March 2018

DOES INSURANCE MAKE SENSE FOR YOU?

If you were asked what you would like to have happen to your family if you were to pass away, what would you say?  Would you want your spouse to not have to work for a few years?  What about paying off the mortgage?  If you have children, would you be able to work and still be there for your kids too?  What if you were to get sick or injured and unable to work yourself?   

Talking about the importance of insurance is quite often a debate.   These questions, although awkward to answer at best, are so important to at least consider.  Why? Because these are all real life situations that we feel will never happen to us…but in reality, they do.  In fact, I’m sure we all know a family member, friend, or a colleague, that has experienced a life-changing event (insert moment to reflect here!). We therefore devoted this quarter’s Q&A to some common questions that focus on what insurance is, what it is typically needed for and how critical it may be to you and your family.  

Q: What is life insurance? 
A: Life insurance is a contract between a policy holder and an insurance company (insurer), where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of an insured person.   The insured person and policy holder are often the same person but do not have to be. ~ https://en.wikipedia.org/wiki/Life_insurance

Q: How does life insurance work?
A:  When you apply for a life insurance policy, in most cases you will be asked to fill out a medical history form.   Some of the critical factors in determining the cost of the insurance are your age, sex and pre-existing medical conditions.   For example, if you have heart conditions, diabetes, or a history of cancer within your family, then your insurance premiums may be higher.   Also, your lifestyle may play a part in higher premiums as well.   The more risky the lifestyle (smoker, skydiver, etc.), the greater risk of increased premiums. 
All of this information is then given to the underwriting department of the insurance companies.  Their job is to analyze the information based on your history and other statistical data within the industry.  From there, mathematical calculations are conducted to determine your insurance premiums.   In some extreme cases, the risk is too high and the applicant is not insurable. 

Q: What are the main types of life insurance? 
A:  There are 3 main types of life insurance:
Term insurance – this provides a death benefit if the insured passes away within a certain time frame (10 years, 20 years, etc.).  Typically these premiums are less than that of a Whole-life or Universal life insurance policy.
Whole-life insurance - this type of insurance provides a death-benefit for life.  The policy also creates a cash value over the life of the policy.  Once the cash value reaches the amount of the insurance, the value will be paid to the owner of the policy.
Universal-life insurance – Also provides insurance for life.  However, the cash value of the policy is determined by the growth rate of a chosen underlying market index.  As your cash value grows, you can reduce your premiums and/or stop them completely.   The cash value will then fund the premiums for the insurance policy. 

Q: When is the best time to buy life insurance? 
A:  Insurance premiums tend to increase as you get older.  So all things being equal with your health, the younger you are, the lower the premiums for your life insurance.  However, the best time is really determined by your current AND expected life situation.  Someone that is single, no children and is debt free will have different needs than that of a new homeowner that is married with children.  

Q: What are other forms of insurance that may be important? 
A:  Disability insurance – used to protect against loss of household income due to a disability.   If you are injured and/or have a medical condition that prevents you from working, then disability insurance is used to replace the income loss.  
Critical illness – used for when someone develops a life-altering illness.  These illnesses often impact not just the insured, but the people around them.   It can also be used for treatments that are otherwise require you to travel long distances or are too expensive to pay for. 
Long-term Care – this type of insurance provides coverage for people with chronic conditions that require nursing-home care or other forms of supervision.   

Q: How do I determine if I’m properly insured?
A:  To truly understand if you are properly insured, conducting an insurance needs analysis with your Financial and/or Insurance Advisor is recommended.   
They have the ability to analyse your current family situation, your net worth and the time value of money, to determine what the appropriate amount of insurance would be.  

Q: How can insurance help if I’m a business owner? 
A:   A lot of people think of life insurance as something that is owned personally, however, it’s just as important when considering your business as well.   Corporately owned life insurance is primarily used to provide risk protection against important shareholders passing away.   Additional advantages to having insurance owned by a company are the use of the insurance policy as collateral, as well as the ability of the policy to be paid out tax efficiently (little to no tax owed on the death benefit of a policy).

Q: What are some additional concepts that can be resolved through insurance?
A:  - It’s an effective use of trapped corporate surplus.
- Individuals with substantial resources who wish to make charitable gifts on a tax-effective basis, can consider life insurance as a way to do this.
- For young families, insurance policies can be an excellent strategy for early savings plans for their children (low premiums and build-up of cash value in whole-life or universal policies).
- Life insurance can create equal estate distribution in an otherwise unequal disbursement of wealth (i.e. a farming family with multiple beneficiaries but only one that will inherit the farming business).

A lot of people look at life insurance as a gamble given you are paying a certain amount of money for insurance coverage you may never use.   In reality, this can only be true with term insurance.   Whereas, if you were to hold permanent insurance long enough, there most surely is a payout at some point.  Insurance should be looked at like an asset class, similar to having some of your net worth in investment strategies, your house, your business and recreational properties.    Insurance serves a purpose and it holds value. 

If you feel like an insurance review may be beneficial to you and your family, please don’t hesitate to contact us!

The information contained in this newsletter was obtained from sources which we believe to be reliable. However, this information is not guaranteed by National Bank Financial Inc., and may be incomplete.

*Insurance services and products are provided by National Bank Insurance Firm (NBIF).  NBIF is not a member of Canadian Investor Protection Fund and the products sold or provided by NBIF are not guaranteed by the Canadian Investor Protection Fund.

National Bank Financial is not a tax advisor and clients should seek professional advice on tax-related matters. Please note that comments included in this letter are not intended to be a definitive analysis of tax law. The comments herein are general in nature and professional advice regarding an individual's particular tax position should be obtained in respect of any person's specific circumstances. Please consult your tax advisor regarding your particular situation.