By Burt Helm | Wealthsimple
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The first rule of life insurance: Stop pretending the problem will go away if you ignore it. The second rule is that it’s actually not that hard, as long as you avoid the most common pitfalls.
How many insurance brokers do I need to call to get the best deal for Life Insurnace? I hope the answer is not, “Talk to 15 and one for good luck.”
Here’s a secret about the insurance business: Whether you shop at one of the Internet-based non-face-to-face brokerages or visit the office that sold your dad life insurance, chances are for term life policies, you’ll end up with practically the same set of offers, from the same group of big insurers, for the same prices. Generally, term policies are quite competitive. What’s most important is to ask if your policy has guaranteed premiums, if it’s renewable (meaning, unconditionally, without having to take another medical or reapply) and if it’s convertible (can I transfer it to a permanent insurance policy)?
The distinctions are important, particularly if someone is healthy when they take out their policy, and then get diagnosed with an illness that may make them uninsurable in the Canadian market. If when diagnosed they are already in a term policy that is renewable and convertible, then they will be able to convert it to a permanent policy without paying any penalties due to declining health. The insurance industry is heavily regulated, giving you the peace of mind to buy from whomever you like. When going with independent insurance agencies, though, be sure they offer a large menu of policies, and know the market. A bonus is if you can find someone with a strong financial planning background who can scope out your needs.
Do I really need to give blood to make it all happen?
If you are young and looking for a policy less than $1 million, maybe not. More and more insurers now offer smaller policies that are available right away and require no medical exam. But they can cost extra and may not be renewable or convertible. Otherwise, you follow the traditional process. First, you answer a long list of health questions online or over the phone designed by actuaries to figure out how big a risk you are. What’s your height and weight? Do you smoke or use drugs? Do you have a sibling or parent who died of diabetes or cancer before age 65? The insurance company will send a physician or nurse to your house to perform a medical exam. Insurers use all that information to sort you into different pricing tiers: smoker or nonsmoker first; then “standard,” “preferred,” or “preferred plus.”
What if I tell them I don’t smoke to get the cheaper rate?
If you’re a regular smoker, they’ll be able to see that when they check your medical history, and they may find evidence of cigarette use in your blood test. If it turns out you lied, they can deny you coverage or not pay out your policy. Better to be honest up front.
Who should I name as my beneficiary?
Usually your spouse, if you have a spouse; your kids (see below if your kids are under 18); or the loved one you trust most to care for your dependents.
About leaving the money directly to your kids: Insurance companies can’t pay money out to minors until the court appoints a guardian, a process that can sometimes take months. If you want your money to go to your kids, it’s better to set up a life insurance trust, name the trust as the beneficiary, and appoint a friend or family member as its trustee. That way the trustee can award the money to the child right away, or otherwise pay it out as you see fit. An estate lawyer can help with all this.
If you name your estate, in Canada that means the payout may be subject to probate taxes.
How big should my policy be?
There is no easy rule of thumb. Insurance companies will never issue a policy where an individual is worth more dead than alive. Having said that, to determine an accurate number, you can calculate all the expenses that your family would need to cover — mortgages, groceries, college tuition, etc. Many insurance sites offer handy calculators to help with this. Make sure to factor in your outstanding debts and the nonmonetary contributions you make to your household as well. For instance, if you take care of the children, include the cost of childcare.
If I need $1 million of life insurance according to the calculators, but I can’t afford the premiums, what should I do?
Don’t feel guilty; just buy a smaller policy. It’s far worse to not buy anything or to buy too much insurance and stop paying your premiums because you can’t afford it — that’s wasted money. It’s more important that your family gets some help, rather than none.
How do I know how long my policy should be for?
It’s best to buy life insurance that covers you at least until your mortgage is paid off and the kids are securely out of college. After that, it comes down to your individual financial situation and goals.
Oh, wait. I just remembered I bummed a Marlboro at a cookout last week. Should I have come clean about that to the insurance doctor?
Most often insurers ask about your last cigarette, even if it was the only one you’ve had all year. Unfair, right? While we would never tell you to lie to anyone, we will point out that your practice of super-occasional smoke-bumming is extremely hard to prove. Insurers typically run a check using medical records databases, like one called the MIB (you can get a copy of your report), and if they see you’ve lied, you’ll risk getting your coverage denied. But smoking two cigarettes a year most likely won’t show up on that.
What about weed? Does that count as smoking?
In the old days, smoke was smoke. More recently, insurers have gotten hip to the cannabis trend and started classifying medical marijuana in its own category. A few chill insurance companies will cover you as a nonsmoker if you smoke weed recreationally. Even so, your drug habit will knock you out of the cheapest health class. Not being a marijuana smoker will save you money.
OK, now to some practical questions. What if my spouse decides to murder me to get the cash?
Sounds intriguing, but insurance policies come with a contestability period to prevent you or your so-called loved ones from taking advantage of most sorts of fatal loopholes. If you commit suicide within two years, for instance, the policy is void. Meanwhile, insurance companies won’t pay any beneficiary who is a suspect in your murder at any time. Just make sure to tell your significant other about this bylaw, especially if you notice that the brakes on your car have been cut and you find wire clippers under your bed.
How long will the whole thing take? The insurance application I mean, not my life.
In most cases, it will take a couple months to apply, get your physical, and activate the policy. But it’s worth it, and you only have to do it once. So get going.
