It’s funny how I used to be against most insurance agent and their products and that I am slowly changing my mind It is probably because I work with a smart insurance representative in my office He is showing me a bunch of great tips on ways you can use insurance for your benefit. Even thought, I still think that insurance products are being crafted in a dark tower by an evil scientist, I must admit that there are a tons of great strategy attached to them!

So today’s strategy is very interesting for your grand parents (the sweet spot is about 65 to 75 years old). In order to realize this strategy, you need two products offered by insurance companies:

- A life income fund

- A life insurance

So the mechanism is pretty easy:

Let say that you have 100K in a certificate deposit (CD), you will probably have a rate of 3% to 5% (more 3% to 4% these days ). Instead of making such low interest, you could use your 100K and by a life income fund from an insurance company. Since you are not getting any younger, the rate of distribution would be fairly appreciable (around 10% to 11%).

So let assume that you get 10K every year based on a 100K investment in a life income fund. The good news is that if you are 65 and you live up to 95, the insurance company will pay you a lot more than what you could have get from your 100K in a certificate deposit. However, the downside is that if you die at the age of 67, you would have received only 20K and your estate will be left with nothing of the original 100K (insurance companies have to make money somewhere, don’t they?).

This is why we insure your life with a life insurance. The insurance premium for a 65 year old (non-smokers ) would be quite high. It will probably be around 3,5K per year. However, at your death, your estate will still have the 100K while you had been able to enjoy the fruit of your money alive.

Let put everything back together:

- You purchase a life income fund for 100K

- You will receive 10K per year from it.

- Tax rate in Canada on life income fund is quite interesting. Therefore, you will only pay 2k of taxes on this income.

- Therefore, you will earn a net income of 8K per year.

- In order to protect your estate, you will purchase a life insurance for 3,5K per year.

- The insurance premium will be paid by your life income fund.

- Therefore, you will receive a guaranteed after tax amount of 4.5%

Wait, I could have made between 3% and 5% with my certificate deposit, so what’s the point of doing this whole thing for a guaranteed rate that I could get anyway?

The thing is that your 3% to 5% is before tax return. As interest income is fully taxable, chances are that you will pay a 30% tax on it (in Canada). Therefore, your after tax return will be between 2.1% and 3.5%…

As you can see, the maximum you can earn with a certificate deposit is 3.5% after tax. Considering our current economic situation, it will even be rough to get your 5% before tax interest rate.

Therefore, it could be a good idea to talk to an insurance agent in order to validate the strategy and make real calculation to make sure it is applicable to your situation. Keep in mind that by doing so, you will earn a better interest rate on your investment, but you will never be able to access your capital until your die. Therefore, if the strategy is suitable for your situation, I still suggest to not put all your money into this strategy.

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It is not in my habit of writing about insurance since I am not an insurance representative. However, as a financial planner, I still need to master the basic of all kind of insurance in order to explain them to my clients (and not to determine how much they need, that’s the insurance rep’s job). After reading a reader’s comment on my latest post about critical illness insurance, I decided to explain the difference between the critical illness, long term care and disability insurance.

Critical Illness

Insurance representatives; correct me if I’m wrong, but I find that the critical illness is the easiest to understand of the three type of insurances. There is a list of critical illnesses (such as heart attack, cancer, etc.). If you receive a diagnostic of one of them, you get your insurance check. Then, you can do whatever you want.

The critical illness insurance contract offer many options such as premium reimbursement (very useful for setting a split dollar strategy). Even though you don’t have a company, you can still ask for this option and receive all paid premiums upon cancellation if you have not been sick. With this option, the real cost of getting insured is the inflation plus the additional fee charged for this option.

Long Term Care

You have two major options when selecting the long term care insurance. You can either ask for a total amount (let say $200,000) that will be disbursed upon a certain amount of time (depending of your needs) or you can ask for steady monthly income flow coming from your insurance (let say $1,000 per month).

In the end, the long term care insurance is used when you request specific help to keep living. For example, if you need a nurse to take blood pressure and give you medicine or if you need someone to cook and make you eat because you are disable, the long term care insurance will pay for those fees (according to the contract obviously). This is also very helpful if you need to move into special care residence (which astronomic cost!).

Disability Insurance

This is probably the most trick type of insurance. Disability insurance payment will kick in upon… disability. The problem is that there is a lot of definition of disability (own occupation, all occupation, etc.). You better be careful to know what you are insured for. This insurance is very useful for professionals (doctors, lawyers, dentists) since they are self employed and their income depends on themselves. If you work for a company, you might be covered too. However, you must look at the amount covered (it is either an amount per month or a percentage of your salary), the time you are covered (for example, disability insurance on debts will cover your payment for a certain amount of time (around 24 months)).

If you are being cautious with the definition and terms used in your contract, disability insurance can be a very good protection tools.

I hope that it gives you a better understanding of these type of insurance and if you need more info, don’t be afraid to ask!

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The Critical Illness Insurance Explained

Critical illness insurance is probably the easiest type of insurance to understand. Even better, there is no ambiguity as of to know if you will get your check or not.

When you subscribe to a critical illness insurance contract, there will be a list of about 23 illnesses in the contract. If you ever get a diagnosis of any of these critical illnesses, you receive your check right away. Plain and simple

You can use this money for whatever you want; spend times with your family, get the best health care possible, pay off your debts, etc. Once you get the money (that is tax free like a life insurance policy), you are free to use it as your will.

The good news is that people can now survive several critical illnesses such as cancer and heart attack.

What if I never get sick?

For a small amount added to your insurance premium, you have the possibility to have all the premiums fully reimbursed after 15 years (see the split dollar strategy for more details).

Also, you can pick the option of having your insurance premiums reimbursed upon death as well. So basically, the critical insurance is almost free (we’ll get to this point at the end of the post).

Best doctors

Another great feature that can be offered through critical illness is to get access to Best doctors. This is a company that will take your file and find the best hospital in the world for your specific illness. They will book your flight, car and hotel room along with book your appointment with a doctor in this hospital.

This service is obviously quite expensive but when you just receive your critical illness insurance check, you can then afford it!

An insurance that is almost free?

Well, there is still a cost even if you get all your insurance premiums back. This is the cost of inflation. If you pay $3,000 per year for 20 years, you will receive $60,000 upon cancellation (or death). If you would have invest 3K at 2% (let’s consider the inflation rate low , your amount with inflation protection would have been almost 73K.

Therefore, you can calculate that the real cost of a critical illness in this example is about $650 per year. You can consider that your cost is higher considering that you could have invested this 3K in the market and get 7% per year. Therefore, your cost of opportunity would be 63K (123K – 60K)…

Disclaimer: I’m not an insurance agent and I do not sell any type of insurance, critical illness insurance included. I’m only reporting information on this blog. Please book an appointment with an insurance professional in order to assess your needs.

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So here’s the deal: You have a corporation paying a $5,000 yearly premium for critical illness insurance. For a young man of 37 years, it could roughly represent an insurance of 200K if he would get a critical illness during the process.

So the premiums include the following:

- A critical illness insurance of 200K payable upon diagnosis (23 listed illnesses such as heart attack, cancer, etc.)

- Premium reimbursement in the end of the policy owner upon death of the insured

- Premium reimbursement option in the end of a named beneficiary (the individual owning the company in this situation)

Every year, the individual will have to declare a taxable benefit of $297 for being the beneficiary of the insurance premium reimbursement (here’s come the split dollar strategy ;-0 ).

So 15 years from now, you are still not ill (let’s hope for it!) and you cancel your critical illness insurance.

You will receive a nice cheque from the insurance company of $75K (so 5K times 15 years) free of taxes! Really? Not really You actually paid a big $142 every year in taxable benefit provided by your company through the critical illness insurance. So total paid in taxed over 15 years is $2,138 ($142 X 15 years). 2K on 75K… 2.85% in taxes

I actually run the numbers to see what would happen if you invest the 5K every year within the company on the stock market and pay yourself a dividend (taxed at 33% for this example) after 15 years.

Well, in order to receive $72,862 (75K – $2,138 in taxes) from your company at a 33% tax rate, you need to have $108,750 within your company. If you invest $5,000 over 15 years within your company at a after tax yield of 5%, you will get your 108K. However, in order to make 5% after tax, you need to make about 7.15% (let say that you are taxed at 30% within the company). So if you are 100% that you will make more than 7% in the next 15 years, you don’t need this strategy

Personally, I would certainly consider putting a part of my company liquidity into it . Then again, I do neither recommend nor selling the Split Dollar Strategy. I am not an insurance licensed representative and I am simply telling you that you might want to look at the Split Dollar Strategy closer with an expert and professional that knows your personal financial situation.

I hope you enjoyed the demonstration of the split dollar and please comment if you have any questions

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This post come over a discussion I had with one of my friend. I was complaining about the fact that we have to offer (can’t mention the word “sell” ) a bunch of product to our clients while I really want to help them and only offer them solutions to their needs instead of becoming a car salesman

I took the example of credit cards and insurance product. In regards to credit cards, if the person needs one, I’ll surely show him what we have. However, I feel kind of cheap asking my client if he wants a Master Card after he just signed a $500,000 investment transfer with me!

But today I’ll concentrate on the insurance product on credit. First of all, insurance should be purchase for only 3 reasons:

1- to cover an amount for financial dependants (spouse, kids, family members that you are taking care of).

2- to use it within an investment or tax strategy.

3- to play Santa Claus one last time after you passed away.

So we will all agree that if you take insurance related to a debt, it is only to satisfy #1. In order to cover your need, you have 2 options: buy a life insurance (term, universal, this debate will not be discussed here) or you buy a life insurance attached to your debt.

The thing is that if you are only looking to buy life insurance, you will pay a huge premium on the credit insurance compared to a regular life insurance. You can actually buy a term life insurance for 20 years (almost the life of your mortgage) for an amount 4 to 5 times bigger with the same premiums attached to credit insurance. Not bad huh?

On top of that, if you die after 10 years, your life insurance will write a full check as of your credit insurance will only pay the remaining balance of your debt (about 60 to 70% of the original amount of your mortgage).

So why the hell banks are offering this product?

Yeah…. Sorry for those who have a credit insurance on their mortgage, you are probably pretty pissed off by now

However, there is good news! If you have a critical illness or disability insurance attached to the very same debt, you probably did a good deal. I said probably This is a case by case analysis.

The thing is that both critical illness and disability come in combo or trio with life insurance on debts. Therefore, in order to have a great deal on one or both type of insurance, you must get the life insurance first…

In regards to disability insurance, the major advantage is that it’s the only way you can get more than 70% of your income. In fact, if you have a good job, your employer insurance will probably cover for 70% of your income (watch out for the waiting period and conditions). By law (in Canada), you are not allowed to purchase a private disability insurance that will exceed 70% of your income as total amount insured for an individual.

However, the disability insurance based on your debt will compensate for your payment for a specific period. Therefore, it is not related to your income but to your payments

In the end, I would strongly suggest that you check with your banker and insurance broker to compare different insurance alternatives. You might not have the best package right now

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