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Finance 101

Understanding your insurance needs

August 16, 2014

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Understanding your insurance needs

Finance 101

Why do Canadians buy insurance? Well, if you’ve ever met someone who sells insurance, you might have heard something along these lines. “Buy insurance for peace of mind! You can sleep better at night knowing your loved ones are taken care of.”

What is insurance? It is a financial product that you use to transfer risk yourself to an insurance company, in exchange for a premium (money). Check out our primer for Canadians on the basics of insurance policies).

For many people, insurance is a very important part of their complete financial plan. Here are some reasons why.

Insurance helps when your health goes south

If you got sick or injured, you might not be able to work and earn an income. So, you will definitely want to look into transferring that risk to someone else.

The good news is if you are a salaried employee at a company that offers extended health benefits, that risk is very likely already transferred.

Most companies offer a long-term disability policy that pays you 55 percent to 65 percent of your income, tax-free if you become sick or injured and cannot go to work for up to 2 years. After that, they get a bit stickier with definitions, but the risk of not being able to work for over 2 years is significantly lower.

For the most part, if you have this insurance coverage at work, you’re going to be fine…

What about Employment Insurance, you ask?

Well, insurance companies were not started yesterday. They know about Employment Insurance. That is why their benefits only start after Employment Insurance is exhausted. Yes, they’re that sneaky!

Got dependents? You could buy supplemental insurance

Does someone else, like your spouse, or your dependent children, an elderly parent, or a disabled relative depend on your income? Will this obligation continues even if you get sick or injured? And is there no way to get out of the obligation if you were to become sick?

In that case, you should consider supplementing the policy you have with your employer with a personal policy and get a little bit more money.

The reason why I say supplement and a little bit more money is because there are an all-source-maximum and an overall-maximum-benefit clause in nearly all policies. Which is to say…

Nobody can get rich if they become sick and can’t work

It’s legislated. The whole thing is designed to motivate you to go back to work so they can stop paying the benefit. Don’t let anyone tell you otherwise. There are very few open-and-shut cases that continue to pay the benefit and don’t ask too many questions.

With most of them, you have to check in and send doctors reports and all that jazz. It works, but it is not meant to be a vacation.

Insurance and the risk of death vs. getting sick or injured

Let’s say other people depend on your income — and if you died, that income stopped. In that case, while you’re still here, you may want to look into a policy to cover that obligation and transfer that risk.

Keep in mind that the risk of dying prematurely vs. getting sick or injured is significantly lower.

The coverage you have at work generally covers up to two years of your salary. Sometimes, it is much less. It is usually not enough to ensure that people who depend on your income will not suffer financial hardship.

The good news is, since the risk is much lower and this is a temporary need, the cost for this is usually very small. It’s easy to manage as part of your household cash flow.

Bottom line: does someone else depends on your income? Then you could look into an income replacement policy to transfer that risk to an insurance company. At the same time, you can manage a level payment over a much larger period of time.

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