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A man and woman sitting at a table looking at papers, discussing insurance options during Financial Literacy Month.

Financial Literacy Month: A Primer on Insurance Protection

Category 1: Cover needs

Do you need clarification on insurance jargon? Do you need help to decide if you have the right coverage? You’re not alone. Many Canadians need help understanding key insurance concepts outside of car insurance and home insurance.

Life and health insurance play crucial roles in safeguarding your finances against life’s unexpected events. Financial Literacy Month offers the perfect opportunity to brush up on your insurance literacy. Thanks to the Financial Consumer Agency of Canada for this ongoing initiative each November.

This primer explains the main types of life and health insurance in plain terms. We’ll discuss how insurance fits into a savvy financial plan. You’ll learn smart strategies to protect your assets and income.

Let’s start demystifying insurance together.

Why Insurance Matters for Your Financial Health

Insurance provides financial security when the unexpected strikes. A severe illness, injury or disability can lead to lost income if you’re unable to work. Long-term care costs for in-home or nursing care can drain savings rapidly. The death of a breadwinner can leave family finances in a precarious state without sufficient life insurance in place.

Having proper insurance coverage means:

  • Replacing income if you become disabled
  • Paying for nursing and hospital expenses excluded from government or employer plans
  • Providing an income stream for your dependents if you pass away
  • Passing wealth to your heirs tax-efficiently

Without adequate insurance tailored to your needs, a single event can jeopardize everything you’ve worked towards. It can impact not just you but family members who depend on you.

Insurance also plays an essential role in financial and estate planning for high net worth individuals for wealth transfer and succession planning.

The key is reviewing your specific situation regularly. Audit what policies you have in place. Check if they still fit your needs as your life circumstances change. Work with qualified independent advisors to explore and implement strategies like trusts and tax-efficient structures.

Let’s walk through the main types of insurance coverage you should consider.

Life Insurance: Protect Your Family’s Financial Future

Life insurance provides financial protection for your loved ones in the event of your death. The amount of coverage you need depends on what you wish to cover:

  • Income replacement – If you passed away, how much income would your family need to maintain their lifestyle? Look at your household expenses and how much you save.
  • Debts – Would your death trigger debts that beneficiaries would need to repay, like mortgages?
  • Final expenses – Factor in funeral costs, medical bills, taxes and probate fees.
  • Education funding – Will children or grandchildren need support for their primary and higher education?
  • Estate planning – Consider estate taxes and liquidity to settle your estate. Life insurance helps pay the large bills tax-free without selling other assets. 

For high net worth Canadians, permanent life insurance offers lifetime coverage and tax-advantaged growth potential. Premiums are generally higher than term insurance, but policies can be structured for estate planning goals like providing quick cash to pay taxes or provide inheritances.

Term life insurance provides affordable coverage for a set period of time, such as 10 or 20 years. It is cost-effective protection for temporary needs like repaying a mortgage and replacing income while children are dependents.

Work with qualified advisors to analyze your assets, debts, income sources, tax situation, and obligations to determine suitable life insurance coverage. The needs assessment should be updated regularly as your family situation and net worth evolve.

Disability Insurance: Replace Income if You’re Unable to Work

Many Canadians would feel the financial strain if they were suddenly unable to work due to illness or injury. Disability insurance provides income replacement in such a scenario. It can be a lifeline for maintaining your lifestyle.

There are two main types:

Short-term disability insurance typically covers temporary disability from a week to 6 months. It typically replaces 60-80% of gross monthly income. Benefits often start after a disability lasts 7-14 days.

Long-term disability insurance provides coverage if a disability lasts longer than a period like 90 days. Benefits could replace around 60% of gross income and continue to age 65.

Some employers provide group disability insurance. However, personal policies often have a more generous definition of “disability” (meaning it may be easier to get a claim approved) and optional inflation protection. Check if you have coverage gaps that personal coverage could fill.

The younger and healthier you are when you get disability insurance, the lower your premiums. Coverage may be available while in university for groups like medical students, residents or fellows.

Financial advisors generally recommend having enough coverage to replace 60-70% of your current income before tax if your disability benefits are tax-free. Review your specific obligations to determine an appropriate level.

Critical Illness Insurance: Extra Financial Protection

A severe illness diagnosis can hit your finances through lost work time and medical costs not covered by provincial health insurance or employer benefits. Critical illness insurance provides a tax-free lump-sum cash payment if you are diagnosed with a qualifying condition.

You can use the cash to cover:

  • Loss of income during treatment and recovery
  • Travel costs to access specialized treatment
  • Home health-care expenses
  • Child care costs
  • Experimental therapies not covered by government or group health plans

Policies specify the illnesses covered, which may include cancer, stroke, heart attack, kidney failure, and coronary artery bypass surgery. Plans usually exclude pre-existing conditions. Read definitions closely to understand the qualifying criteria and ask questions.

The benefit payout typically occurs once per condition. Amounts are usually $25,000 to $2,000,000. Coverage is typically for 10 years, 20 years, to age 75, or to age 100. 

Long-Term Care Insurance: Cover Assistance if You Can’t Care for Yourself

Advancing age often brings declining independence. Long-term care insurance helps fund daily living assistance if chronic conditions leave you unable to care for yourself. This includes in-home health aides or nursing home care.

The costs add up quickly for home care services or residence in long-term care home.

Long-term care insurance covers a portion of these expenses. Policies have a maximum benefit amount, usually $100 to $200 per day. Benefits may be payable for two years, five years or for the rest of your life. Lifelong protection with inflation protection provides the most comprehensive coverage and has the highest premiums.

The younger you are when purchasing a policy, the lower your premiums will be. Those with pre-existing conditions may be denied coverage. 

Many Canadians prefer self-insuring for long-term care costs. Others appreciate the predictability of premiums and guaranteed coverage that long-term care insurance provides. Assess your overall financial picture when deciding.

Essential Factors When Structuring Insurance Plans

The right insurance coverage is highly personalized for your financial situation, assets, obligations and estate planning objectives. Here are vital factors to consider:

Affordability – Balance premium costs with the value insurance products provide through risk mitigation and wealth transfer. 

Health – Declining health leads to higher insurance premiums, if protection is available at all. Get coverage when you’re younger and healthier.

Age – Insurance costs rise steadily with age. Long-term care and disability insurance are more affordable for younger applicants.

Family – Assess if income and debts are tied to one or both spouses. Each may need tailored life insurance. Having children is a trigger to re-evaluate needs.

Investment real estate – Those with significant real estate assets often need higher life insurance coverage for estate liquidity and capital gains taxes.

Business interests – Owners should have buy-sell arrangements funded by life insurance to facilitate succession planning and provide liquidity.

Tax efficiency – Permanent insurance offers tax-deferred growth. 

Inflation – Increasing coverage to offset inflation provides more peace of mind.

Frequently Asked Questions

How much life insurance do I need?

There is no one-size-fits-all answer. Coverage should be based on an analysis of your income, debts, final expenses, education costs for children, taxes at death, and other financial obligations. Permanent life insurance that accumulates cash value is often used for estate planning purposes in addition to term life insurance for short-term income replacement.

What does disability insurance cover?

Disability insurance replaces a portion of your income if injury or illness prevents you from working. Short-term disability benefits typically last for 6 months or less. Long-term disability benefits can continue until you are 65. Personal policies can enhance group coverage from an employer.

What is the benefit of critical illness insurance?

Critical illness insurance provides a lump-sum cash payment if you are diagnosed with a serious condition like cancer, stroke, or heart attack. The tax-free cash helps cover loss of income, travel expenses for treatment, and extra costs like home care.

Who needs long-term care insurance?

Those concerned about the costs of their care if they become unable to look after themselves may opt for long-term care insurance. Policies cover a set amount per day for assisted living in a facility or in-home care. Premiums are lower when coverage is put in place at a younger age.

How often should I review insurance coverage?

Aim to review policies at least annually or when major life events like the following occur: getting married, having kids, buying a home, changes in income or net worth, new business ventures, retirement.

What strategies can reduce premiums?

Purchasing permanent life insurance at a younger age locks in lower premiums. Paying annually instead of monthly often reduces the premiums. Term policies have lower premiums than permanent insurance.

How can insurance facilitate estate planning?

Permanent life insurance creates a tax-free death benefit that can provide liquidity to settle estates. The cash benefit can fund taxes and equalize inheritances.

What coverage do businesses need?

Buy-sell arrangements funded by life insurance ensure liquidity is available to transfer ownership if an owner dies. Life insurance on key employees protects against lost income. Commercial policies cover risks like fire, theft, and liability.

Who are the top insurance providers?

Leading insurance companies in Canada include BMO Insurance, Manulife, Sun Life, RBC Insurance, and Industrial-Alliance. Compare ratings for financial strength when choosing a provider. 

Take Action to Protect Your Financial Future

We always have competing demands for our money. Prioritizing proper insurance coverage can give you confidence and peace of mind. You can face life’s uncertainties knowing your family and finances have an extra layer of protection.

Financial Literacy Month is the perfect time to schedule an insurance review. Reach out to have a conversation about your unique situation and goals. Together, we can ensure you have the right insurance solutions in place as life evolves. Here’s to your financial resilience and your family’s continued prosperity!