The only insurance guide you need

My 24-year-old daughter, Laura, recently started a new job and, like many new employees, she had to navigate a maze of choices in her group benefits plan. She earns a modest salary and there’s little left after paying for basic living expenses. So her main goal was getting the coverage she needs for the lowest cost.

As Laura and I went through the insurance options in the booklet, even an extra $50 in premiums for more coverage made her sit back and consider: did she really need to spend that much for a cost-of-living adjustment on disability benefits? Did she even need life insurance at her age? Laura soon understood that buying insurance isn’t simple. Whether you’re trying to insure your life, your income, your health, your car or your home, the costs add up quickly.

I gave Laura three pieces of advice. First, only buy insurance to protect yourself from unlikely events. Next, only buy enough insurance to maintain your standard of living: no more. Finally, forget about buying insurance for life events that won’t severely strain your finances. That means in most cases it pays to focus on the basics in several key categories: disability, life, travel, auto and home insurance. It can be easier than you think. “When people come to see me, they want to know one thing: what’s the right insurance for my budget?” says Jennifer Moore, a certified financial planner in Toronto. “I do my best to make sure all of their risks are covered off for minimal cost.”

Here’s how to figure out what insurance you need right now—and which types you can forget about all together. Just remember, before you buy anything, sit down with an independent insurance broker or fee-only financial planner who understands your situation so you make an informed decision. 

Disability insurance

Disability insurance—which pays a benefit if you suffer an accident or disease that prevents you from working—is probably the most important coverage you can get. That’s true whether you’re single or have a family who depends on your income. A typical 30-year-old is four times more likely to become disabled than die before age 65. And one in six Canadians will be disabled for three months or more before age 50. “When I ask clients what their largest asset is, they often say it’s their house,” says Tim Landry, a living benefits consultant in Montreal. “But for many people, their largest asset is their future income-producing ability. If you have 30 years left to retirement and you’re making $100,000 a year—that’s $3 million. Ensuring that is crucial for peace of mind.”

Long-term disability (LTD) insurance provides a monthly income if you’re unable to work due to a serious injury or illness. You can also purchase critical illness insurance, which pays a tax-free lump sum if you’re diagnosed with one of several illnesses covered by your policy (such as cancer, stroke and heart disease). So which is right for you? In almost all cases where a spouse is working and providing ongoing income for the family, LTD insurance is by far the best option. Critical illness polices aren’t necessary for most families on a limited budget.

Not understanding the difference between the two has kept David Singh, a 38-year-old environmental planner in Calgary, from protecting his family from income loss were he to become disabled. “With three kids under eight and a wife who works only part-time, money is tight,” says Singh. “We aren’t sure it’s necessary and believe it may be costly. So for now, we have just a secured line of credit to fall back on if anything happens to me. We may be rolling the dice.”

Rolling the dice, indeed. For families like Singh’s, disability insurance is a must. The good news is, if you work for a large company LTD coverage is probably part of your benefits package, and in some cases it’s mandatory. Typically, such a plan will pay you a percentage of your monthly income if you are unable to work, and these payments continue until you return to your job, reach age 65, or die. But coverage differs greatly from one employer to another, and if you’re self-employed or you work for a smaller company, you may have no coverage at all.

Disability plans will either cover you for “any occupation” or “own occupation.” The latter is much better, because under this definition total disability means the inability to work at your regular job. With “any occupation,” total disability means the ability to perform the duties of any job. So if you become disabled but you could do less demanding work, you may not get the benefit. Often plans offer own-occupation coverage for the first two years of the benefit period and then switch to any-occupation after that.

To figure out whether you have enough coverage, contact your company’s HR department or office manager and have them walk you through your group benefits. If your company plan covers at least 60% of your pay, you likely have enough coverage. If you’re single, have no kids, or if your mortgage is paid off, you likely could get by on a policy that pays 50% of your salary. “List all your basic expenses for the year, including mortgage payments, utilities, food, rent and transportation,” says Lorne Marr, an independent insurance broker and director of business development for LSM Inc. of Markham, Ont. “And keep in mind that many disability plans include a cap on benefits.”

For instance, your plan may cover 60% of your gross income, but only up to $3,000 a month. That means if you’re earning more than $55,000 a year, you won’t actually receive 60% of your salary. If you earn $150,000 annually, the $3,000 a month maximum amounts to only 24% of your pay.

That’s why, if you earn a high income, you may want to consider a private disability plan to supplement your group benefits. To give you an idea of the cost, a private “own occupation” disability policy for a 40-year-old male white-collar non-smoker that pays $3,000 a month until age 65 (90-day waiting period) would cost about $122 a month. The same policy for “any occupation” would cost about $76 a month. (For a 40-year-old female, the premiums would be slightly higher, since women have a lower mortality rate on average but a higher chance of sickness (called “morbidity” in the industry).

When working out how much disability insurance you need, keep in mind that payments from a private plan are tax-free, while the payout from most corporate plans is taxable.

Life insurance

For Daniel Stinson and his wife Brigitte, money is tight. When Brigitte, 34, resigned from her job last year to be a stay-at-home mom to their 14-month-old daughter Rachelle, she lost the life insurance coverage she had through her employer’s plan. “That got me thinking,” says Daniel, a 36-year-old compensation specialist in Toronto. “We have a mortgage and child costs, so we’re making more critical decisions about what we spend money on. I’d like to avoid paying higher premiums for life insurance as I get older and switch jobs.” For that reason, Stinson is opting out of his group life insurance plan and replacing it with a 20-year term policy with fixed premiums. “Locking in a price now when I’m in my 30s will be more cost-effective in the long run.”

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Stinson knows that life insurance is essential if you have a family or dependants who rely on your income. If you die without proper coverage, your spouse and kids may be unable to pay the mortgage or meet daily expenses. The key is getting the right kind, and for most people that’s term life.

With term life insurance you pay a fixed premium that covers you for a specific period—usually 10 or 20 years—after which you would need to renew and face much higher premiums. The other category is permanent insurance—such as universal life and whole life—where the premiums start out higher but stay level throughout your life. Permanent policies are unnecessarily costly for most young families, whose priority should be getting adequate coverage at a reasonable rate.

Start by doing a needs analysis. How old are your children? Would you need to pay for daycare if a spouse died—or, if you’re a single parent, if you died. “Your life insurance should cover your mortgage and personal debts, as well as replace 10 times your income if you have kids under age 10—five times your income if your kids are older than 10,” says Marr. Stinson, who has a $300,000 mortgage, three kids under 10, and a salary of $100,000 would need a 20-year policy with a death benefit of $1.3 million—minus whatever savings he already has.

If you have a mortgage, you have probably been offered a policy that would pay off the balance if you die. Moore doesn’t recommend these policies: not only is mortgage insurance more expensive (by several hundred dollars a year), but your coverage decreases as you pay down the principal. With term life, the death benefit stays the same over time. “So if you bought $500,000 in term life insurance at age 30 and your mortgage has $50,000 remaining when you die at age 40, your family will get the full $500,000 payment—not just the $50,000 to pay off the mortgage, which is what mortgage insurance would pay out,” says Moore.

Travel insurance

Three years ago, John Kates and his wife Miriam, were on a trip through Europe to celebrate their 40th wedding anniversary when John started having severe heart pain in his Paris hotel room. He was immediately taken to a hospital, where he had a triple heart bypass and spent six weeks recuperating. His wife stayed at a local hotel during that time. The final bill? $200,000.

Luckily, Kates had spent $300 on travel insurance to cover him for the 17-day trip. His insurer, a Canadian bank, also handled all payments to the hospital, so Kates didn’t have to open his wallet and ask to be reimbursed later. “I know people who have had to sell their home because they had medical emergencies outside Canada and no health insurance,” says Kates. “My policy covered being transported by ambulance to the Paris airport on my return flight, as well as a nurse to accompany me home. I don’t know how I would have been able to do the planning and paperwork for the flight back myself. My wife and I travel several times a year and we always get good travel health insurance. It’s worth every penny.”

Before booking a vacation, travel insurance should be at the top of your list, says Tim Landry, a living benefits specialist in Montreal. “I have a client who went to Florida and had some stomach tests done. The ultimate remedy was Pepto-Bismol—and $30,000 in medical bills. It can bankrupt you if you’re not careful.”

There are several ways to keep costs down. Start by checking your employer benefits plan to see if you’re already covered. Some credit cards also include travel medical and trip cancellation insurance. But check your policy closely to make sure you understand what coverage you have. Insurers often limit how much they’ll pay out for claims and restrict coverage to shorter trips—typically seven days or so.

Travel agents usually sell travel insurance and may offer it when you’re booking your trip. “These policies can often be much more expensive than getting insurance from an online provider such as Travel Guard,” says Gavin Prout, vice president of Special Benefits Insurance Services in Port Perry, Ont.

To compare costs, use a service such as Kanetix.ca. You’ll get quotes from several providers on the spot. If you travel more than twice a year, it’s cheaper to simply buy an annual plan. For instance, a 40-year-old would pay $25 for emergency medical coverage during a one-week trip to Acapulco. By contrast, he could get an annual plan that would cover him for unlimited trips of 10 days or less in duration—almost anywhere in the world—for $60. An added benefit? If you just want to go across the border for a weekend, you’ll have a plan already in place. “A health care policy that covers you for any trips you take almost anywhere in the world for three days or less at a time costs $52 a year. Just search online for ‘Canadian travel insurance brokers’ to find a list of providers,” says Landry. Organizations like the CAA or the Canadian Snowbirds Association also have plans tailored to their members, and they’re usually cheaper. Family plans can be considerably less expensive than covering each individual separately. “The premium is based on two individuals, so the kids are free,” says Landry.

And finally, if you’re returning to Canada after more than six months away—teaching English in South Korea, say—you have to reapply for provincial health insurance, and there is usually a three-month wait. “Get insurance for those three months,” says Prout. “About $50,000 of coverage for a 30-year-old male would cost about $300 and includes all x-rays, prescription drugs, wheelchairs and home care services.

Auto insurance

Car insurance premiums vary by the type of vehicle, your driving record and city you drive in, and also from company to company. But by remembering a few key tips, you can scoop up big savings no matter what your situation.

Three years ago, I added my two grown children to the family’s car insurance policy. And while this bumped our annual premium by $2,000, that’s a lot less than the $2,000 to $3,000 they would each have paid if they owned their own vehicles and were primary drivers. “Anyone can stay on someone else’s insurance policy for as long as they’d like—there are no restrictions,” says Adam Mitchell, president of Mitchell and Whale Insurance Brokers in Whitby, Ont. The key is to maintain a solid driving record while being covered by some form of insurance. Mitchell says a membership in a car-sharing service such as Zipcar—even if you hardly ever use it—can be a good way for an inexperienced driver to establish a track record. A 10-year member could get their own insurance on a new vehicle for $1,200, he says, compared with $6,000 or so for someone who has a license but no driving record for that period. Those are great savings for an annual membership that costs less than $100.

A second option for lowering your costs is to consider telematics—technology your insurance provider puts on your car to measure acceleration, braking and cornering. “You could get up to 30% off your premiums if your driving shows you are in a low-risk category,” says Mitchell. “You can get a 10% discount for just signing up.”

Of course, some auto coverage—like third-party liability insurance—is mandatory. This is your first line of defence if someone sues you. You have some say over the amount of coverage you get, but don’t skimp in this area. What happens if you run into an 18-wheeler or Greyhound bus? Bumping up your coverage from $1 million to $2 million only hikes your premiums by about $50, and it’s well worth it. “If you’re involved in a lawsuit, the difference could be bankruptcy,” says Mitchell.

The accident benefits portion of your policy looks after medical expenses not covered by your province’s health insurance—everything from physiotherapy treatments to crutches. “Collision” covers damage to your vehicle resulting from an impact with another vehicle or object—including crashing into a fire hydrant, like I did one rainy night in a mall parking lot. “Comprehensive” coverage takes care of theft, vandalism, fire and hail. Don’t waive collision or comprehensive unless your car is so old that the increase in premiums you’d face when making a claim exceeds the value of the vehicle. Think $3,000 or less. In total, collision and comprehensive will set you back $100 to $400 annually.

If you frequently rent cars, consider adding rental coverage for about $50 a year: that may be more affordable than paying for insurance every time you rent a car.

To lower your premiums, consider raising your deductible: the amount you need to pay out of pocket when you make a claim. Raising the deductible from $500 to $1,000 can save you 5% on your premium. You may be able to get bigger savings if you boost your deductible to $5,000, but that’s risky.

To get the best rates, enlist an independent broker rather than going directly to one provider. And finally, don’t forget to look at the group packages offered by professional associations and university alumni societies. If your association consists of dentists who drive BMWs to work, say, they may be able to offer you a lower rate than you’d get from an individual policy.

Home insurance

Few people know the details in their home insurance policy. I certainly didn’t when one of our trees fell on a neighbour’s property and my husband spent hours of his own time chopping it up and hauling it away. Had I checked our policy, I would have discovered that our home insurance policy would have covered the cost of removal. So lesson number one: read your policy. If you don’t know what’s covered by your home insurance, it won’t do you much good.

The basics of home insurance are simple. If you rent an apartment or home, then you need contents insurance—also known as tenant’s or renter’s insurance—to replace the contents of your unit due to loss, theft or damage. It also provides you with personal liability coverage should someone hurt themselves while visiting your home, or if you cause an injury to someone else anywhere in the world. “So if you bump someone on a cruise ship and they fall down the stairs and sue you, you’re covered,” says Mitchell.

If you’re a homeowner, you’ll want a comprehensive policy, or “all perils” insurance that covers you for all conceivable disasters except a list of excluded events—typically earthquakes and floods. Just be sure to read the fine print. “One company may exclude water damage, while another company includes it,” says Mitchell. “Or some policies may restrict coverage during home renovations, while others have no such clause.”

You can pay extra to add “riders” to your policy to cover items on the exclusion list, and if you live in an earthquake-prone region like B.C., there’s a case to be made for buying earthquake insurance separately. But for most Canadians, sewer backup is the one optional coverage you really need. “It’s the most common claim these days, and it often costs up to $1,000 for $50,000 of coverage,” says Mitchell. If your basement is finished, that’s well worth the cost. “But if you only have a few items down there sitting in some Rubbermaid storage bins, you could save yourself several hundred dollars by opting out.”

So how much home insurance coverage do you need? Don’t confuse the value of your policy with the market value of your home, which includes the land it’s sitting on. Your policy only needs to provide you with the money to rebuild or repair your home if it gets damaged. These days most policies simply include full replacement value and do not set a maximum dollar amount, so you’re covered even if the insurance company underestimated how expensive it would be. Remember, though, that when you renovate, you have to let your insurance company know, as it will affect the replacement cost.

You can reduce your premiums by including a security system, a sprinkler system as well as by kicking the smoking habit. Also consider upping your deductible and only putting in a claim if your independent broker advises it’s worth the cost of future premium increases.

If you want to save more money, consider bundling your home and auto policies together. “This can save you up to 15% off the final bill,” says Marr. Or, pay your home and auto premiums annually instead of monthly. Insurance companies build in a financing charge of about 18% if you spread out the cost over a year. Whenever your policy comes up for renewal, ask your insurance company if there are ways you can reduce your costs without giving up significant coverage. A little negotiation could mean thousands of dollars of future savings.