It's easy to tell the truth,

it's much harder to make it believed.

An insurance primer

or ...

a smorgasbord of life and health insurance related facts, concepts and ideas

If you are forty now, you have a 44.4 % chance of a disability before age sixty-five, with an average duration of disability of 3.1 years.
Every year, 1 in 106 persons die, 1 in 88 homes have fires, 1 in 70 cars are in serious accidents, and 1 in 8 people become disabled. A 35 year old Canadian has a 1 in 15 chance of dying before age 65.

The main aim of life insurance is income protection. The earning potential of people is frequently underestimated. Someone with an annual income of $36,000 today can earn more than $1.7 million in 25 years, almost $2.4 million in 30 years, and almost $4.5 million in 40 years, if we assume a 5% increase each year. In this sense, usually it is the ability to earn money that is the main asset of a person. If we consider the huge costs (negative income) illness and disability can cause, then even in strictly financial terms it is one's health that is one's main asset. Life and health insurance is to at least partially relieve the hardship from damage to these main assets by death or illness.

The life expectancy at birth of those born in 1925-27 was 60 years for males and 62 years for females. For those of them who reached the age 65, the remaining life expectancy is 16 and 20 years, respectively. In other words, an average 65 year old man can reasonably expect to reach the age of 81, an average 65 year old woman can reasonably expect to reach the age of 85. Once aged 75, men can expect to live another 9 years; women, almost 12 more years. Later generations have to prepare for an even longer retirement period.

Half the males who died in 1921 were younger than 41.3 years old; in 1990, half of the male deaths occurred at an age of older than 72.1 years. The respective ages for women were 43.5 and 78.2. Currently, 12% of the population is over the age of 65. This proportion will increase to 25% by the year 2036. The age 80 and over segment will double in the next 20 years; triple in the next 40 years, according to Statistics Canada. One in six people who are 65 today will live beyond age 90.

Another way of looking at improving demographics is the examination of survival probabilities. While a century ago almost half of males died before reaching age 50, today half of them will live up to about 76. For females, the respective ages are 54 and 82. The most spectacular improvements in mortality occurred at younger ages, and the accelerating chance of death can be observed from about age 45 for males, and from about 55 for females.

It is very important to distinguish life expectancy and disability-free life expectancy. While life expectancy in 1996 was 16.1 years for 65 year old men and 19.9 years for 65 years old women, these same people could expect only 10.9 and 12.4 years, respectively, that will be free from any disability. (More detailed data on and explanation of this quality of life concept can be found at ) The proportion of disability-free life expectancy decreases steadily with age. For example, for a female of 35, disability-free life expectancy represents 71% of total life expectancy, while at age 65 it represents only 49% of the shorter life expectancy at that age. (You may find this pictorial representation of how a generation of people - in general, and without disabilities only - is shrinking over time informative.) As a Statistics Canada analysis of aging and the elderly put it, 'a significant portion of the gains in life expectancy which have been made during recent years represents gains of life in poor health'. These demographic developments, together with deteriorating dependency ratios, are basic factors in the much debated challenges / crisis of the health care system, and good reasons for anyone to think about protecting own financial interest from the risks of disabilities.

In Canada, about a quarter of the people will have some kind of heart problem during their lifetime, and about a third of the people will have a life threatening form of cancer. Half of 75,000 heart attacks a year hit people under the age of 65. The number of strokes is 50,000 and that of the cases of cancer is 100,000 annually. (for some additional data, click here, or visit Statistics Canada, the Canadian Cancer Society, or the excellent site of The Heart and Stroke Foundation. A separate page is devoted to information about our 'loosing war' against cancer.)

There seems to be some contradiction between the statistics about the simultaneous occurrence of increasing life expectancy and an increasing frequency of some serious illnesses. The explanation: an increasing number of people can now survive, for increasingly longer periods, illnesses that were fatal previously. (E.g., 75 % of the people hit by stroke for the first time survives; the mortality rate for patients with heart diseases or stroke halved in 40 years.) It is easy to understand that these otherwise admirable facts may have serious consequences for the financial situation of families.

There is a basic mathematical rule of probabilities that is quite easy to grasp, still it tends to slip our attention: The chance of occurrence of A or B is much higher than the chance of the occurrence of either A alone or B alone. Insurance is based on the mathematical principles of probability, and this rule has basic implications on calculating costs. In mortality terms, the rule means that if the chance for a husband to die within x years is 50%, and the same is true for the wife, then the chance that any (at least one) of them will die within x years is not 50, but 75%. The flip side of this is that the chance of both of them dying within x years is only 25%. When the number of "independent cases" increases, the effect compounds. Because of this, e.g., the chance of at least one prolonged disability occurring in a group of three people, aged 35, 40, and 45, before they reach age 65, is 95%.

On a per capita basis, Canadians rank fourth in life insurance ownership, after the Japanese, the Americans and the Dutch. The most popular life insurance product in Canada: ten year renewable term insurance. There are about 150 life insurance companies in Canada. Wherever you move, your policy will remain in force, as long as it is paid for.

The definition of fundamental concepts and terms (e.g., smoker, age, total disability) varies according to insurance companies, products, or the occupation of the customer. (for examples, click here)

Price differences for the same or very similar products are sometimes more than 100% among various companies. (see a fewexamples for yourself)Rank order of companies on a certain product today is not necessarily the same as it was even a few months ago.

In most cases, insurance premiums are not tax-deductible, but life insurance benefits are usually tax free. However, disability insurance benefit is taxable if your employer paid at least part of the premium. The premium can be deducted if the beneficiary is not a person but a business, or when the saving part in the policy is an RRSP.

In 1991, there were 4.2 million Canadians with various disabilities. Of this, 3.8 million were adults. Most became disabled after they became adults. Only 56 percent of them were employed or seeking employment, but they frequently faced barriers to employment. Adults with disabilities are more likely to be poor than those without disability. Due to the fragmented income support system in Canada, there is a great variation in poverty rates among these people.

An individually owned insurance policy cannot be revoked or its terms changed by the insurance company, unless there was some misstatement of related facts in the application form. This is one of the several advantages of individually owned policies, as opposed to group policies. Group policies, including variousassociation plans, can be advantageous in some cases, and disadvantageous in others. Each situation should be analyzed separately.

A life insurance policy owner is not necessary the person insured.

Business aims that are most frequently served with life and disability insurance are: ensuring the continuation of sole proprietorships or partnerships in case of permanent or temporary absence, because of death or sickness of an owner or some other person whose contribution is vital to the successful operation of the business; ensuring that the overhead expenses will be paid during temporary inactivity of a small business because of illness; various group insurances, including disability, accident and dental coverages; extracting profit out of businesses in tax-efficient ways.

The policy owner can unilaterally change the beneficiary (the person/s/, company, organization or charity receiving the money at the death of the person insured) any time, unless /s/he has designated an 'irrevocable' beneficiary. Usually, it is a wise choice to name a 'contingent' beneficiary as well.

If the beneficiary is a close family member, or anyone who has been designated as an irrevocable beneficiary, then both the sum insured and the savings within the insurance policy are creditor-proof, that is they are inaccessible for the lenders to the owner of the policy. In cases where there is no irrevocable beneficiary and the beneficiary is not a close family member, this creditor-proof feature of the insurance starts only at the death of the person insured (and not even then if the beneficiary is the person insured - or rather his or her estate -, in other words, if there was not any beneficiary designated in due time).

It is usually not a wise decision to cancel existing policies before you make sure that you have a better policy approved and issued. Insurability is a factor that has great financial value! The premium for the same protection can be quite different for people who represent different risks to the insurer. The best example is the roughly double premium for smokers. Overweight people, or who are in poor health, can expect extra-premiums, or perhaps coverage restrictions because of pre-existing medical conditions. On the other hand, healthy people can get preferred rates. There are more and more companies offering different premiums for people in various risk categories. One company has altogether 8 categories, and a matching, sophisticated evaluation system, e.g.
A relating fact is that a lot of people can buy insurance today who would have been rejected off-hand several years ago. Since companies make their risks assessment decisions independently, one who is rejected or overrated by a company can sometimes find a better offer elsewhere.

The financial consequences of certain illnesses are sometimes more devastating than those of death. Beside the better known term, whole life, and universal life policies, traditionally there has been disability insurance available, providing a monthly cheque when you are too sick to work. Today, there are policies also for particular risks (e.g., cancer or heart disease, the causes of death in more than half of all deaths), or policies that can benefit not only surviving beneficiaries, but also the person insured before death. (Click here to learn more about our chances for a critical illness, or here, for information on critical illness insurance)The most recent related development is the launch of a long term care insurance policy that pays daily indemnity in case the insured needs long term care.

When someone wants to buy a disability insurance policy, usually that person has to prove that /s/he had an annual income of at least $ 15,000 in the two previous years. There are various other factors (e.g., certain occupations, avocations, life styles, or medical conditions) as well that can prohibit or complicate someone's buying an individual disability policy. The conditions of health insurance tend to become tighter. However, the critical illness insurance mentioned in the previous paragraph can be accessible for many people who otherwise could not buy any individual health insurance, because, e.g., they are a homemaker, a new job entrant, a contract or part-time employee, a home entrepreneur, or have been "declined". Furthermore, there are some insurance companies that specialize mainly in providing policies - naturally, more restrictive and proportionally more expensive ones - to people in such situations. One can even buy a policy, e.g., that covers specific injuries only.

Half of all people who lose their homes blame illness or injury for their financial troubles.

By law, you can return any insurance policy to the insurance company for full refund within ten days after you received the approved policy.

Almost half of the people at age 65 have an annual income of less than $14,000.

With certain universal life products, if you accumulate a sum of money invested linked to your insurance policy, you can borrow money (income) tax-free and use your investment as a collateral. Although there will be some interest calculated on the loan, (i) the amount of this will be much smaller than the gain on taxation, and (ii) the interest will have to be paid only at the maturity of the insurance policy, that is at the death of the person insured, and there will be ample funding by then from the tax-free accumulation of savings. Saving that is linked to insurance is especially advantageous to people who want to save in access of their RRSP room.

The annual rate of inflation in the 30 year period before 1994 was 5.71 %. In the same period, the average annual return for long term bonds was 9.23 %, and that of the TSE 300 stocks was 10.64 %. Each of these averages resulted, of course, from widely different, fluctuating series of annual figures.

The time factor, the quality and diversity of our investments, or the utilization of possible ways to avoid - as much as we can - taxation that hampers the accumulation of our investments are equally important fundamental considerations in our finances. A simple example for the role of taxes: if you assume a six percent real rate of return, $ 1000 investment will quadruple in 24 years; if half of that real rate of return is paid as tax, the same capital of $ 1000 will grow only to $ 2000, instead of the $ 4000, in the same 24 year period.

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