Don't talk to me about insurance!

Most of us have the same visual when it comes to insurance: the friend or acquaintance that has nothing but our best interests at heart, trying to convince us that our future generations will perish destitute because of our irresponsible decision to not purchase a policy from them.

Often, this is a deserved stereotype; but rather than saying no in principal, maybe we should look a little closer and try to understand where it really does work in our favour. First, let’s talk about why. The only reasons an individual should be buying insurance, is to replace an income, create an estate or provide for care. There are business cases which are very effective and beyond this discussion, but for the average citizen, these are generally the only reasons you should purchase insurance.


Income Replacement

Insurance is one way to generate income should you become unable to work or deceased.

Disability is a form of insurance designed to provide income should you be unable to work for a specific period of time or permanently. It can be expensive and the health standards more stringent than those for regular life insurance. A hybrid of disability, critical illness pays out a lump sum of money if you are diagnosed with an illness that is on a pre-approved list (the list is quite extensive and usually includes most major illnesses). Premiums can be substantial, but often a rebate system is available if you don’t actually become ill and need to use it.

Life insurance is also used to generate an income; in this case, for the surviving family members. The principal can be invested to generate a regular income that will replace the deceased spouse’s income.

Often people are able to purchase insurance through their employer; but if that is not an option or you require portability you should consider buying it individually as well.


Estate Creation

For people whose potential estate is less than what they believe adequate to leave behind for beneficiaries, life insurance is a cost effective way to create an estate. Assuming you are healthy, or even if you are not (depending on what is wrong with you), you can purchase a life insurance policy for a relatively low incremental cost over a number of years which pays out on your death. If you have a pre-existing condition, you can often purchase life insurance with a premium rating. As your assets grow, your need for insurance usually declines.

When considering a life insurance policy, the first questions you should ask yourself are how much of an estate do I want to leave after I am gone, and how much income does my family need to generate if they no longer have the benefit of my income?

The answers to these questions will help you to determine how much insurance you will need. To calculate the amount of life insurance you would need to replace a specific income, simply divide the income you are looking to replace by the rate of return you expect to achieve (be conservative).

To replace an income of $75,000 would require $2,500,000 at a rate of return of 3%.

75,000/.03 = 2,500,000 (Remember though, this is before inflation and taxes)


Care Provision

With an aging population whose numbers have been fuelled by coming of retirement age of the baby boom generation, and longer life expectancies as a result of healthcare advances, the need for capital to cover long-term care costs has never been greater. Long-term care insurance is a tool to put aside funds for the time it may become necessary for you and/or your spouse to move into a care facility. For those who want some say in the location and type of facility they want to be in, the cost can be prohibitive. Often the assumption is that you will sell your home or use other assets to cover the costs; with uncertain markets and rising costs this can be a risk not everyone is comfortable taking. If you are a married couple, the onset of Alzheimer’s or dementia may necessitate that only one of you may requires additional care; this may limit your options in using the family home as a way to fund the costs of care.


There are many variations of life, disability, critical-illness and long-term care Insurance available. While these options are important once the decision has been made to purchase insurance, ultimately they are all a way to leverage the funds you’re able to put up today for a larger pay-off sometime in the future. Whether it is to provide an income when you can’t, to leave an estate behind when you aren’t able, or to keep you in comfort should you become unwilling or unable to care for yourself, there’s no magic bullets or great deals. There’s only the amount of money you need to provide for and the amount of funds you have available to purchase it with. While there may be some differences, the base costs come down to a set of actuarial tables that are very similar; everything else comes from the marketing budget.


Questions or comments? [email protected] or http://yourlifeyourplan.ca

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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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