Are you due for an insurance check-up?

How to decide what best suits your needs

Deanne Gage 11 February, 2014 | 7:00PM

When we think about our investments, we generally review things at least every year. But how often should we be reviewing our insurance policies? Bruce Cumming, a financial planner and president of Cumming & Cumming Wealth Management in Oakville, Ont., likens insurance strategies to wills and estate planning -- something to definitely update but not every year. He reviews insurance every three years or when there's a life change.

The first key question to ask is: How much insurance do you need? Your magic insurance number depends on what's going on in your life. You may have some group policies through your employer and an advisor will review whether they will in fact meet your needs.

All insurance products sound necessary in theory -- insurance if you get disabled or critically ill, insurance to pay for a nursing home, insurance for your loved ones when you die -- but few people can afford all types and must prioritize on the basis of their most pressing concerns. For the vast majority of Canadians, that means life insurance.

Perhaps you're a married couple who wants to set up a life-insurance policy to pay off the mortgage and other debts in case of one of you dies suddenly. This is common among couples because few want to pass debt on to their loved ones, says Cumming. "If you're going to suffer the loss of a spouse, for instance, you don't want to end up in the financial penalty box," he says. "You're already in the emotional penalty box; you don't want financial woes as well."

But does your existing life-insurance policy still meet your protection needs? Using the above married-couple example, let's say there's now a larger house -- and, accordingly, bigger mortgage -- and three children. You'll likely require a larger policy for the increased debt load and provide protection for the children, says Mark Halpern, president of Toronto-based illnessPROTECTION.com.

Some may also want their policy amount to replace the deceased spouse's income, which would allow the family to maintain their lifestyle, Halpern adds. He suggests sitting down with an advisor to determine the appropriate amount of coverage.

"Most people don't do analysis. They just come up with a number that sounds right," says Halpern, who holds the designations of certified financial planner (CFP) and trust and estate practitioner (TEP). "But you can't afford to take a risk of having the wrong number."

While a $1-million insurance policy sounds impressive, for example, low interest rates mean it will not generate as much income as many people believe. "Invested at 3%, that's $30,000 a year in income before tax," Halpern says.

What insurance is best for your situation?

Some clients come to Halpern with bank mortgage insurance. The product sounds simple enough -- pay off the mortgage when you die. But here's the problem: your premiums remain the same even though what's being insured -- your mortgage -- decreases as time goes on. And underwriting isn't completed until you make a claim -- always risky since your claim could be denied.

Halpern notes that with a personally owned term policy, not only do you get underwriting upfront, but a guaranteed amount of money on your policy. For the same cost as your mortgage insurance, a term policy buys more insurance coverage. This policy can be used for things other than your mortgage, he adds.

Term comes in 10- or 20-year policies. Cumming likes 20-year policies for young families since it protects the family debt payments and/or lifestyle until the children become adults.

Once debts are paid off and kids are out of the house, the couple may no longer require life insurance. But for those who have more savings and are considering retirement strategies, Cumming may recommend term-to-100 insurance, which will pay out the face policy amount upon death.

"It's an excellent long-term investment and guarantees an estate for the kids," Cumming says. "It might be important for you to leave $100,000 or $500,000 for the kids."

Cumming also discusses long-term care (LTC) insurance with clients in their 50s who see their aging parents going through health issues. LTC would help with expenses if you're no longer able to conduct basic daily living activities. You could use the money to hire a caregiver or help pay for a private nursing home. Just one issue: LTC doesn't come cheap. Instead of paying up for an LTC policy, says Cumming, individuals may instead decide to set aside some funds privately.

Long-term disability insurance is something Cumming especially recommends for sole proprietors. You may have left your employer to run your own business and so no longer have a group disability policy. But since disability insurance is based on your income, it will take at least a year for the newly self-employed to qualify and prove they actually have income to protect.

Cumming says there is one disability product available for the first year but the payouts are small and it's expensive to purchase. So he recommends they get the right coverage after the first year. He acknowledges that it's definitely a gamble.

Finally, critical-illness insurance may be a consideration for people, Halpern says. Like LTC, it can be expensive. The underwriting process to qualify for a policy is extensive. But upon diagnosis of heart attack, cancer, stroke or other particular illnesses, your CI policy promises to pay out a tax-free lump sum that can be used how you see fit, whether it's paying off debt or on experimental medical treatment, he says.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.