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RE: Frugal life insurance question - canadians
- Posted Thu, Apr 12th, 2007 by google blogger Post a reply

You say that the person considering insurance, age 48, has nodependents. Would anyone be financially hurt if his income weregone? It would be handy to have money to pay off the mortgageand for his final expenses, yes. It was usually an entirelydifferent matter in an earlier generation when there were manyfamilies with only one wage earner.

Right now I'm advising a young man in early 20's, single, livingwith his brother, who was advised to get life insurance. Hisassets of over $10,000. can pay final costs should he die soon.He says that no one would be in financial difficulty if hisincome were gone, so I say that the only reason for him to getlife insurance now is if he suspects that he might not beinsurable later.

Further, if he invests the amount of the premium now and theasset grows at a reasonable rate, in a few years when he decidesthat he needs insurance to cover dependents needs if he can't,the income from the investment will probably be enough to paythe premium, even though it increases year by year.

When there are dependents, the issue is that insurance plusinvestments should be enough that the annual income theyproduce, and the asset itself, eventually, will be enough toprovide for the loved ones as long as they have need. Don'tforget to allow for possible fluctuations in rate of return oninvestments, and erosion of value of the asset due to inflation.In many families there is a large need for extra money if thesingle/main wage earner dies early in life, as there is usuallya large mortgage and the children are small, so a long way frombeing on their own. On the other hand, there is only a smallchance of death in those years, so insurance payouts for peopleof those age ranges is small. With obligations large and incomerather small, this need for heavy level of insurance at low costcan be met by term - the kind that may be requireed to pay onthe rare occasions when client dies young. But the contract isfinished in a limited number of years, so the contract can bepriced low.

In the early years most families have small assets, but mostplan to build assets over the years, so that they come closer tofinancial independence, thus their need for outside money incase income stops is lower. Moreover, the number of years thatsupport is necessary for both surviving spouse and children arefewer. Most families opt for a smaller amount of term lifeinsurance in those years, but as the possibility of death over agiven number of years is increasing, the price rises and thefamily is better able to afford the higher rate.

Most families plan to have enough assets by the time they retirethat if wage earner dies the survivor can survive on them, sothey don't need life insurance any more. Some have it then, asit comes free of tax, here (Canada) and they want to have enoughto pay taxes owing on the deceased's last year of income and ontaxable parts of the deceased's estate.

It is important throughout wage earners' working years to carrydisability insurance, for disability often means that thedisabled person can't earn income, but is an extra mouth to feedand often there are medical costs beyond insured amounts.

Some of my clients, especially ones who had no children andlived frugally, especially rural dwellers, tell me with a biggrin that they never had it so good. I tell them to thinkcarefully. Every Canadian resident with certain residencerequirements receives Old Age Security, about $400./mo. Manywomen who never had employment income are delighted to have thatcheque in their own name. Two such cheques while two alive.Canada Pension Plan, a compulsory contributory system is introuble due to larger numbers of aged and smaller numbers ofwage earners and it's largely a pay-as-you-go system. FullC.P.P. is about $750./mo. now: only one such cheque if only onewas employed for years. And many have private pension planscovering the retired worker.

But I ask them to consider how well they will do when one dies.One O.A.S. payment is gone; if the former wage earner is the onethat dies, Canada Pension rate drops to 60%, and many privatepension plans drop to around 60%. So the surviving wife, if shewas not employed subsequent to l966 has less than 60% of formerincome. If the former wage-earner survives, the only reductionis the loss of one Old Age Security, but both pensions (usually)continue at the full level (unless they had split Canada PensionPlan benefit).

Although many financial advisors work on commission, some of uscharge by the hour but sell no financial products, so ourclients do not need to worry that we are trying sell themsomething. I tell my clients that no one cares as much abouttheir money as they, that I want them to learn how to manageit. Some ask whether I'm not afraid that I'll advise myself outof business, to which I reply, "My job is to keep far enoughahead of my clients that occasionally they'll call to say, 'Ed,we need to have a little talk'", but even if they don't, thereare lots of financial illiterates out there.

Remember: learning how money works is an interesting hobby, thatpays well.

Good wishes to you and to the ones that you care about.

RE: Frugal life insurance question - canadians
- Posted Thu, Apr 12th, 2007 by google blogger Post a reply

I suggested off the top of my head that he take the money he would be
paying in for premiums and stick it in a mutual fund making a
conservative 10% and he would be better off than the cash surrender
value on a whole life policy.

1) 10% is _not_ conservative, except in the mind of someone
who thinks that the last couple of years in the stock market
were typical.

2) investing in a mutual fund and buying life insurance,
whether that life ins. is whole, cash or term are entirely
_different_ beasts. If this person has dependents whose
well-being relies on his earning power, he ought to have
both life insurance and disability insurance in order to
provide for them in case he is unable to work. In addition,
he should consider investments for many other reasons.

I recommend that your friend see a professional, possibly
a financial planner, but at least an insurance agent who
can explain the differences between these things (types of
policies, etc) and what they can do for him.

However, you might want to post your question, perhaps with
a bit more detail, in one of the more relevant groups, like

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