Archive: Insurance

*Important: Bill S-201 (Genetic Non-Discrimination Act.)

I know most of you rely on me to be more up-to-speed than you on insurance-based changes/issues. That said, there was much discussion about Bill S-201 that was largely overlooked because of the exempt test changes effective on January 1, 2017.

Here’s the scoop…..on May 4, 2017, the Federal Government passed the Genetic Non-Discrimination Act.

“This law makes it illegal to require someone to take a genetic test or disclose the results of a genetic test as a condition to obtain goods or services, or enter into a contract, such as insurance.”

So what exactly does that mean?  It means that individuals (you, me, clients) can have genetic testing completed and NOT DISCLOSE those results to the insurance company (it’s now illegal). If an insurance company uses/requests this information and it will be fined $1,000,000.

When I was in Ottawa at calu weeks ago, they are lobbying this issue to the supreme court, but as of today, this law is in effect.

The major unintended consequence of this new law is the creation of anti-selection for insurance purposes. What if a client had genetic tests that showed they were a carrier of the BCRA gene (ie. Angelina Jolie)? Currently, it is possible for a client to have a test showing they are a carrier of this gene, then immediately apply for critical illness insurance and not need to disclose this result.

This law will require the insurance insurance companies to (a) increase price heavily (up to 65%) and/or, (b) completely change the structure of critical illness insurance (or stop selling it entirely).

Since I knew that this change was happening, I literally just increased my own critical illness by $825,000 (I purchased a 20 year term with Manulife).  See my summary below:

Laundry CI

It’s important we talk more about critical illness insurance before products start to change. I also encourage each of you to consider adding some critical illness to your own insurance portfolio (if you haven’t already).

How Much Life Term Insurance do I Need? Let’s find out!

For the past several years I have met with hundreds of advisors.  Some of these advisors have a difficult time having the “insurance discussion” with their clients.  Others are only comfortable with the idea of using life insurance instead of mortgage/creditor insurance with their local bank.

There is a very simple method of going through a life insurance needs analysis.  There are two distinct steps:

  1. Do the Math
  2. Do you care?

Do the Math

There are 3 main factors that determine a term life insurance needs analysis.  Never forget these three:

  1. Debt Elimination (mortgage included): This number is very easy.  How much debt do you currently have as a family?  If one spouse were to pre-decease the other, ideally, this expense would be eliminated
  2. Education Costs for Children: The question I ask to every family is, “how much do you think education will cost for your children?” — there is no ‘right’ answer, but based on the education cost calculator provided by MacKenzie Financial, for 4 years of school plus living expenses, based on Ontario costs and inflation rates, will cost approximately $80-100,000/child (present value).
  3. Income Replacement to your Family/Surviving Spouse: Let’s assume that after death, your surviving spouse has no more debt, no need to save for education AND a family without a spouse/parent.  Things are much different. To me, you should want to calculate a certain level of income for as long as the children live in the house (let’s say age 20).  Below is a table that I created many years ago.  The top row is the number of years to replace income and the column to the left is the after-tax amount of income provided.    I literally print this table and allow client(s) pick their own number.

grid

Let’s do an example:

Bob and Susan have a $500,000 mortgage and two young children (2 & 4).  Susan stays home with the kids and Bob earns approximately $100,000/yr gross (after-tax $70,000/yr).  What happens if Bob dies prematurely:

  • Debt: $500,000
  • Education: $200,000
  • Income Replacement ($40,000/yr for 20 years – see table): $676,000
  • TOTAL NEED FOR INSURANCE: $1,376,000
  • Less: Current Insurance
  • Less: Current RESP’s
  • EQUALS: TOTAL SHORTFALL

Make sense?

Do you Care?

As a professional, my job is to show the math and explain where life insurance fits.

However, as a client, you may not “care”.  You would be surprised how many times I’ve been told that, “we’ll just sell the house”.  My response to that specific objection is, “let’s me get this straight…Dad dies, mom has no husband, there is no more paycheques and the solution is to uproot the family from their home?  Really?”

My job is to make sure we have this awkward conversation and for me to challenge these conventional objections and help better educate.  Not everybody has to be a believer, but ALL advisors should have this conversation with their clients.