Are you under-insured or over-insured and which is worse?
To be honest, both can be equally costly. Read on to learn more about the basics of life insurance.
The first thing to establish is your NEED for insurance. A good basic needs analysis can be broken down into the following components:
Death Expenses – what will be the cost of your funeral, lawyer fees and taxes upon death?Income Replacement – if you have a partner or dependents who rely on your income what would be the cost to them if you passed away? (Typically, your income multiplied by a number of years).
Mortgage/Debt – if you have an outstanding mortgage balance, lines of credit, student loans or existing car loans what would be the cost to pay these off?
Education Costs – how much would money would you require to take care of your dependents’ education expenses?
How can one possibly be over-insured?
Well, if you are paying more than you need to be for insurance on lines of credit, car loans, or on mortgage protector insurance, you may be OVER Insured. For example, you pay $10/month on your line of credit, $100 monthly on your mortgage and $60 on your car payment. Paying $170 in monthly premiums with no residual benefits for family in the event of your death is a costly mistake. A basic term policy covering all those loans for the length of time required can be significantly less.
The same is true if you have an individual life, critical illness or disability policy for an amount that is far more than you really need. If you are single, with no dependents a simple life or disability policy for the amounts of any outstanding loans + funeral expenses would be enough. For example: Bill is a 24-year-old male who recently purchased a house, he has an outstanding mortgage of $150,000, a car loan of $20,000 and estimates expenses upon death may run around $15,000, a straight forward term policy for the amount of $185,000 would be enough to satisfy his needs. He does not need a $500,000 policy as the premiums would be more expensive and he really doesn’t need it. Bill could also take the route of applying for mortgage protector insurance, and insurance on his car loan but Bill would likely be surprised that the premiums from an individual life insurance company may be much lower than those offered by the bank, mortgage dealer or car dealership. He could then “opt out” of the costly loan insurances offered to him as his individual policy would satisfy all his needs.
How can one be under-insured?
Well having NO insurance would be one way to be under-insured. Another way is to not have insurance equal the needs of those insured. In this example we will take Ryan and Cindy. They are a young married couple with one child. Both Cindy and Ryan work full time, have a mortgage of $200,000 and $60,000 in outstanding car loans. Cindy works in healthcare and earns $75,000/year, Ryan in construction earning $60,000/year. To cover Ryan’s needs we would factor in the mortgage $200,000, income replacement ($60,000 x 10 years = $600,000), car loans $60,000, education for their son $50,000, plus funeral expenses of $15,000. Ryan would require $925,000 worth of coverage. Cindy, factoring in her higher income, would need $1,025,000. Most of these needs cease to exist once the mortgage/loans are paid off, or their son is grown – an approximate 20-year time frame. Therefore, Ryan should have a term policy for $925,000 for 20 years and Cindy $1,025,000 for the same time-frame. What Ryan and Cindy chose instead was an expensive whole life policy for only $250,000 each. Unfortunately, this insurance is not right for either of them. They are overpaying to be under-insured. If something were to happen to Ryan or Cindy, the other partner would be left covering a lot of expenses on their own, and the needs of the family would not be met by the insurance they purchased.
What are the different types of insurance and why would someone choose whole or universal (PERMANENT) life over a straightforward term policy?
Permanent insurance makes sense for people who do not know when their insurance need will end.
It is best suited to people who want to leave a legacy.
It also makes sense for people who may become un-insurable: if your child has a chance of developing a hereditary illness making it difficult for them to afford insurance when they are older, it may make sense to invest in a permanent policy now.
If you have more money than you could possibly need, it may make sense to invest in a permanent/whole life policy, because the benefit is always paid tax-free. So, if you are wanting your money to be passed along to your heirs, and avoid paying taxes in investments now, a permanent policy might make sense.
Finally, if you believe your estate may face high taxes upon your death (say you want to pass along a family cabin that has increased in value significantly) but don’t want your children to pay high taxes when inheriting it, a policy can be used to offset the taxes owed when the property is passed along after your death.
If none of the circumstances above are relevant to you – it is likely you do not need whole or permanent life insurance and if you hold a permanent or life insurance policy you are likely over-paying on premiums which can be as much as five times those of straightforward term policies.
So – to summarize some of the worst mistakes people can make regarding insurance:
Not being insured
Having multiple insurance policies on car loans/mortgages/lines of credit/credit cards when one basic term policy would likely suffice
Being insured for more money than you need
Not having enough coverage to meet your needs
Having a permanent life policy when it is not required
If you have any questions about Life, Accident and Disability, or Critical Illness Insurance I encourage you to speak to a licensed Insurance Professional today. Have them evaluate your current policies at no obligation to you, and insure that your needs, and the needs of your family are being met.
Brooklyn Scott is a Financial Advisor/Mutual Funds Representative for Lewis & Jones Group/Desjardins Financial Group/Desjardins Financial Security Investments Inc. in Killarney, Manitoba.
Mutual funds are distributed through Desjardins Financial Security Investments Inc. For insurance products, Desjardins Financial Security Investments Inc. acts as a national insurance brokerage agency.
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