive than life insurance. Because of the cost associated with disability insurance, it is important to take the maximum advantage of other benefits available to you such as Employment Insurance (EI) disability benefits, assuming you qualify for them.

Well isn’t the government going to take care of me if I get disabled?

Nope. Most employees are eligible for Employment Insurance (EI) disability benefits. If you are off work for 14 days due to illness or injury you can start to collect EI. Benefits are 55% of your pre-disability income, to a maximum of $435 per week for a maximum of 17 weeks. It’s not a lot of money, but it is better than nothing. Since benefits stop after 17 weeks that is the perfect time to have a disability policy start.

The biggest factors in disability insurance pricing are how long you have to be disabled before you receive a benefit, known as the waiting or elimination period, and how long the benefit is payable for. An elimination period of 30 days is about twice as expensive as an elimination period of 90 days. Also the policy that only has to pay out for 24 months is going to be a lot cheaper than the policy that pays for 10 years. By pushing the waiting period of a disability policy out to 120 days we receive the maximum EI benefit and obtain a far cheaper disability premium.

A 2 year disability policy is going to provide a big cushion for someone who becomes disabled. It can easily be the difference between foreclosure, a distressed sale, or bankruptcy and being able to squeak by and survive. If you are disabled for the rest of your life, you will probably have bigger things to worry about than your mortgage payment. In most cases if you are disabled for more than 2 years you are probably very seriously injured or will and will most likely not make a full recovery. That being said your lifestyle is probably going to be in for a big change. Selling your house is probably going to be part of that change. Because you would probably be forced to sell anyways, there is usually little point in taking out a policy that pays a benefit for 10 years or to age 65, 2 years and 5 years are usually going to provide the same level of assistance for a lot less cost.

Show me the money!

A big point to consider when buying disability insurance for a mortgage is who gets the money. When purchased from a bank, the bank gets the money, they waive your mortgage payment for the length of your disability. When you buy disability insurance from an insurance company, you receive the benefit, you can then use it to pay the mortgage amount, or not, it is up to you. A big caveat of buying from a bank is that if you are forced to sell your home, you lose your disability policy as well. Since you would discharge your mortgage with the bank the benefits stop. Buying from an insurance company, you continue to receive your benefit payments, as long as you meet the definition of disability under your policy. Your other financial issues are not considered in the benefit payments.

The taxman cometh

Disability insurance is a little tricky when it comes to taxation. If you own the policy yourself and pay the premium with after tax dollars, your benefit comes in tax free (good). If you have a plan through an employer or if your company owns the policy, your benefit could be considered taxable income when you claim (bad). Make sure you know if you have to pay tax on the benefit when you are setting up the policy. If the benefit is taxable you are going to need a higher monthly benefit to counteract the taxation drain.

Sweeping generalizations

Everyone needs to take their own consideration into account when setting up their policy. But to generalize a best fit scenario for most people, a disability policy starting after 120 days of disability, with a 2 or 5 year benefit period will provide the best bang for the buck. Paid personally the benefit is tax free, and when purchased from an insurance company you can do whatever you want with the money. The dollar amount of monthly benefit should at a minimum cover your mortgage payments, and fixed monthly costs like food and utilities. When set up like I have mentioned above an average 35 year old white collar worker can receive a $2000 per month benefit for about 30 bucks a month.



Robert Reynolds - GBA
Partner / Group Accounts Manager
HMR Employee Benefits Ltd.

Disclosure: The content of this post are provided as general information only and should not be taken as financial advice. I am a licensed life accident and sickness advisor, I am paid partly by salary for servicing my block of business and by commissions on new sales of insurance and financial products. I do not own any interest in any insurance company nor do any insurance company’s own any portion of my business. The opinions expressed are my own, and do not represent the opinions of HMR Employee Benefits Ltd.

Monday, July 6, 2009

Mortgage Insurance

While often not required by the financing institution, mortgage insurance is a prudent purchase for most homeowners. Banks typically use the ambiguous term “Mortgage Insurance” but rarely define what you are actually paying for. For clarification purposes mortgage insurance will be broken down into three separate types of insurance.

· Life Insurance

· Disability Income Insurance

· Critical Illness Insurance

Life Insurance: The reasoning behind buying mortgage life insurance is fairly easy to understand. If you are married and have a family that relies on you to provide an income, what would they do if you died and that income stopped? Aside from the obvious emotional trauma, money would be tight, mortgage instalments would go unpaid, and foreclosure and bankruptcy would loom.

By purchasing life insurance you are able to use the cash benefit to pay off your mortgage debt entirely, pay off the portion supported by the now deceased spouse or use interest earned on the benefit to pay the monthly instalment.

Mortgage life insurance is typically bought on a Joint First to Die basis, this means that two people, usually spouses, are insured under one contract. The first person to die triggers the death benefit, which is payable to the survivor. After the first death the contract ends. Personally I don’t like these types of policies for several reasons listed below, I prefer to always use two individual policies.

· They don’t provide any real cost savings over two separate policies.

· They can be cumbersome to split in the event of a marriage breakdown.

· Some policies do not pay out double if both insured die in a “joint disaster” such as a car crash or plane crash.

Life Insurance also comes in several different term lengths. For the purposes of this discussion I won’t get into permanent insurance. Policies typically have a rate guarantee based on either 10 or 20 years, flexible policies are also available which can extend the rate guarantee to 35 or 40 years. The longer the rate guarantee the higher the monthly premium, though longer term policies are typically cheaper in the long run. Two back to back 10 year terms typically cost about 33% more than a single 20 year term. The decision to go with a 10 year or 20 year policy often comes down to a matter of cash flow.

When looking for life insurance, always ask the sales person if they are a broker or if they are affiliated with a specific company. Investors Group and Freedom 55 are examples of “captive agents” they can only sell IG or F55 products, even if they are not the best price or fit for the client. A broker is your best bet to get the best deal, brokers use a software program called LifeGuide which provides a list of all the available rates for all the insurance companies in Canada. Ask to see a printout of the top 10 companies, and ask why he is recommending the company he has chosen for you.

Brokers won’t always recommend the cheapest company all the time, and there is usually a good reason for this, either contracting, poor past experience, poor contract wording etc. We are paid by commission so there is a financial incentive to sell a more expensive policy as it will pad our wallets. Some companies also pay more than others, that shouldn’t be the only reason the broker chooses that company. We are also required to disclose how we get paid, by commission, but we do not have to tell you how much we get paid, unless you ask. As long as you are dealing with a reputable broker you shouldn’t have much to worry about.

I am happy to provide the inside scoop on the insurance industry, if anyone has any comments or questions about the life insurance industry post in the comments.

Rob Reynolds

Partner / Group Accounts Manager

HMR Employee Benefits Ltd

Disclosure: The content of this post are provided as general information only and should not be taken as financial advice. I am a licensed life accident and sickness advisor, I am paid partly by salary for servicing my block of business and by commissions on new sales of insurance and financial products. I do not own any interest in any insurance company nor do any insurance company’s own any portion of my business. The opinions expressed are my own, and do not represent the opinions of HMR Employee Benefits Ltd.