This month I will be writing about part 4 spending category, namely Insurance. To see full complete spending categories, read my February 2016 newsletter.
What comes to your mind when you read the word “Insurance”? For many, it would mean health insurance or car insurance. For our spending category, health insurance would be included under Medical/Dental, while car insurance would be covered under Transportation (see May 2016 newsletter). So insurance here means life insurance, long-term disability insurance, critical illness insurance, and other types of insurance that are not included in other expense categories. Since this newsletter is not meant to be a comprehensive insurance information, I will write about a few types of insurance that I think people should consider getting.
A Few Types of Insurance
Many of you probably have this coverage through your employer already. If so, you should find out the extent of the benefit. If I speak to an insurance agent, many will tell me that I need to buy more than the coverage provided through an employer. So, if I were to buy one, I’d ask the following questions.
§ What is life insurance?
§ Why do I need it?
§ How much would I need?
§ What should my beneficiary(ies) know if/when they receive the money?
According to A Guide to Life Insurance (https://www.clhia.ca/domino/html/clhia/clhia_lp4w_lnd_webstation.nsf/resources/Consumer+Brochures/$file/Brochure_Guide_To_Life_ENG.pdf), a life insurance is a way to protect your survivors and dependents against financial hardship. How much you need would depend on a variety of factors such as how many people depend on you, how young your children are, do you have any liabilities or mortgage, etc. In general, insurance agents recommend between five to ten times of your net income. Your insurance agent can help you perform a financial needs analysis to figure out how much you would need.
There are 2 major types of insurance: permanent and temporary. A permanent one covers your permanent needs such as supplementing survivor’s income. A temporary one covers temporary needs such as mortgage and expenses for young children.
There are 2 types of permanent insurance: Whole Life and Universal Life (interest-rate sensitive policies and variable life). And there are 2 types of temporary insurance: term and term to 100 (which provides coverage to age 100). In general, permanent insurance costs more than term. In deciding which type is best for you, you need to determine the amount of money you can afford and the coverage you need. If you start with term, you can check to see if it’s renewable and convertible into a permanent policy. If you have group life insurance through your employer, you can check to see if the policy is convertible to individual life insurance when you leave the company.
When shopping around for a life insurance, A Guide to Life Insurance stated that “a policy that does not meet your needs is no bargain no matter how low the cost.”
Life insurance proceeds can be paid out in lump sum or regular payments. In general, life insurance benefit is not taxable. If you name a beneficiary (spouse, child, parent, etc.), the money will go directly to that person and no probate fees apply. You can also name a contingent beneficiary, that is, the person to receive the money if your primary beneficiary is no longer living.
When receiving a large sum of money, your beneficiary(ies) should speak to a lawyer, an accountant and/or a tax professional, and a fee-only investment advisor (or a good investment advisor) to determine the best action he/she/they should take to ensure that the money will provide for he/she/them as it was intended.
Long-Term Disability (LTD) Insurance
Many employers provide this insurance as part of their benefit package. Do you know if you have it? Do you know how it works?
LTD insurance provides income for when you are unable to work due to illness, injury or accident for a long a time. If you get injured while you work, you may be covered through Worker’s Compensation Benefit (WCB) or Work Safe BC if you are in BC.
In general, there is a waiting period before the Long-Term Disability (LTD) benefit kicks in. In the meantime, your daily expenses will continue to occur. This is why it’s important to have emergency fund, to cover your needs while you are unable to work, and perhaps during the waiting period before any benefit kicks in.
Critical Illness Insurance
If there is a history of serious illness in your family, you should probably consider getting a Critical Illness insurance. Again, I’d check my employer’s benefits first to see if I’m covered. If so, for how much, and would I need more? I would go through the same four questions again as listed in the Life Insurance part.
There are so many types of insurance. Carefully evaluate your needs and the amount of money you have available. Crown Financial Ministries Canada’s Percentage Guide recommends that we spend about 4% of our net spendable on insurance. The primary purpose of insurance is to take care of your needs when you are unable to. So the key is to provide just enough, not too much, not too little. And of course, a prudent money management will ensure that the money will last for the intended period. If you have more insurance questions talk to a qualified insurance agent.
For more help with improving your personal finance, take advantage of my free first assessment meeting. Effie[at]PrudentMoneyCoach[dot]com or (six zero four) 728-5139.