However, this is one aspect of risk protection that Canadians aren’t as good at. Three out of 10 Canadians have no life insurance,1 while only 2.4 million have critical illness insurance.2 Of course, we often like to think that serious events won’t happen to us. However, almost half of all mortgage foreclosures in Canada are caused by critical illness or disability.3
Given that there are several potential risks that you need to protect yourself against, it makes sense to have an insurance portfolio that’s focused on your particular circumstances, given that not all insurance products are suitable for everybody. Let’s break down the different types of risks that you might need to consider and the insurance policies that are available to protect you, your portfolio and your loved ones.
1. CIA 86-92 Aggregate Table & 1985 Commissioner’s Disability Table A (Experience Table). 2. U.S. Housing and Home Finance Agency. 3. U.S. Housing and Home Finance Agency. 4. National Cancer Institute of Canada: Canadian Cancer Statistics 2004. 5. Heart and Stroke Foundation, 2004. 6. CIA 86-92 Aggregate Table & 1985 Commissioner’s Disability Table A (Experience Table)
Term life insurance
The main benefit of life insurance is to provide a lump sum of cash that can help replace the deceased person’s income. That money can also be used to pay off any debts, such as a mortgage.
It can also be used to provide ongoing income to maintain your family’s lifestyle and help pay for your kids’ education. You would sign up to term insurance for a specific period of time: your beneficiaries would receive a payout if you were to pass away during that time period.
After the term is up, you would need to take out a new term life insurance policy (if you still needed this kind of protection). Term life insurance is typically considerably less expensive than permanent life insurance when you’re young, but premiums usually increase every time you renew the insurance and start a new term.
Permanent life insurance
This covers you for your whole life (as long as you keep paying the instalments) and pays your beneficiaries a tax-free amount when you pass away. Most permanent life insurance policies also provide savings in what is called “cash value”. You can choose to cash it in or borrow against it, an option you don’t get with term life insurance.
Because of this added benefit, permanent life insurance tends to be more expensive than term, but the premiums are guaranteed not to increase. It also offers the opportunity for tax-preferred capital growth if you have maxed out other registered investment accounts, such as your RRSP and TFSA.
Critical illness insurance
Given that illness (and potential unemployment it may bring) is a major cause of home foreclosures, it's well worth considering critical illness insurance, which would prevent this from happening to you.
If you have critical illness insurance, you’ll be paid a lump sum if you’re diagnosed with a serious illness. This could be one of several, including:
- Cancer
- Stroke
- Heart attack
- Dementia
- Brain injury
- Loss of limbs or speech
- Multiple sclerosis
The illnesses covered will depend on the insurance policy you take out, and the costs involved will depend on the amount of coverage you want. Also, several circumstances can affect your riskiness in the eyes of the insurer (and the insurance cost), such as your gender, age, medical history and whether you’re a smoker.
This kind of insurance can be a valuable investment considering how prevalent some critical illnesses are. For example, roughly two in five Canadians will develop cancer4 and around 2.4 million Canadians have heart disease.5
If you’re no longer able to work because of an illness, this type of insurance can make sure that your financial plan stays on track, you stay in your home and you avoid the added problems of financial stress at a time when you need to focus on your health.
Disability insurance
This insurance is designed to protect your future earnings: if you’re unable to work because of an injury or illness, you’ll receive a monthly payment. It means you and your family can maintain the same lifestyle while covering expenses such as food, utilities, mortgage payments and kids’ activities.
The payments continue until the benefit period ends or you’re able to go back to work. Premiums for this type of insurance can vary widely, depending on:
- Your age.
- How long you want coverage to last.
- Your occupation (dangerous jobs will have higher premiums).
- Your current health.
- How much you want to receive in monthly payments.
- How long you’re able to wait before starting to receive payments.
Again, this insurance covers a circumstance that happens far more often than most people realize. For example, a third of Canadians will be disabled for 90 days or longer at least once before the age of 65.6
Insurance as a tax-efficient estate planning tool
As well as helping to protect you, your family and your portfolio, insurance (specifically life insurance) can be used to enhance your estate planning. There are several key ways that life insurance can be beneficial, beyond helping you in times of trouble:
- Use it to cover your estate’s taxes (particularly helpful if your estate has to pay large capital gains taxes).
- Make your estate more equitable for your beneficiaries (for instance, if you leave a property to one of your children, your other children could receive the proceeds of your life insurance).
- Have a bigger nest egg to leave to your kids.
You can read more about why life insurance is not just for emergencies.
Your insurance needs evolve as your life changes
Protecting your income and your portfolio are both essential, but it’s also important to realize that the need for those protections changes over your lifetime. The image below shows how using one or more risk-mitigating insurance policies can ensure protection for what matters most during every life stage.
Typically, income protection is more important when we’re younger and starting out in your career, while asset protection can become more important later in life. This is why it’s so important to constantly monitor and re-assess your insurance portfolio.
At IG, we have an ongoing process to review your insurance needs. Our goal is to ensure that our clients sleep well at night, knowing that what’s important to them and their family is protected. Contact your IG Advisor to arrange an appointment to discuss your protection needs. If you don’t have an IG Advisor, you can find one here.
Sources:
1 Ipsos: Majority (70%) of Canadians have life insurance.
2 Money Sense: Critical illness and disability insurance in Canada.
3 LIMRA: Canadian billion-dollar baby revisited: sales potential of the underinsured life insurance market.
4 Canadian Cancer Society: Cancer Statistics.
5 Canadian Institute for Health Information: Cardiac care.
6 CLHIA: A guide to disability insurance.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant. Trademarks, including IG Wealth Management and IG Private Wealth Management, are owned by IGM Financial Inc. and licensed to subsidiary corporations. Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).
